Must-read: Janet Yellen: “The Outlook, Uncertainty, and Monetary Policy”

Posted on by Brad DeLong

Must-Read: Back in 1992 Larry Summers and I wrote that pushing the target inflation rate from 5% down to 2% was a very dubious and hazardous enterprise because the zero-lower bound was potentially a big deal: “The relaxation of monetary policy seen over the past three years in the United States would have been arithmetically impossible had inflation and nominal interest rates both been three percentage points lower in 1989. Thus a more vigorous policy of reducing inflation to zero in the mid-1980s might have led to a recent recession much more severe than we have in fact seen…”

Now we have an answer from Janet Yellen: that the zero lower bound is not, in fact, such a big deal:

Janet Yellen: The Outlook, Uncertainty, and Monetary Policy: “One must be careful, however, not to overstate the asymmetries affecting monetary policy at the moment…

…Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that we and other central banks successfully employed in the wake of the financial crisis to put additional downward pressure on long-term interest rates and so support the economy–specifically, forward guidance about the future path of the federal funds rate and increases in the size or duration of our holdings of long-term securities.10 While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.

The natural next question to ask then is: Then why isn’t nominal GDP on its pre-2008 trend growth path? Why is the five-year ahead five-year market inflation outlook so pessimistic? Why hasn’t the Federal Reserve pushed interest rates low enough so that investment as a whole counterbalances the collapse in government purchases we have seen since 2010?

Gross Domestic Product FRED St Louis Fed Graph 5 Year 5 Year Forward Inflation Expectation Rate FRED St Louis Fed FRED Graph FRED St Louis Fed

The gig economy? Or the fissured workplace?

Posted on by Bridget Ansel
The growth of online apps like Uber has ignited a debate about the “gig economy,” in which people don’t hold regular jobs in traditional workplaces but rather work in some “alternative arrangement.” Research on the gig economy, however, finds that it reaches much deeper into the labor market than most observers realize.

If there were a measure that showed the ratio of hype to actual impact on the U.S. economy, the rise of online “gig economy” companies like Uber would certainly rank quite high on it. Uber and its ilk have been hailed as companies that will usher in a new kind of work that will have a significant impact on the employer-to-employee relationship. But until now, the data haven’t shown that much about the kind of employment we’d see at these firms. And any sign of increased contracting work in the data show that the rise in contracting far precedes the advent of app-based ride sharing companies. New research, however, shows that the online gig economy may have distracted us from the importance of the rise of another major trend in the labor market.

Anna Louie Sussman and Josh Zumbrun of the Wall Street Journal highlight research by economists Larry Katz and Alan Krueger on the changing employment relationships that U.S. workers find themselves in these days. For a period of time, the U.S. Bureau of Labor Statistics conducted the Contingent Worker Survey, which asked workers about the amount of contingent or temporary work that they were doing. Such a survey could tell us more about how much firms contract out labor, but it hasn’t been conducted since 2005. (Fortunately, the Department of Labor plans on bringing the survey back in 2017.)

With some help from the RAND Corporation, though, Katz and Krueger replicated the survey for 2015 and found a significant increase in the amount of non-standard work, or work where a laborer isn’t a direct employee of the firm they work for. According to the two economists, the share of U.S. workers in these “alternative arrangements” grew significantly from 10 percent in 2005 to 16 percent in 2015. The increase was across a wide number of industries such as manufacturing, health and education, and public administration. Online gig economy companies had quite a small impact, however, as they account for less than 0.5 percent of the U.S. labor force. And there’s a pretty good chance that the “online gig labor force” is a synonym for “Uber drivers.”

So if apps aren’t the main driver of the rise in non-standard work, then what’s behind this transformation? Sussman and Zumbrun note that this increase could be the result of the “fissured workplace,” a trend highlighted by David Weil who’s now at the U.S. Department of Labor as the Administrator of the Wage and Hour Division. Weil’s story has less to do with disruptive technology and more with companies outsourcing many jobs that would usually be inside the firm to focus on their “core competencies.”

As part of the fissuring of the workplace, workers and roles that were not at the heart of the firm’s particular strength were shed, and contractor firms were formed to provide these jobs. As many of these contracted-out jobs were lower-paying jobs, this may explain some of the increase in inter-firm inequality as low- and high-wage workers ended up working at different firms.

