Must-read: Spencer Headworth and Jeremy Freese: “Credential Privilege or Cumulative Advantage?: Prestige, Productivity, and Placement in the Academic Sociology Job Market”

Posted on by Brad DeLong

Must-Read: Cumulative advantage plus bureaucratic formally-meritocratic procedures that rely on “objective” indicators of achievement plus a degree of signaling but risk aversion do wind up producing something that looks a lot like a caste system. Thus I think Headworth and Freese misinterpret what their own results are really saying to them:

Spencer Headworth and Jeremy Freese: Credential Privilege or Cumulative Advantage?: Prestige, Productivity, and Placement in the Academic Sociology Job Market: “We examine different predictors of placement in research-oriented, tenure-track academic sociology jobs…

…The enormous relationship between PhD institution and job placement that has, in part, prompted a popular metaphor that academic job allocation processes are like a caste system. Yet we also find comparable relationships between PhD program and both graduate student publishing and awards. Overall, we find results more consistent with PhD prestige operating indirectly through mediating achievements or as a quality signal than as a ‘pure prestige’ effect. We suggest sociologists think of stratification in their profession as not requiring exceptionalist historical metaphors, but rather as involving the same ordinary but powerful processes of cumulative advantage that pervade contemporary life.

Must-read: David Becker: “Republican Senator Portman Opposes TPP Trade Deal in Present Form”

Posted on by Brad DeLong

Must-Read: An interesting political tack by ex-USTR Portman. TPP doesn’t make any attempts to constrain “currency manipulation”. But it doesn’t contain any provisions that make “currency manipulation” easier. And I, at least, had not thought that the rules-of-origin on auto parts mattered at all…

David Becker: Republican Senator Portman Opposes TPP Trade Deal in Present Form: “Dealing a significant blow to the pact a day after officials from 12 countries signed it…

…Portman, from Ohio, said the Pacific trade deal fails to meet the needs of his state’s workers because it lacks an enforceable provision to fight currency manipulation and because of new, less-stringent country-of-origin rules for auto parts. ‘I cannot support the TPP in its current form because it doesn’t provide that level playing field,’ Portman said…

Weekend reading: Narayana Kocherlakota: “Dovish Actions Require Dovish Talk (To Be Effective)”

Posted on by Brad DeLong

The wise Mark Thoma sends us to the newly-unmuzzled and very sharp Narayana Kocherlakota: Dovish Actions Require Dovish Talk (To Be Effective): “The Federal Open Market Committee (FOMC)…

…has bought a lot of assets and kept interest rates extraordinarily low for the past eight years.  Yet, all of this stimulus has accomplished surprisingly little (for example, inflation and inflation expectations remain below target and are expected to do so for years to come).   Does that experience mean that we should give up on monetary policy as a useful way to stimulate aggregate demand?
My answer is no.  I argue that, over the past seven years, the FOMC’s has consistently talked hawkish while acting dovish.  This communications approach has weakened the effectiveness of policy choices, probably in a significant way.  Future monetary policy stimulus can be considerably more effective if the FOMC is much more transparent about its willingness to support the economy – that is, about its true dovishness.

My starting point is that households and businesses don’t make their decisions about spending based on the current fed funds rate – which, is after all, a one-day interest rate.  Rather, spending decisions are based on longer-term yields.  Those longer-term yields depend on market participants’ beliefs about how monetary policy will evolve over the next few years.  Those beliefs are a product of both FOMC actions and FOMC communications. 

In December 2008, the FOMC lowered the fed funds rate target range to 0 to a quarter percent. It did not raise the target range until December 2015, when the unemployment rate had fallen back down to 5%.   But – with the benefit of hindsight – a shocking amount of this eight years’ worth of unprecedented stimulus was wasted, because it was largely unanticipated by financial markets. (Full disclosure: I took part in FOMC meetings from November 2009 through October 2015, and it could certainly be argued that I was part of the problem that I describe until September 2012.)  

