Must-read: Olivier Blanchard et al.: “Reality Check for the Global Economy”

Posted on by Brad DeLong

Olivier Blanchard et al.: Reality Check for the Global Economy: “After five years of disappointing recovery throughout the major economies…

…almost everyone is ready to believe the worst. The widespread large declines in global asset prices indicate a significant divergence between what financial markets fear and what most mainstream macroeconomic forecasts are showing for the world economy. Having some clarity to distinguish between the more solid underlying economic outlook and the shadows thrown by financial puppetry is critical to avoid an unnecessary recession.

In this Briefing, a group of PIIE scholars came together to provide a reality check for the global economy. They set out what is known, both about macroeconomic dynamics and policy capabilities, in a context where distrust of both mainstream economic analysis and policymakers’ credibility has become excessive. Global economic fundamentals today are not so grim, though there is room for improvement in key areas including China, the United States, European banks, Brazil and Latin America, oil markets, global trade, and monetary policy options.

In particular, we argue: The relative forecasting ability of financial markets for the real economy has probably gone down postcrisis (Adam S. Posen). The US economy remains at a relatively low, though slightly elevated, risk of recession (David Stockton). The positive effects of the decline in the price of oil on the US economy have taken longer to materialize than was expected, but they will strengthen looking forward (Olivier Blanchard and Julien Acalin). Chinese economic growth is, at a minimum, well above current fear-driven estimates, and that growth is predominantly service sector–based and therefore sustainable (Nicholas Lardy). The slowdown in growth of global trade reflects weak global investment and a medium-term adjustment to the past creation of global supply chains and is not a harbinger of further contraction (Caroline Freund). The European banking system is in transition to a stronger state, and the problems evident in Italy are not enough to throw Europe’s economy off course (Nicolas Véron). Brazil’s economy while dysfunctional is far more likely to experience years of higher inflation than any overt fiscal or balance of payments crisis (Monica de Bolle). Latin America more generally has run into problems of slow productivity growth but is not doomed by the commodity cycle (José De Gregorio). Monetary policy remains potent, with multiple possible avenues for additional stimulus if needed, starting with effective quantitative easing on private assets (Joseph Gagnon).

What’s your college degree worth? It may depend on your parents’ income

Posted on by Bridget Ansel
The 2015 graduating class of Texas Southmost College in Brownsville, Texas.

Education is supposed to be a silver bullet. A great equalizer when it comes to income inequality, and a boost to flagging wages and incomes. But higher levels of education alone may not be able to reduce income inequality. While increasing the share of so-called “marginal students” attending college would have a positive return, it’s unclear just how large that return would be. And the return to higher education may also vary by how much a student’s parents earn.

In a column for the Brookings Institution, Brad Hershbein of the W.E. Upjohn Institute for Employment Research lays out some surprising results on the lifetime earnings of U.S. workers from different family backgrounds. Specifically, he and his colleagues looked at the lifetime earnings measured by the Panel Study of Income Dynamics for workers who grew up in families with incomes above and below 185 percent of the federal poverty level (about $45,000 for a family of four in 2016).

Unsurprisingly, workers with college degrees earn more than workers with just high school degrees, regardless of family background. College grads from families with incomes below 185 percent of the poverty line make more than than high school grads from the same income background, and the same for those from families well above the poverty threshold. But the boost from a college degree varies by background.

College grads from lower-income backgrounds (specifically families with incomes below the 185 percent threshold) earn 91 percent more over the course of their career than high school grads from the same background. But college grads coming from families that were well above poverty (or families earning above the 185 percent threshold) make 162 percent more than high school grads from the same background. So the return on a college degree is significantly higher for a student who grew up far away from poverty.

In other words, if you were to interpret these results as the causal effect of a college degree, a college degree boosts the earnings of students from low-income backgrounds, but college grads from higher-income backgrounds pull away from them as they get a larger boost. Incomes for both groups go up, but inequality rises.

