Must-Read: Matthew Yglesias: Conservatives Turn on the White Working Class

Posted on by Brad DeLong

Must-Read: Matthew Yglesias: Conservatives Turn on the White Working Class: “One of the great conceits of conservative punditry over the past 15 years…

…has been the notion that American politics is dominated by affluent liberal snobs who disdain white working-class America and its communities…. Charles Murray… Clive Crook… merely assert its existence via broad generalities. But now… some conservative pundits are unleashing sentiments about white working-class communities that are a good deal more vicious than snobbish disdain.

National Review’s Kevin Williamson…

the truth about these dysfunctional downscale communities is that they deserve to die: Economically, they are negative assets. Morally, they are indefensible. Forget all your cheap theatrical Bruce Springsteen crap….The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles…. They need real change, which means that they need U-Haul.

David French… backs up Williamson using less colorful language… makes an even more explosive charge–that conservatives should regard economically struggling white people in rural communities in the same way they regard… [the] inner-cit[ies]….

It was consistently astounding how little effort most parents and their teen children made to improve their lives…. Always–always–there was a sense of entitlement. And that’s where disability or other government programs kicked in….

These are essays making the case that suffering white working-class communities don’t deserve help of any kind. That’s a correct application of the strict principles of free market ideology, but it’s also a signpost of how American political discourse has changed since the end of the Cold War. If you said in 1966, or even 1986…. It was taken for granted that the governing class had an obligation–a practical one, if not a moral one–to actually make the system work for average people. Over the past 20 years, that idea has been increasingly abandoned on the American right…

Economists of the world, unite!

Posted on by David Hudson

When some 13,000 members of the American Economic Association (AEA) gathered for their annual convention in San Francisco during the first week of January, few of them may have been aware that their organization turned 131 this year. Fewer still would probably have ever read the organization’s 1885 “platform.” The original draft of that founding document stated the group’s objectives as the encouragement of economic research and of “perfect freedom in all economic discussion.” Then it went on:

We regard the state as an educational and ethical agency whose positive aid is an indispensable condition of human progress. While we recognize the necessity of individual initiative in industrial life, we hold that the doctrine of laissez-faire is unsafe in politics and unsound in morals; and that it suggests an inadequate explanation of the relations between the state and the citizens.

We do not accept the final statements which characterized the political economy of a past generation. . . . We hold that the conflict of labor and capital has brought to the front a vast number of social problems whose solution is impossible without the united efforts of Church, state, and science.

This undisguised manifesto of rebellion against the economic orthodoxy of the Gilded Age raised eyebrows among the established preachers of “political economy.” The state as an “ethical agency” whose aid was “indispensable”? The “conflict of labor and capital”? Even after the denunciation of laissez-faire as “unsafe in politics and unsound in morals” was removed from the final document, lest it appear that the new association had any motives beyond scientific advancement, the AEA was still understood as a challenge to the status quo.

Read more here.

This article was originally published in the Spring 2016 issue of Democracy.

Home economics

Posted on by David Hudson

The following excerpt is from an essay adapted from Heather Boushey’s forthcoming book, “Finding Time: The Economics of Work-Life Conflict.” Read the full essay here, originally published in the latest issue of Democracy.

American businesses used to have a silent partner. This partner never showed up at a board meeting or made a demand, but was integral to profitability. That partner was the American Wife.

She made sure the American Worker showed up for work well rested (he didn’t have to wake up at 3 a.m. to feed the baby or comfort a child after a nightmare), in clean clothes (that he neither laundered nor stacked neatly in the closet), with a lunch box packed to the brim with cold-cut sandwiches, coffee, and a home-baked cookie. She took care of all the big and small daily emergencies that might distract the American Worker from focusing 100 percent on his job while he was at work. Little Johnny got in a fight on the playground? The American Wife will be right there to talk to the school. Aunt Bea fell and broke her hip? The American Wife can spend the afternoon bringing her groceries and making her dinner. The boss is coming over for dinner? The American Wife already has the pot roast in the oven. Even if she had a job—and a certain percentage of American wives, like my mom, worked and had to work despite suburban cultural expectations—she was still the primary caregiver when work-life conflicts arose. The presumption was that she would be the one at home.

This meant that for decades, the American Wife gave American businesses a big, fat bonus. Her time at home made possible the American Worker’s time at work.

This unspoken yet well-understood business contract is now broken. Moreover, it doesn’t look like we’re going back to it anytime soon. Nor should we. American families look different today. Wives—and women more generally—work outside the home because they need to and because they want to.

