Must-read: Nick Rowe: “Capital Theory and the Distribution of Income”

Posted on by Brad DeLong

Must-Read: Nick Rowe provides a very brief masterclass in “capital theory”, which is really the theory of the price system not just at a point in time but over time. (Cf. Christopher Bliss (1975): Capital Theory and the Distribution of Income.) Needless to say, there is no presumption that there is only one equilibrium vector for the intertemporal price system. And there is no presumption that problems of aggregation for commodities called “capital” is any easier than problems of aggregation for commodities called “labor” or “services” or “nondurable goods”. (The question of whether the problems of aggregation for commodities called “capital” is any more difficult than for any other not-completely-unreasonable grouping is left as an exercise):

Nick Rowe: Interest, Capital, MRScc=(1+r)=1+(MPK/MRTci)+(dMRTci/dt)/MRTci: “The slope of the indifference curve [is] the Marginal Rate of Intertemporal Substitution…

…between consumption this year and consumption next year. Call it MRScc…. The slope of the PPF [is] the Marginal Rate of Intertemporal Transformation, between consumption this year and consumption next year. Call it MRTcc. The equilibrium condition is: MRScc = (1+r) = MRTcc…. We don’t need ‘capital’, or its marginal product, to determine the rate of interest…. Where is ‘capital’ in this model? And where is the Marginal Product of Kapital? Does MPK determine r? Does MPK=r? ‘No’, is the answer to both those questions.

The equilibrium condition is MRScc=(1+r)=MRTcc. MPK is one of the things, but not the only thing, that affects MRTcc. And MRTcc is equal to (1+r), but it does not determine (1+r)…. MPK is defined as the extra apples produced per extra existing machine, holding technology and other resources constant, and holding the production of new machines constant. If we move along the PPF between consumption and investment this year, we will have a bigger stock of capital goods next year, which will shift out next year’s PPF. MPK tells us how much it shifts out, per extra machine….

If capital exists, the real rate of interest is equal to, but not determined by, the Marginal Product of Kapital divided by the real price of the machine, plus the capital gains from appreciation of the real price of machines…. Rather than saying ‘MPK determines r’, it would be more true to say ‘MRScc determines r, which determines the prices of capital goods’. And the only thing wrong with saying that is that is that MRScc… depends on the expected growth rate of consumption, which in turn depends on our ability to divert resources to producing extra capital goods instead of consumption goods, and the productivity of those extra capital goods…

Weekend reading: “Appreciating anniversaries” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

There’s been quite a bit of theorizing that higher levels of inequality may cause lower levels of economic mobility. Up until now, there hasn’t been much evidence of a causal relationship. But a new paper finds a connection between higher levels of income inequality and higher high school dropout rates.

The effectiveness of monetary and fiscal policy in responding to the Great Recession has been one of the great economic debates of the past few years. But those debates overlook federal credit programs, which may have had a significant impact in countering the recession.

Earlier this week, Equitable Growth hosted economists David Card and Alan Krueger to discuss the impact of their book “Myth and Measurement” on our understanding of the minimum wage. In the 20 years since the book was published, the economics profession has changed its tune when it comes to the minimum wage.

Speaking of challenging the conventional wisdom, a new paper by Julien Lafortune and Jesse Rothstein of the University of California, Berkeley and Diane Whitmore Schanzenbach of Northwestern University argues that school finance reforms can boost student achievement. Their brief for Equitable Growth dives into their results.

Bridget Ansel takes their results and argues that our current education policy debate could be improved by considering these findings. “Rather than ‘throwing money at the problem,’” she writes, “no-strings-attached funds may actually make a difference for the country’s most disadvantaged school districts.”

Links from around the web

If you listen to the hype about technology companies, you’ll probably hear the word “disruption” quite often. New tech companies, in this telling, will upend old established companies. But Noah Smith floats the possibility that technology could help facilitate market concentration. [bloomberg view]

Since the end of the Great Recession, wage growth and productivity growth have been quite weak in both the United States and the United Kingdom. Are wages low because of low productivity? Or is productivity low because of low wages? Ryan Avent says yes. [the economist]

As I mentioned above, Equitable Growth hosted David Card earlier this week—an economist who has made a number of important contributions to the field of labor economics. Peter J. Walker profiles this “challenger” of conventional wisdom. [imf]

The U.S. labor force participation rate, after years of declining in the wake of the Great Recession, has ticked up in recent months. Whether or not this trend will continue is uncertain, but what’s behind this movement? Ernie Tedeschi digs into the numbers. [medium]