Hershbein notes that he and his colleagues are now trying to dig into the reasons for this differential rate of return on college and making sure the trend holds up in other data sources. If the trend does hold up, understanding the causes will be incredibly important. If we want higher education to be a growth-enhancing and equalizing policy tool, we have to understand how to make sure that students from low-income backgrounds get the same—or perhaps even greater—rate of return.

Must-read: Justin Fox: “The U.S. Could Use a New Economic Strategy”

Posted on by Brad DeLong

Must-Read: Some very nice thoughts about our Concrete Economics from the extremely-sharp Justin Fox:

Justin Fox: The U.S. Could Use a New Economic Strategy: “In his four-plus years as the country’s first treasury secretary…

…Alexander Hamilton crafted an economic strategy that helped the U.S. rise from agrarian former colony to global economic power… [write] Stephen S. Cohen and J. Bradford DeLong write in their brand-new book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy…. No U.S. leader since has articulated and then put in place an all-encompassing economic plan in quite the way Hamilton did. But the country has always followed some sort of economic strategy, even if it has seldom been clearly defined…. It is at least possible that this last era has come to an end…. It’s not at all clear, though, what’s going to replace it.

DeLong… and Cohen… simply recommend that discussion of economic policy focus on the concrete–what works…. Still, it’s not easy to figure out what the U.S. should do next. Nations playing catch-up… have concrete examples…. But the U.S. of 2016 is the biggest economy on the planet…. In the latest World Economic Forum global competitiveness rankings, for example, it trailed only Switzerland and Singapore. There is surely much we can learn… but… the U.S. remains largely sui generis. I’m almost certain that more infrastructure investment would be a smart part of any new U.S. economic strategy. But I’m not so sure what should be built and where, or what else…. Got any suggestions?…

I would say that our book has two big lessons to teach. The first is that, in America, economic policy has been successful when it has been pragmatic. Hamilton is our first example. But “Hamiltonianism” is not the right economic policy configuration for the ages. The United States did not stay with Hamilton’s policy configuration. The post-Civil War Gilded Age’s focus on homesteading, truly massive infrastructure subsidies, and mass immigration had little to do with Hamilton’s debt, finance, bank, tariff, and manufacturing focus. The Progressive Era had different concerns and policies. As did the other Roosevelt’s New Deal. As did Eisenhower. And our recent age–which Justin Fox calls “financialization”, but which we might as well call “neoliberalism” (it’s what everyone else calls it)—has been broadly unsuccessful not because it has deviated from Hamiltonianism but because it has been ideological.

Must-reads: March 9, 2016

Posted on by Brad DeLong

Must-read: John Plender: Uncertainty Principles: ‘The End of Alchemy’, by Mervyn King

Posted on by Brad DeLong

Must-Read: John Plender: : “King’s hugely ambitious aim in his book is to put an end to the alchemy…

…that has made financial crises a permanent feature of the landscape and allowed money — a public good — to become the byproduct of credit creation by private-sector banks. Above all, he argues that the crisis of 2007-09 reflected not just a failure of individuals or institutions, but a failure of the ideas that underpin current economic policymaking…. King argues that in a world of what economists now call ‘radical uncertainty’… there is simply no way of identifying the probabilities of all future events and no set of economist’s equations that describe people’s attempts to cope with that uncertainty…. In King’s terms, the coping strategy of households, businesses and investors involved adopting a narrative of stability while the level of spending ran at unsustainably high levels….

Western consumers’ urge to spend was not strong enough to offset the greater urge of northern Europeans and Asians to save, [so] global interest rates fell. Banks then satisfied investors’ desperate search for income by creating increasingly complex and risky financial products…. Bank balance sheets grew explosively…. The financial crisis changed the narrative. In King’s estimation, policymakers were right to adopt a Keynesian stimulatory response in 2008-9…. They averted a repetition of the Great Depression but, in doing so, created what King calls a paradox of policy. Interest rates today, he says, are too high to permit rapid growth of demand in the short run but too low to be consistent with a proper balance between spending and saving in the long run….