“Finding Time: The Economics of Work-Life Conflict” will be available on April 19, 2016.

Must-reads: March 15, 2016

Posted on by Brad DeLong

Must-read: Jonathan Portes and Simon Wren-Lewis: “Issues in the Design of Fiscal Policy Rules”

Posted on by Brad DeLong

Must-Read: Jonathan Portes and Simon Wren-Lewis: Issues in the Design of Fiscal Policy Rules: “The potential conflict in designing rules between the need to mimic optimal policy…

…where debt is a shock absorber and is adjusted only very slowly, and the need to prevent deficit bias…. It may therefore make sense to make different recommendations depending on… the nature of governments…. [In] governments… not… subject to deficit bias… simple debt feedback rules come close to reproducing the optimal fiscal policy… [if] the exchange rate is floating and there is little risk of hitting the ZLB…. [G]overnment[s] behav[ing] in a non-benevolent manner… need… operational targets… fixed for the end of the natural term of the government… [to] provide strong incentives… for cyclically adjusted primary deficits…. These targets should be set in cooperation with a fiscal council, which would monitor progress… [and,] in exigent circumstances… suggest that the target be revised….

These rules should not apply if interest rates have hit the ZLB. In that case, fiscal policy should focus on demand stabilization… the suspension of the rule while the ZLB constraint applies, and not its modification. This ‘knockout’ should be an explicit part of the rule…

How extending credit can fight recessions

Posted on by David Hudson
The Fannie Mae headquarters is seen in Washington.

When you’re fighting a recession, you want to use the policies with the most “bang for your buck.” Given what we now know about the potential scarring effects of recessions, using inefficient policies not only waste resources but also risk damaging the future potential of workers and the economy as a whole. Policymakers attempting to hasten the return of strong growth often think of fiscal and monetary policy, but a new paper by Deborah Lucas of the Massachusetts Institute of Technology highlights the often-overlooked stimulus power of federal credit policies, which made a sizable contribution to the fight against the last recession.

If fiscal policy is about the government transferring income to households, and monetary policy is about the central bank affecting the flow of credit to households, businesses, and governments, then the kinds of credit policies Lucas highlights—such as Fannie Mae, Freddie Mac, and student loans—are about the government affecting the flow of credit. Lucas notes that there have been few papers on the recession-fighting effects of these federal credit programs for almost 25 years. So that’s what she sets out to do in the paper: to see how effective these programs are at fighting recessions.

Lucas goes about figuring out their effectiveness by calculating how much additional economic output happens after an additional dollar is spent on a specific program—a metric known as a “multiplier” to those familiar with fiscal policy. Economists frequently calculate the multiplier of an additional dollar spent on unemployment insurance during recessions, for example. The relative size of multipliers varies over the business cycle: There’s more bang for your buck during recessions, when there are more idle resources—unemployed workers and underutilized capital—to mobilize.

Lucas ends up finding some pretty significant effects for the federal credit programs during the Great Recession, which helped increase the amount of funds borrowed by households and businesses. And given the substantial multipliers (up to 2, which is the upper end of estimates from the Congressional Budget Office) that she assigns to these programs, the effect of all the credit programs appears to be quite sizable. Overall, the credit programs made a considerable contribution to the fight against the recession: According to Lucas’s estimates, the credit programs in total had a similar impact—$344 billion in additional output—as the American Recovery and Reinvestment Act, better known as the stimulus bill, in 2010.

The scope of these credit programs is clearly underappreciated. And if economists, analysts, and policymakers are starting to think about the proper mix of fiscal and monetary policy to fight future recessions, perhaps they should start considering the role of these programs.

Must-read: Paul Krugman: “Globalization and Growth”

Posted on by Brad DeLong

Must-Read: Paul Krugman: Globalization and Growth: “Brad DeLong… arguing that the really big benefits of globalization come from technology diffusion…

…which make it a much more positive force than I suggest. I used to believe the same thing, and still find myself thinking along those lines now and then. But I’d argue that economists need to be, at the least, upfront about the argument’s limitations. First, it doesn’t come out of the models. As Brad says, the map is not the territory; but guesses about such things are, well, guesses. There was a time when everyone knew that import-substituting industrialization was the key to economic takeoff, based on loose historical reasoning (America and Germany did it!). Then developing countries tried it en masse, and the results weren’t great.