As such, the term “gig economy” is probably not the best way to describe the actual increases in contingent and alternative work in the U.S. labor market. The Uber driver who can control when they drive by opening and closing an app is not the poster child for this trend. Rather, it seems the trend reaches much further in the U.S. labor market than most observers realize

Must-read: Branko Milanovic and Suresh Naidu: Branko Milanovic’s New Approach to Global Inequality

Posted on by Brad DeLong

Must-Read: Branko Milanovic and Suresh Naidu: Branko Milanovic’s New Approach to Global Inequality: “Convergence and Divergence Across Nations Reinforced or Damped by Kuznets Waves within Nations…

…Global inequality can be broken down into inequality between countries (btw US & Mexico) & within them (among US citizens). Within-country inequality is driven by “Kuznets waves” & between country by economic growth convergence. Real income growth has been quite strong for the global middle class (Vietnam, China, etc), but weak for 80th-90th percentile (US lower MC)…. Migration is the most powerful tool for the reduction of global poverty and inequality

Must-Read: Matthew Yglesias: “Brian D. McKenzie’s ‘Political Perceptions in the Obama Era

Posted on by Brad DeLong

Must-Read: Racial animosity, myths of betrayal, and fear of poverty and economic insecurity all combined together in a cocktail–but at least it’s an ethos!

Matthew Yglesias: “Brian D. McKenzie’s ‘Political Perceptions in the Obama Era: Diverse Opinions of the Great Recession and its Aftermath among Whites, Latinos and Blacks’…

…The Kaiser Family Foundation and the Washington Post working with some scholars from Harvard to look at race and the recession… included one question asking whether Obama has done ‘too much’ in terms of ‘ looking out for the economic interests of African Americans’ and another one asking which racial groups had been hardest hit by the recession. The results….

Numerous whites overlook the economic evidence that blacks were substantially harmed on multiple fronts during the recession and instead believe this group was unfairly aided by a sitting black president. These perceptual biases shape whites’ political opinions and are associated with feelings of financial frustration and higher levels of blame toward the government…. Interestingly, while many whites believe that African Americans are the beneficiaries of favorable economic policies from the Obama administration, blacks themselves do not feel they have been uniquely assisted financially (Harris 2012; Harris and Lieberman 2013).

This ties together white nationalist themes, economic anxiety themes, and populist anti-establishment themes nicely–a large bloc of white voters believes they are suffering economically because their elected representatives in Washington betrayed their interests in order to help nonwhites….

Following Mitt Romney’s defeat in 2012, the leadership of the Republican Party decided that they wanted to go in the exact opposite direction… the GOP would present itself as a modern, cosmopolitan, forward-thinking vehicle for right-of-center economic policy. Conservatism would be an ideology for everyone, not just for white people terrified that all their money was going to be spent on Obamaphones and hip-hop barbecues…. This sent… the wrong message to an important element of the GOP base… that their own party’s leaders were planning to betray them….

Resentful white people perceive themselves to be in a zero-sum clash for resources and opportunities with African Americans and Latinos, and want candidates who will champion their interests rather than throw them overboard in pursuit of a broader electoral coalition.

Medicaid, job lock, and moving up the job ladder

Posted on by Bridget Ansel
New research finds that more generous state Medicaid programs have benefits beyond its residents’ health, and also improve workers’ chances of moving into a higher-paying occupation or industry.

Social safety net programs, such as unemployment insurance and government-provided health insurance, are often appropriately characterized as redistribution. But as their names hint at, they are also forms of social insurance: By boosting the earnings of low-income workers, they insure against the possibility of having a low income. And as that insurance provides a cushion against a fall in income, it can also encourage workers to take on more risk—particularly in moving from one job to another.

One of the many arguments for expanding government-provided health insurance is that workers would be less tied to their current jobs for the sole reason of retaining health insurance. Decoupling the two would get rid of “job lock” and allow workers to move to other jobs. But what kind of jobs would these workers move into? In a new National Bureau of Economic Research working paper, economists Ammar Farooq and Adriana Kugler of Georgetown University find that more generous health insurance improves the chance that a worker moves into a new, higher-paying occupation or industry.