Free-floating fiat currencies are supposed to help countries avoid financial crises provoked by borrowing too much from abroad. But that really only works when a country’s currency is widely accepted by its trading partners. Otherwise, old problems can still arise according to Frances Coppola. [coppola comment]

Friday figure

Figure created by Nick Bunker

Must-reads: March 18, 2016

Posted on by Brad DeLong

Must-read: Martin Sandbu: “Manufacturing didn’t leave; it left workers behind”

Posted on by Brad DeLong

Must-Read: Martin Sandbu: Manufacturing didn’t leave; it left workers behind: “America’s blue-collar aristocracy fell on hard times long ago…

…but its ghost remains influential in politics. That much is clear from Hillary Clinton’s vow to ‘bring manufacturing back’ and Donald Trump’s railing against the ‘mortal threat to American manufacturing’ (presumably any number of foreign countries with which the US trades, but in this case the target was the Trans-Pacific Partnership trade agreement). One problem with this rhetoric, politically potent though it may be, is that manufacturing has never left the US. As the chart below shows, manufacturing output has grown at a steady pace for decades, only temporarily thrown off course by recessions before returning to its previous trend. American factories today produce as much as they ever have.

Of course the number of jobs in manufacturing has fallen deeply — US manufacturing employment peaked in the 1970s — with particularly steep slides in the recessions of the 2000s. And this is what drives the rhetoric, and makes the Trans-Pacific Partnership a particularly delicate issue, in the current US political campaign. Mark Muro and Siddharth Kulkarni are quite right to refer to the blue line above as a one-chart explanation of why voters are angry. That’s understandable even though, as Jeffrey Rothfeder points out, job numbers in US manufacturing have been on a steady increase since 2010. However, the fact that output has kept going up while employment has sunk like a stone means that the political narrative of manufacturing activity ‘stolen’, or whisked away to other countries, doesn’t quite add up. What the numbers show is, by definition, that manufacturing has become more productive as well as increasing in total output. In other words, what has been happening — since the 1970s — is a productivity-boosting restructuring, not a shrinkage…

Must-read: Justin Fox: “About That U.S. Manufacturing Renaissance…”

Posted on by Brad DeLong

Must-Read: Justin Fox: About That U.S. Manufacturing Renaissance…: “After a brutal period of downsizing and reorganizing…

…the U.S. manufacturing sector has become the most competitive in the world. Output per worker is higher than in any other major manufacturing country. Labor costs per unit of output are lower than in Brazil, Canada and Germany, and only slightly higher than in China. What’s more, writes Gregory Daco of Oxford Economics in the new report from which the above facts are taken, ‘the U.S. is ‘gifted’ with a stable regulatory framework, a flexible labor market, low energy costs and access to a large domestic market.’

So that’s great! Time for a manufacturing renaissance, right?… But… there are few signs of it actually happening yet. Yes, there are the almost 900,000 manufacturing jobs added in the U.S. since early 2010. But it’s important to see that for what it is–a modest rebound after a spectacular collapse…. Why isn’t reshoring taking off? Daco, of Oxford Economics, stressed that such shifts don’t happen overnight. ‘It takes quite a bit of time for a company to modify its supply chain,’ he said in a phone conversation. He also noted that ‘nearshoring’ to Mexico, where unit labor costs are still substantially lower than in the U.S., remains popular….

The countries of South and Southeast Asia… have labor forces that run into the hundreds of millions of workers, so the gradual shift of certain industries to other Asian low-cost countries is likely to continue…. Clothing- and furniture-making, for example, are unlikely to return to the U.S. in a big way. But in capital-goods manufacturing, labor costs matter less than technology and the existence of a local ecosystem of suppliers, consultants and skilled workers that can take a while to put together. In their rush to offshore, then, U.S. manufacturers may have permanently destroyed their ability to make certain products here. As Gary P. Pisano and Willy C. Shih wrote in a 2009 Harvard Business Review article:

In making their decisions to outsource, executives were heeding the advice du jour of business gurus and Wall Street: Focus on your core competencies, off-load your low-value-added activities, and redeploy the savings to innovation, the true source of your competitive advantage. But in reality, the outsourcing has not stopped with low-value tasks like simple assembly or circuit-board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.

This loss of capability could be what we’re seeing evidence of in the trade data. If so, a true U.S. manufacturing renaissance may be a long time coming.