Furthermore, my sense is that nonstandard free-trade arguments tend to involve, often unintentionally, a kind of bait and switch. Economists love to talk about comparative advantage…. Somewhere Alan Blinder said that economists would almost all agree on the slogan ‘Yay free trade.’ But the seeming authority of the comparative-advantage case then ends up being carried over, illegitimately, to arguments for trade that have nothing to do with comparative advantage. Yes, there could be positive externalities associated with trade, but there could be positive externalities associated with lots of things, and Ricardian models don’t give us any special reason to think that the trade ones are more important.

So how would you test such arguments? Well, in a way we did carry out an experiment. In the early 1990s there was a widespread orthodoxy that ‘outward-looking’ development policies were much more favorable to growth than ‘inward-looking’ policies… the rapid growth of Asian economies, which had followed an export-oriented path rather than… import substitution… in the 50s and 60s. The question, however, was whether you would see dramatic acceleration of growth in other places, such as Latin America, when policy shifted away from inward focus. And the answer turned out to be, not so much. Look at Mexico, which did a radical trade liberalization in 1985-88, then joined NAFTA. It has seen a transformation of its economy in many ways; it has gone from an economy that didn’t export much besides oil and tourism to a major manufacturing export power. And the effect on development has been… underwhelming.

So Brad could be right; but the evidence is far from conclusive. I would still argue very strongly that it’s crucial to keep markets open for poor countries. But we should be cautious in our claims about the virtues of free trade.

Does inequality affect high school dropout rates?

Posted on by Bridget Ansel
Melissa Kearney and Phillip Levine investigate how inequality affects the decisions of low-income students when it comes to completing high school.

One way that high levels of income and wealth inequality might affect economic growth is through the development of human capital. Inequality could warp workers’ ability to improve their level of education and skills in a number of ways—for example, income inequality and residential segregation might combine to create an inequitable and inefficient distribution of school spending. Or perhaps high levels of inequality might cause young people to become pessimistic about their future and underinvest in their education. A new paper from the Brookings Papers on Economic Activity reports new evidence for that second story.

The paper, by Melissa Kearney of the University of Maryland and Phillip Levine of Wellesley College, is part of the continuing investigation into the Great Gatsby Curve. The curve (based on work by Miles Corak and proposed by Princeton University economist and former Council of Economic Advisers chair Alan Krueger back in 2012) shows that countries with high levels of income inequality tend to have lower levels of intergenerational mobility. Of course, this is just a correlation—it’s still an open question of whether and how inequality has a causal effect on mobility.

Kearney and Levine try to untangle the possible causal relationship between the two. More specifically, they look at how higher levels of inequality might affect the decisions of students from low socioeconomic backgrounds when it comes to completing high school. Perhaps students will see higher inequality as motivation to work harder. Or maybe higher inequality will cause students instead to feel despair and drop out. It’s not clear which effect will be larger until we look at the data.

But let’s be clear about what the authors mean by inequality. In this paper, since Kearney and Levine look at the effects on students from low socioeconomic backgrounds (measured by the educational level of their mothers), they focus on inequality between those at the bottom and those at the middle of the income distribution. And they are looking at inequality within states and metropolitan areas.

The authors find that states and metropolitan areas with higher levels of inequality have higher high school dropout rates. But the result is only significant for boys from low socioeconomic backgrounds. Boys in high-inequality states are 6 percentage points more likely to drop out than similar boys in low-inequality states. While their analysis doesn’t definitively prove causation, it does show that many other possible explanations don’t reduce the strength of the statistical relationship.

Kearney and Levine’s argument is about students’ perceptions, but they also present some interesting evidence on “returns” to an extra year of school. In low-inequality states, the returns appear to be about the same across all classes. But in high-inequality states, the returns are not only slightly lower but also less equally distributed. This is particularly interesting in light of other research on differential rates of return to education. Perhaps this is why boys from low socioeconomic backgrounds perceive high school to not be worth the effort.

This analysis is far from a smoking gun on the causal relationship between inequality and mobility. No one paper ever will be. But it’s an interesting and thought-provoking step in our efforts to better understand the wide-ranging effects of inequality.

Must-reads: March 13, 2016

Posted on by Brad DeLong

Speaker’s Notes for: Concrete Economics @ SXSW!