Specifically, the two economists explore how differences in the generosity of Medicaid across states affects mobility across occupations and industries. They use the fact that there were statutory changes in the income and age thresholds among the states during the late 1990s and the early 2000s to tease out the effect on the occupational and industry mobility of workers.

Farooq and Kugler find that more generous Medicaid programs boosted the movement of workers into new occupations and industries. But this movement wasn’t random: The workers were more likely to move into occupations that are not only riskier (as measured by the dispersion of wages in the occupation or industry), but also higher-paying (measured by the median wage) and requiring higher education credentials. These results show that a more generous public health insurance system helps reduce job lock and allows workers to move up the occupation or job ladder.

The two economists additionally use a case study to show that the opposite holds as well: When Tennessee reduced the generosity of its Medicaid program, movement to new occupations and industries declined.

Farooq and Kugler’s result is another piece of evidence that reducing the downside risk for workers can help them take risks that will help them and the overall economy in the long run. This research complements other studies demonstrating the role of employer-provided health insurance in employment lock. There’s also evidence that entrepreneurship, for example, is more likely to happen when a potential entrepreneur doesn’t have tremendous downside risk. The same goes for the benefits of a tighter labor market. If there are more jobs available to workers, they’re more likely to take a risk by quitting their old job and jumping to a new one. And of course this could be why high levels of wealth inequality may affect entrepreneurship and dynamism in the U.S. economy. All trends and possibilities to keep our eyes on.

Must-read: Menzie Chinn: “Estimates of the Elasticity of Employment with Respect to the Minimum Wage”

Posted on by Brad DeLong

Must-Read: Menzie Chinn: Estimates of the Elasticity of Employment with Respect to the Minimum Wage: “Some people would have you believe the impact of a minimum wage hike…

…on employment is known to be large and negative. A cursory acquaintance with the literature helps in immunizing one (if one believes in vaccines and the like) against falling for such assertions. The meta-analysis of Doucouliagos, Hristos, and Tom D. Stanley. ‘Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis.’ British Journal of Industrial Relations 47.2 (2009): 406-428. [ungated working paper version] is useful in this regard.

I have drawn the mid-point of the estimate range cited by Professor Neumark (a respected researcher on minimum wages). It is useful to observe that the range he cites (-0.1 to -0.3) is substantially to the left of where the most precisely estimated locate elasticities are located. This suggests caution in attributing too much weight to one single estimate or set of estimates drawn from a single researchers. That researcher might have indeed obtained ‘the holy grail’ of elasticity estimates; but it is useful to recognize the variation in findings nonetheless, if one is to be a social scientist.

Estimates of the Elasticity of Employment with Respect to the Minimum Wage Econbrowser

Must-read: Paul Krugman: “Trade Deficits: These Times are Different”

Posted on by Brad DeLong

Must-Read: There are big reasons to be for “mercantilist” policies:

  1. In a world in which a country suffers from a shortage of risk-bearing capacity or a savings glut, exports are a very valuable source of aggregate demand.
  2. In a world in which there are substantial spillovers from the creation and maintenance of communities of engineering practice, exports in associated industries are a powerful nurturant and imports a powerful retardant of such communities.
  3. To the claim that subsidies to such communities are better, the proper rebuttal is “subsidies to whom?” Export champions reveal themselves to be competent productive organizations, and policies that encourage competent productive organizations are likely to do more to nurture communities of engineering practice than policies that encourage competent lobbying organizations.

The arguments against “mercantilist” policies are two:

  1. The little one: such policies are inefficient, in that the losers lose more than the winners win.
  2. The big one: such policies are not win-win, and economic policy energy is best devoted to things that are win-win–at least in the behind-the-veil-of-ignorance sense of win-win.

Paul Krugman: Trade Deficits: These Times are Different: “In normal times, the counterpart of a trade deficit is capital inflows…

…which reduce interest rates, and there’s no reason to believe that trade deficits reduce employment on net, even if they do redistribute it. But we are still living in a world awash with excess savings and inadequate demand, where interest rates can’t fall (or at any rate not much) because they’re already near zero. That is, we’re in a liquidity trap. And in that kind of world it’s true both that trade deficits do indeed cost jobs and that there are basically no benefits to capital inflows — we already have more desired savings than we are managing to invest.