Must-read: Dean Baker: “The Fed and the Quest to Raise Rates”

Posted on by Brad DeLong

Must-Read: Dean Baker: The Fed and the Quest to Raise Rates: “The justification for raising rates is to prevent inflation from getting out of control…

…but inflation has been running well below the Fed’s 2.0 percent target for years. Furthermore, since the 2.0 percent target is an average inflation rate, the Fed should be prepared to tolerate several years in which the inflation rate is somewhat above 2.0 percent… [and] allow for a period in which real wage growth slightly outpaces productivity growth in order to restore the pre-recession split between labor and capital…. The most recent data provide much more reason for concern that the economy is slowing more than inflation is accelerating….

There are many other measures indicating that there continues to be considerable slack in the labor market despite the relatively low unemployment. There are no plausible explanations for the sharp drop in the employment rate of prime-age workers at all education levels from pre-recession levels, apart from the weakness of the labor market. The amount of involuntary part-time employment continues to be unusually high…. And the duration measures of unemployment spells and the share of unemployment due to voluntary quits are both much closer to recession levels than business cycle peaks…

Must-read: Richard Mayhew: “A California Earthquake for Narrow Networks”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: A California Earthquake for Narrow Networks: “[The] Covered California… exchange’s five-member board is slated to vote on…

…[whether] insurers would need to identify hospital ‘outliers’ on cost and quality starting in 2018. Medical groups and doctors would be rated after that. Providers who don’t measure up stand to lose insured patients and suffer a black eye that could sully their reputations with employers and other big customers. By 2019, health plans would be expected to expel poor performers from their exchange networks. The goal is to start trimming the inefficient high cost extremes.

In some ways, this is not an unusual move.  Narrow networks have been proliferating under the ACA, and they were around pre-ACA…. My employer’s best-selling commercial network is a narrow network built when Howard Dean was the favorite Vermonter among online liberals.  Narrow networks are usually built to get a better price and value proposition than a broad network… an insurer thinks it can steer thousands or tens of thousands of members to Provider A… so Provider A should give the insurer a volume discount.

When I was building narrow networks for Mayhew Insurance, there were a set of hospitals and provider groups that were in our broad network that we really tried not to use for the narrow products.  One… had good quality but a gold-plated contract that was paying them roughly twice the regional rate for a set of frequently used codes.  Another… tended to have very low HEDIS scores on basic things…. Other[s]… we were stuck using them as they were the only specialist of that type within forty miles, but we actively tried to… get new docs to those regions….

The interesting thing is the threat of en-masse exclusion to trim the outliers…. There are some significant concerns with implementation. The big one is what exactly is quality? Is it risk adjusted and if so, how is it just medical risk adjustment or is it medical and socio-economic risk adjusted? How does a provider appeal?  How does a provider get back in?… Even with those questions, this is an interesting experiment.

Must-read: Jared Bernstein: “The Fed’s Pause and the Dollar’s Retreat”

Posted on by Brad DeLong

Must-Read: Jared Bernstein: The Fed’s Pause and the Dollar’s Retreat: “The linkage between the more dovish U.S. Fed and the recent decline in the dollar…

…is notable…. Last year, net exports subtracted 0.6 of a percentage point from real GDP growth and manufacturing job growth slowed sharply: factory jobs were up 208,000 in 2014 compared to 26,000 last year…. The value of the dollar moves roughly with the odds of a higher Fed funds rate. The decision not to raise at this week’s meeting and the somewhat dovish shift in their statement, which referenced global risks to the US outlook, contributed to a sharp decline in the dollar. In my view, that’s smart policy at work…

Must-reads: March 17, 2016

Posted on by Brad DeLong

Must-read: Nick Rowe: “It’s easier to have a sensible fiscal rule with an NGDP level-path target”

Posted on by Brad DeLong

Must-Read: Nick Rowe: It’s easier to have a sensible fiscal rule with an NGDP level-path target: “Even if you are skeptical about the feasibility of a formal fiscal rule…

…it’s a useful thought-experiment to help us be conceptually clear about what we want fiscal policy to look like…. One thing we want… is sustainab[ility] in the long run…. whether we think fiscal policy is or is not needed to help monetary policy stabilise aggregate demand. A sensible fiscal rule would not let the debt/GDP ratio wander off over time towards plus infinity or minus infinity…. We are talking about a ratio of debt to nominal GDP…. A (say) 5% Nominal GDP level-path target… would make it a lot easier to write down a sensible fiscal rule…. If you don’t have an NGDP level-path target, nobody know what NGDP will be be over the coming decades. So nobody knows what average deficit would be sustainable…. Sure, an NGDP level-path target only fixes one problem with getting fiscal policy right. But every little bit helps.