King argues that Bagehot’s famous dictum on central bank crisis management — lend freely on good collateral at penalty rates — is out of date because bank balance sheets today are much larger and have fewer liquid assets than in the 19th century. Central banks are thus condemned in a crisis to take bad collateral in the shape of risky, illiquid assets on which they will lend only a proportion of the value, known as a haircut…. King suggests this lender of last resort role should be replaced by what he calls, with a pleasing irreverence towards central banking mystique, a pawnbroker for all seasons…. Banks would decide how much of their asset base to lodge in advance at the central bank to be available for use as collateral. For each asset, the central bank would calculate a haircut…. The system would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty…

Must-read: Simon Wren-Lewis: “The ‘Strong Case’ Critically Examined”

Posted on by Brad DeLong

Simon Wren-Lewis: The ‘Strong Case’ Critically Examined: “The deficit obsession that governments have shown since 2010…

… has helped produce a recovery that has been far too slow, even in the US. It would be nice if we could treat that obsession as some kind of aberration… but unfortunately that looks way too optimistic. The Zero Lower Bound (ZLB) raises an acute problem for… the consensus assignment… [of] leaving macroeconomic stabilisation to an independent, inflation targeting central bank) [and when you] add in [fiscal] austerity… you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession….

Many macroeconomists do see the problem, but the solutions they propose are often just workarounds… [q]uantitative Easing… NGDP targets… a higher inflation target… mean that in response to a sharp enough recession, we would still regret no longer having the possibility of undertaking a money-financed fiscal stimulus.

I also think there is a grain of truth in the argument that ICBs created an environment where deficit obsession became easier…. Ask the following question: in the absence of ICBs, would our deficit obsessed governments actually have undertaken a money financed fiscal stimulus? To answer that you have to ask why they are deficit obsessed. If it is out of ignorance (my Swabian syndrome), then another piece of macro nonsense that ranks alongside deficit obsession is the evil of printing money in any circumstances. I suspect a patient suffering Swabian syndrome would also be subject to this fallacy. If the reason is strategic (the desire for a smaller state) the answer is obviously no. We would simply be told it could not be done because it would open the inflation floodgates.

Why is U.S. labor market fluidity drying up?

Posted on by Bridget Ansel
People wait to talk with potential employers at a job fair in New York.

The U.S. labor market is a far less dynamic place than it was 30 years ago. Workers today are less likely to get a job while unemployed, move into unemployment, switch jobs, or move across state lines. You’d think just the opposite would be true given some of the discussion about our rapidly changing digital economy, but the data show what the data show. Even still, the reason—or reasons—for the decline in fluidity aren’t known.

A new working paper—by economists Raven Molloy, Christopher L. Smith, and Riccardo Trezzi of the Federal Reserve and Abigail Wozniak of the University of Notre Dame—takes a closer look at the decline in labor market fluidity and tries to find the causes. While the authors find nothing close to a smoking gun, they point to interesting avenues of future research.

The new paper, part of the Brookings Papers on Economic Activity, starts by laying out the trends in fluidity. Labor market fluidity can mean a number of things, including the rate at which workers move into and out of unemployment, switch jobs, and move across state lines. Molloy and her co-authors create a composite measure that combines these kinds of fluidities and find that overall fluidity in the U.S. labor market has fallen between 10 percent and 15 percent since the early 1980s. But for some of the individual flows, the decline has been as large as one-third.

Why has that happened? Let’s look first at demographics. The U.S. population has changed quite a bit since the early 1980s as more women have entered the labor market and the labor force has gotten older, among other trends. These demographic changes could be responsible for less fluidity as, for example, older workers are less likely to switch jobs. The authors find, however, that while demographics can explain a decent amount of the decline in fluidity, it can’t explain the “bulk of the decline.” A full accounting needs to look at other potential causes.