One indicator of how the rules differ in these circumstances: Remember all the hand-wringing about our dependence on Chinese financing, and how U.S. interest rates would spike if the Chinese stopped buying our bonds? Well, the Chinese have stopped buying bonds and started selling them…. And US interest rates remain very, very low — still under 2 percent on 10-year bonds.

I’m not saying that Trump has any idea what he’s talking about; he doesn’t. But we are living in a world where, for the time being — and maybe for a long time to come, if secular stagnation theorists are right — mercantilism makes a fair bit of sense. But then Keynes could have told you that.

Must-read: Macro Advisers: Now-Cast: Personal income and outlays way undershot expectations…

Posted on by Brad DeLong

Must-Read: Macro Advisers: Now-Cast: First-quarter real GDP growth at 1.0%/year:

Https macroadvisers bluematrix com sellside EmailDocViewer encrypt 07856b96 a505 4d8c 9910 fdea16842f37 mime pdf co macroadvisers id jbdelong uclink berkeley edu source mail

They will probably be angry at me for posting this, but it is genuine news: personal income and outlays way undershot expectations, and so they have marked down their estimate for first-quarter 2016 real GDP growth from the 1.9%/year it was five days ago to 1.0%/year now.

Certainly makes last December look like a bad time to stop sniffing glue the zero-interest-rate policy, doesn’t it?

The labor share, the ongoing recovery, and structural forces

Posted on by Bridget Ansel
The share of income going to wages increased over the course of 2015 and is now 1.6 percentage points above its post-recession low point in 2012.

Usually when the government announces new data on the growth of the overall U.S. economy, the attention of the press and analysts jumps to the level of economic growth. But last week, their attention turned to the distribution of growth. On Friday morning, the U.S. Bureau of Economic Analysis released data on economic growth for the last quarter of 2015 and the figures on corporate profits for the whole year. The data show that the share of income going to wages increased over the course of 2015 and is now 1.6 percentage points above its post-recession low point in 2012. The labor share of income seems to be on the upswing.

Why is this happening? Dean Baker of the Center for Economic and Policy Research says it’s a sign of a tightening labor market. As the U.S. labor market tightened up, wages rose and the share of income going to wage earners increased as the share going to profits declined. Baker also takes this as an incredibly important cue for monetary policy moving forward: Further tightening by the Federal Reserve would either slow down or stop this trend.

Picking up where Baker left off, Jared Bernstein of the Center on Budget and Policy Priorities points out that the level of the wage share is also an important consideration when the central bank thinks about the health of the labor market. As Bernstein writes, Federal Reserve Chair Janet Yellen has laid out some criteria for how strong wage growth can get before it starts pushing up on inflation. Add the Fed’s inflation target (2 percent) to the pace of labor productivity growth (about 1 percent these days) and you get a non-inflationary wage target of about 3 percent.

But that assumes you want to keep the labor share of income constant. If we want labor to reclaim some of the income it lost during the recession, then wage growth should stay above the 3 percent target for some time. The high levels of income going to profits may also mean that inflation wouldn’t pick up that much if wage growth surpassed productivity growth. That could explain why wage growth doesn’t seem to turn into inflation as strongly as it did in the past.

Along with thinking about the decline in the labor share since the Great Recession, we should also consider its structural decline since 2000. Perhaps the Federal Reserve (or fiscal policymakers if they want) should allow the economy to run hot for a while, shifting income back to wages. But there’s considerable evidence that there are other reasons for a declining labor share besides a weak overall economy. It may be technological change, globalization, or increased concentration of businesses—we’re not sure yet. So letting the economy run hot might trigger much higher inflation than the Federal Reserve would like.

But such a conundrum would probably only happen once the labor share losses from the Great Recession are reversed. And the Federal Reserve seems unlikely to let inflation even peak over 2 percent, so such a shift would swiftly be ended. But in thinking about optimal policy, it’s still worth thinking about and figuring out how much of the decline in the labor share could be solved with a hotter economy.