Posted on by Brad DeLong

Speaking 12:30 PM Meeting 10AB Level 3 :: Signing 1:00 PM Bookstore Level 3:

Stephen S. Cohen, J. Bradford DeLong: Concrete Economics: The Hamilton Approach to Economic Growth and Policy] (Allston, MA: Harvard Business Review Press:1422189813) http://amzn.to/22ds5TK

The Book:

  • Small book
  • Readable book
  • Important book (we think)

The Thesis:

  • America’s political-economic governance from 1787-1975 or so was extraordinarily successful
  • America’s political-economic governance since 1975 or so not so
  • What changed?
  • America’s political-economic governance took an ideological turn about 1975

Hold It!: Wasn’t America Governed by Political-Economic Ideologies Before 1975?

  • No
  • There were strong ideologies:
    • Jefferson’s agrarian ideology
    • Madison’s (early) small-government ideology
    • Calhoun’s Herrenvolk ideology
    • Lochnerites–the claim the Constitution imposed Herbert Spencer’s Social Statics
  • But they all lost in the great political-economic scrum
    • Hamilton overcame Jefferson
    • Even Madison and certainly Madison’s successors overcame Madison
    • Lincoln overcame Calhoun
    • Teddy and Franklin Roosevelt overcame Herbert Spencer and the Lochnerites

What, Then, Did Govern America from 1787-1975?

  • Pragmatism
    • Hamilton’s state-led push for commerce, industry, finance
    • A very heavy governmental role in westward expansion–very bad for the Amerindians, very good for the settlers and the settler economy
    • Lincoln and his successors’ push for the acquisition of capital–farm capital via homesteads, human capital via education, plus corporate capital
    • Teddy Roosevelt’s Progressive curbing of overweening Gilded-Age power
  • All of these were ruthlessly pragmatic: looking not at ideology as a guide but at the world, and what seemed likely to work to increase popular wealth

But the New Deal! FDR Was Ideological!

  • No
  • FDR’s New Deal was the antithesis of ideology
  • FDR tried everything
    • Corporatism
    • Keynesianism
    • Agricultural subsidies
    • Antitrust
    • Social insurance
    • Unionism
    • And he reinforced what seemed to work
    • The New Deal policies that survived became an ideology, but they started out as the most ruthless pragmatism
  • And Eisenhower:
    • Highways, automobiles, suburbs, massive federal support for technology
    • But also fear of the military-industrial complex and a strong desire neither to break inherited things from the New Deal the worked
    • Eisenhowerism was, as Daniel Bell wrote, an attempt to institutionalize the permanent end of ideology

So What Has Gone Wrong in the Past 40 Years?

  • Belief that the inflation and oil shocks of the 1970s demonstrated that Eisenhowerism was tapped out
  • And the fault laid to insufficient love of the free market (and excessive big government)
  • Hence the big push for:
    • Spending two Pentagons on excess wealth for our overclass in an attempt to give them “incentive”
    • Spending a Pentagon on excess health care administration and excess unnecessary and harmful treatment
    • Deregulation and financialization leading to a Pentagon’s worth of waste in over-financialization
      • Is corporate control better? Is risk-bearing more advanced?
      • Plus two additional Pentagons’ worth of waste in permanent damage from the financial crisis
    • The only rich capital-inflow economy in history
      • A really rich country should be exporting capital
      • And leveraging its innovative, intellectual, and human-capital expertise over ever-growing communities of engineering and entrepreneurial practice
        • To some degree, we have been doing the second
      • But we have been letting “the market” greatly reduce the scale
  • From the middle-class perspective, 8 Pentagons worth of waste over the past 40 years–all of them driven by ideology (and interest)

What to Do Next?

  • All such books are supposed to end with: MY PLAN
  • We refuse: such “my plans” are never convincing
  • What we do seek to convince you of is this:
    • The world is a complicated place
    • The world surprises you–and the more bound you are to your ideology, the more you will be surprised
    • Feedback and pragmatism are better than ideological oversimplifications
    • Arguments against policies of the form “this breaks ideological principle X” should have much less purchase than we give them

Today That Principle Leads to a Total Rejection of the Republican Party and All of Its Works

  • But that fact is a judgment on the Republican Party as it is currently constituted
  • And whatever parties we have in 30 years will be equally vulnerable to ideological viruses–as vulnerable as were jefferson, Madison, Calhoun, the Lochnerites, and more recently the Bushites, Cruzites, Rubites, Gingrichites, and even the Kasichites.
  • We need to defeat them and be pragmatic–with Hamilton, the later Madison and company, Lincoln, Teddy and Franklin, and Ike…