Molloy and her co-authors look at two groups of potential causes of the decline: benign causes and “less benign causes.” Because while the decline in movement within the labor market may seem troubling on its face, it’s not necessarily a bad thing. Declining fluidity might be a sign that workers are better matched with employers. Or perhaps workers don’t have to switch jobs as much as in the past because they can get larger raises by staying with their current firms. In other words, workers can climb the job ladder inside their current firm instead of jumping to a rung at another firm. The authors find no evidence, however, that the return to tenure has increased and that the gain from switching jobs has declined. But they do think much more investigation needs to be done in this area.

Another thought is that the rise of labor market regulations or other regulations in the economy might explain the decline in fluidity. But the economists cite research by Nathan Goldschlag and Alex Tabarrok of George Mason University that finds federal regulation has “little to no effect” on economic dynamism. Nor is there much evidence that land-use regulations have depressed across-state moves. While the authors do find some speculative evidence that declines in fluidity are related to declines in social trust, the results aren’t particularly strong, so much more research is needed on this particular question.

The authors acknowledge that the paper “has raised at least as many questions as it has answered,” but that’s not a bad thing. After their analysis, it seems more likely than not that the decline in labor market fluidity is harmful for U.S. workers. As such, spurring more research in this area is critical, because if we want to restore some fluidity, we need to figure out where the leak is.

Must-read: Thomas Piketty: “A New Deal for Europe”

Posted on by Brad DeLong

Must-Read: Thomas Piketty: A New Deal for Europe: “Only a genuine social and democratic refounding of the eurozone…

…designed to encourage growth and employment, arrayed around a small core of countries willing to lead by example and develop their own new political institutions, will be sufficient to counter the hateful nationalistic impulses that now threaten all Europe. Last summer, in the aftermath of the Greek fiasco, French President François Hollande had begun to revive on his own initiative the idea of a new parliament for the eurozone. Now France must present a specific proposal for such a parliament to its leading partners and reach a compromise. Otherwise the agenda is going to be monopolized by the countries that have opted for national isolationism—the United Kingdom and Poland among them…

http://www.nybooks.com/articles/2016/02/25/a-new-deal-for-europe/

Must-reads: March 7, 2016

Posted on by Brad DeLong

Must-read: Tim Worstall: “Brookings Is Wrong On The Productivity Slowdown”

Posted on by Brad DeLong

Must-Read: Tim Worstall: Brookings Is Wrong On The Productivity Slowdown: “My own favoured example being that in our current GDP numbers globally…

…we have Facebook marked down as providing some $18 billion of economic value, that should then translate into perhaps $36 billion of consumer surplus, which is the true measure of how we’ll we’re doing as humans. And yet that’s obviously ridiculous: something that 1 billion people do for an average 20 minutes a day simply cannot be valued at such a low number. If we measured that time at US minimum wage (maybe not right, but indicative) then we’d have $800 billion or so of time value. Or, alternatively, we should be valuing the time people spend on Facebook at 10 cents or whatever an hour….

Brookings has a new paper out:

We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services…. Many of the tremendous consumer benefits… are, conceptually, non-market…. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising.

And that’s a horrible assumption, a terrible line of reasoning. As Delong says:

Isn’t ‘measuring consumer welfare’ the point? We (a) arrange atoms (b) in forms we find pleasing and convenient, and then use them in combination with (c) information and (d) communication to accomplish our purposes. That our measures of economic growth are overwhelmingly ‘market’ measures that capture the value of (a), much of the value of (b), and little of the value of (c) and (d) is an indictment of those measures, and not an excuse for laziness by shrugging them off as ‘non-market’ and claiming that measuring the shifting-out of market-sector production functions is our proper business….

Consumer welfare… is the thing…. Market economic activity… are only a proxy… because we want to be able to calculate it in something close to real time… [and] to have objective rather than highly subjective numbers…. But we must never forget that it is only a proxy…. Consider WhatsApp. Currently it charges no fee… and… carries no advertising…. Anyone want to claim that WhatsApp adds nothing?… Thus we know absolutely that we’ve got a measurement problem here. Our only question is how bad is it?… And yes, obviously, this spills over into public policy…. We do indeed have 1 billion of those guys’n’gals getting their telecoms for free: what do you mean this isn’t making people richer?