I’ll illustrate my basic point in the most extreme way that I can.  In November 2009, the Committee’s statement said that the fed funds rate might be raised after ‘an extended period’ – a term that was generally interpreted to mean ‘about six months’.  Accordingly, as footnote 25 of this speech notes, private forecasters in the Blue Chip survey projected that the unemployment rate would be near 10 percent at the time of the first interest rate increase.  

Now, suppose that the FOMC had communicated its true reaction function in November 2009 (or even as late as December 2012): as long as inflation was anticipated to be below 2% over the medium-term, the Committee would not raise the fed funds rate until the unemployment rate had fallen to 5% or below.  We can’t know the impact of such communication with certainty.   But most macroeconomic models would predict that this kind of statement would have put significant upward pressure on employment and prices.  In other words: the models predict that if the FOMC had been willing to communicate its true willingness to support the economy, the Committee would have been able to (safely) raise rates much sooner.  

I want to be clear: my point in this post is not to express regrets or recrimination over past ‘mistakes’.    (It would have been good in 2009 to know what we know now, but we didn’t.)  And my point is not that monetary policy is some kind of panacea.  In the presence of a lower bound on nominal interest rates, expansionist fiscal policy would have been helpful in the past (and could be now too). 

My point is this: we shouldn’t make judgements about the efficacy of future monetary policy stimulus based on the experience from the past seven years.   Unfortunately, much of the potential impact of that lengthy stimulus campaign was vitiated by the FOMC’s generally hawkish communications.   

In my view, the FOMC can deliver useful impetus to aggregate demand with its remaining tools.  But it needs to communicate ahead of time about its true willingness and ability to support the economy.   Without that prior communication, later attempts at stimulus are likely to prove in vain – and the Fed’s credibility may suffer further damage.

Must-reads: February 5, 2016

Posted on by Brad DeLong

Must-read: Antonio Fatas: “A 2016 Recession Would Be Different”

Posted on by Brad DeLong

Must-Read: “The years that the locust hath eaten, the cankerworm, and the caterpiller, and the palmerworm…” –Joel 2:25 (KJV). The task of fiscal and monetary policymakers as of the start of 2009 was (1) to arrest the slide, (2) to trigger a strong recovery, and (3) to set the world economy in a situation in which future policymakers would have the room to maneuver so that future substantial adverse macroeconomic shocks–and there would be future substantial adverse macroeconomic shocks–could be neutralized. They (probably) accomplished (1), they (certainly) failed at (2), and they continue to fail at even starting at (3)–and the fact that it is now seven years and they have not even started this task somehow fails to exercise them:

Antonio Fatas: A 2016 Recession Would Be Different: “1. The Yield curve would be very steep…

…2. The real federal funds rate (or the ECB real repo rate) would be extremely low…. 3. And nominal central bank interest rates would be stuck at zero…. So maybe this tells us that a recession is not about to happen. But if it is, the lack of space to implement traditional monetary policy tools should be a big concern for policy makers. If a recession ends up happening, helicopter money will likely become a policy option.

Must-read: Tim Worstall: “Facebook Doesn’t Waste Trillions In Time: That’s The Value Facebook Adds For Us”

Posted on by Brad DeLong

Must-Read: Tim Worstall: Facebook Doesn’t Waste Trillions In Time: That’s The Value Facebook Adds For Us: “CNBC… [is] saying that we all spend lots of time on Facebook…

…That’s entirely true…. They’re then saying that that time has a value: this is also true…. But then they say that the time we spend on Facebook is a waste… because we are doing Facebook rather than working to make money. And that’s entirely the wrong way around. That we are on Facbeook rather than making money shows that we value the Facebook time more than the money. Thus this financial value of this time is the value that is being added to our lives. And yes, this is an important economic point which then feeds through into public policy….

[CNBC’s] is bad economics… a fetishisation, a reification, of GDP… not something that we want to do at all: we need to remember that GDP is only a proxy for how well we’re doing, not how well we’re doing itself…. Facebook is valued in GDP at it’s profits plus its wage bill… about $10 billion [a year]…. [But] we’ve got people giving up $900 billion in hypothetical labour value…. I’m not going to insist upon that $900 billion…. But I am going to insist that the addition is very much larger than the $10 billion odd that sits in GDP…

Must-read: Ben Zipperer: “U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employment”

Posted on by Brad DeLong

Must-Read: Almost all of those believing that we are now near full employment here in the U.S. dismiss the low employment-to-population ratio by noting that the population is aging. They very rarely confront the collapse since the late 1990s of the prime-age employment-to-population ratio.

But when they do confront the collapse since the late 1990s of the prime-age employment-to-population ratio, what do they say? I have heard only:

  1. “Peak male”–that the rise of the robots will systematically disadvantaging male workers, and we are starting to see this already. The problem with this is that the decline in employment-to-population since 2000 is about equal for 25-54 year-old males and females.

  2. “It’s too late”–that our failure to induce a rapid recovery in 2009-11 broke the connection of many prime-age workers to the social networks that allowed them to navigate the labor market, and that taking steps to get them back into the labor market could only succeed if accompanied by unwelcome and unthinkable inflation.

  3. “Stop and smell the roses”–that people found out in the late 1990s that they really did not want to work that hard and that long anyway.

May I say I find all three of these profoundly unconvincing?

Ben Zipperer: U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employmenth: “Estimates of full employment vary, but one natural point of comparison is the tight labor market of the late 1990s…

…For the entire 1998-2000 period, the employed share of the prime-age population (ages 25 through 54) was at least 81 percent, reaching 81.9 percent in April of 2000. In the most recent business cycle, the prime-age employment rate was above 80 percent during the final quarter of 2006 and first quarter of 2007. A full employment standard of 81 percent therefore lies somewhere in between the peaks of the last two business cycles. Some of the brightest news in today’s employment report is that the employed share of the prime-age population moved to 77.7 percent, up from 77.4 percent in December…. Last month’s increase in the prime-age employment rate is excellent progress. But as part of its mandate to promote full employment, the Fed should consider the projected progress of the labor market as it considers slowing the rate of employment growth.

A Non-Sokratic Dialogue on Social Welfare Functions: Hoisted from the Archives from 2003

Posted on by Brad DeLong

A Non-Sokratic Dialogue on Social Welfare Functions: Hoisted from the Archives from 2003:

Glaukon: ‘Professor!’

Agathon: ‘Professor! Good to see you. Getting coffee?’

Glaukon: ‘Yes. I’m teaching. I find that teaching is always and everywhere a caffeine phenomenon.’

Agathon: ‘I tend to find that teaching is usually a bagel phenomenon myself. What are you going to teach them?’

Glaukon: ‘Social welfare. Utilitarianism. Condorcet. Arrow. Aggregation of preferences. Preference-revealing mechanisms.’

Agathon: ‘Sounds like a full class.’

Glaukon: ‘You have no idea.’

Agathon: ‘Be sure to teach them about the market’s social welfare function.’

Glaukon: ‘The market has a social welfare function?’

Agathon: ‘Under appropriate conditions of perfect competition, non-increasing returns, and the absence of externalities the market’s decisions about the production and allocation of goods and services attain a point on the Pareto frontier. Every point on the Pareto frontier maximizes some social welfare function.’

Glaukon: ‘Yes, of course.’

Agathon: ‘Therefore the market, considered as a collective mechanism for making social decisions, chooses to maximize a particular social welfare function. It is instructive to consider what that social welfare function is.’

Glaukon: ‘I resent the tone in which you are talking down to me.’

Agathon: ‘You do not. This part of this conversation never took place in even approximate form in the real world. It is interpolated in order to bring readers of this weblog up to speed. Since I never said my last speech to you, you could not have resented it.’

Glaukon: ‘And I want readers of this weblog to know that I am considerably smarter and more clued-in than he is letting me appear to be.’

Agathon: ‘Are you quite finished?’

Glaukon: ‘Plato at least worked harder to make his information dumps fit more gracefully into the conversation. I want a better author.

Agathon: ‘Are you quite finished?’

Glaukon: ‘Yes.’

Agathon: ‘As I was saying, the market system chooses an allocation. That allocation can only be justified under the assumption that moves along the Pareto frontier in every direction–moves that transfer wealth from one member of society to another–are of no benefit to social welfare, while moves toward the Pareto frontier do benefit social welfare. If we restrict ourselves to social welfare functions that are weighted sums of individual utilities, that means that the market system’s social welfare function gives each individual a weight inversely proportional to his or her marginal utility of wealth.’

Glaukon: ‘Didn’t somebody say about society that there was no such…’

Agathon: ‘Hush! If you want to quote Margaret Thatcher, you must introduce her as a speaking character in this dialogue and grant her some of her time…’

Glaukon: ‘I? You’re the authorial stand-in in this dialogue, not me…’

Agathon: ‘That means that the market system, in weighting utilities and adding them up, gives you a much lower utility than it gives Richard Cheney. In fact, if marginal utility of wealth is inversely proportional to the square of lifetime wealth, the market system gives Richard Cheney about 400 times as big a weight as it gives you.’

Glaukon: ‘That’s sick.’

Agathon: ‘And it gives Bill Gates a weight about 400,000,000 times as big a weight as it gives you.’

Glaukon: ‘That’s sicker.’

Agathon: ‘But it gives you about 40,000 times the weight it gives your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system’s concern as Bill Gates has. Will you teach that?’

Glaukon: ‘They’ll call me a Communist!’

Agathon: ‘But it’s true!’

Glaukon: ‘That I’m a Communist?’

Agathon: ‘No. That that’s what the market system does!’

Glaukon: ‘We are value neutral economists! We don’t care about distribution! We care about efficiency!’

Agathon: ‘But claiming that you don’t care about distribution is implicitly saying that shifts in distribution are of no account–which can be true only if the social welfare function gives everybody a weight inversely proportional to their marginal utility of wealth.’

Glaukon: ‘You’re introducing politics into a value-neutral technocratic social science.’

Agathon: ‘Politics?! Moi? I’m simply evaluating the derivatives of a social welfare function under the assumption that the market allocation is its ArgMax. What could be more technocratic than that? I’m just trying to attain a little clarity of thought.’

Thrasymachus: ‘But where rule rests not–as somebody or other said at one of Old Joseph de Maistre’s little soirees in St. Petersburg–on the hangman, but on misdirection and confusion, to strip away the veils of alienation and false consciousness that keep humans from perceiving their species-being, the act of unveiling is itself a powerfully political act.’

Agathon: ‘Are you Thrasymachus or Karl Marx?’

Thrasymachus: ‘Ah. Marx thought unveiling was a good thing. I think it is neither good nor bad, for ‘good’ like ‘justice’ is really just another word for the interest of the stronger party.’

Glaukon: ‘And we gave you tenure here at Berkeley?’

Thrasymachus: ‘Shhh! The humanities departments still think relativism is sexy. They haven’t yet figured out that to assume a position of relativism–like the claim to be neutral on issues of distribution–is really a statement that you are on the side of the powerful.’

Agathon: ‘And are you?’

Thrasymachus: ‘It is the just and the good–or, rather, the ‘just’ and the ‘good’–thing to do.

Weekend reading: “How low can they go?” 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

The Bank of Japan cut interest rates last week and entered the realm of negative interest rates. And Japan isn’t alone—a number of central banks have pushed interest rates below zero. But how low can they go? Demand for cash may determine the effective lower bound.

A number of states are trying to fill the gaps in the current U.S. retirement savings system by offering state-sponsored accounts. Increasing access and actual contributions to savings accounts will be critical, but let’s make sure investment fees are low as well.

A recession in the United States might be imminent. Or it might not arrive for another year. Or even several years from now. But another one will come eventually. Now’s the time to think about how to fight the next recession.

The gender wage gap is a persistent if declining source of economic inequality in the United States. As the gap has declined, so has the relative importance of the reasons for the gap. But as we potentially enter the final chapter of the convergence, it’s worth looking at the current sources for the wage disparity.

Today’s jobs report on the labor market in January showed that the employed share of prime-age workers jumped up a bit after weak growth in 2015. But looking at recent trends is a bit more sobering. At the pace of the past two years, the U.S. economy won’t reach full employment until 2022, according to Ben Zipperer.

Links from around the web

One troubling trend in the U.S. labor market is the declining rate of job-to-job moves, particularly for young workers. Fewer workers quitting and moving up the job ladder slows down wage growth. That’s why employers’ increasing use of non-compete agreements, detailed by Aruna Viswanatha, is so troubling. [wsj]

Tim Duy breaks down a speech by Federal Reserve Vice Chair Stan Fischer from this past Monday. While Fischer seems confident in the central bank’s planned rate hikes this year, he doesn’t seem to fully grasp, in Duy’s view, how new the normal is when it comes to interest rates. [fed watch]

Negative interest rates were thought to be impossible for a number of reasons—one among them that the technical feasibility of passing on negative rates to retail savers was low. But as Martin Sandbu shows, those technical concerns have been assuaged. Net savers, however, might not like how they’ve been solved. [free lunch]

A major argument in tax policy, in both academic and policy circles, is the extent to which capital income should be taxed lower than labor income. One presidential candidate—Marco Rubio—wants to take it in a direction that would greatly reduce taxes for those at the top: total abolition of capital gains taxes. Josh Barro discusses the idea. [the upshot]

You’ve probably been told not to be concerned about the falling stock market because it isn’t that connected to the real economy. But what if exactly the opposite is true? What if stock market crashes are what cause recessions? John Carney lays out the views of UCLA economist Roger Farmer. [wsj]

Friday figure

Figure from “U.S. job growth slows in January, as the nation remains years away from full employment” by Ben Zipperer.

U.S. job growth slows in January, as the nation remains years away from full employment

Posted on by Bridget Ansel
A help-wanted sign displays outside the Mayfield Drive-In movie theater in Chardon, Ohio. U.S. job growth slowed in January, with employers adding 151,000 jobs last month, compared to the 262,000 jobs added in December.

After unusually warm weather helped boost U.S. employment growth at the end of 2015, job growth slowed a bit last month. According to the latest data from the Bureau of Labor Statistics, U.S. employers added 151,000 jobs last month, compared to the 262,000 jobs added in December. The best news in today’s report was that the nation’s prime-age employment rate jumped to 77.7 percent, but at current rates, the United States is still years away from full employment.

A slower pace of job gains early this year is expected, as some employers compensate for faster-than-usual hiring in December when the weather was unseasonably warm. Some of the warm weather at the end of 2015 may have also pulled hiring forward in the construction industry. Construction employment growth slowed significantly in January as the industry added only 18,000 jobs, compared to 48,000 new construction jobs in December. In contrast, the opposite trend occurred in retail, which may have been depressed during the warm weather in December as consumers avoided purchasing winter apparel. Retail employment growth was flat in December, but the sector posted strong gains of 57,700 jobs last month.

The pace of U.S. wage growth has also increased somewhat this year, now growing at a 2.5 percent annual rate. In particular, wages grew by 3.2 percent at an annual rate in the leisure and hospitality sector, which includes restaurants. Faster wage growth in these industries relative to the overall private sector is partially due to minimum-wage increases in January. Around the start of last month, 14 states and several cities and localities raised their minimum wages. Employees in the leisure and hospitality industry are more likely to be minimum-wage workers than employees in any other major sector.

The 2.5 percent wage growth rate is substantially better than the 2.1 percent average growth over 2014, and slightly better than the 2.3 percent average growth over 2015. But current rates are still far below what would be considered healthy wage growth. If the Federal Reserve maintains a long-run 2 percent inflation target, and U.S. productivity grows at roughly 1.5 percent annually, the workforce requires annual, sustained wage growth of at least 3.5 percent to keep income inequality from rising.

As the Fed considers slowing the economy further by raising interest rates, it’s also worth considering how far the United States remains from full employment. Estimates of full employment vary, but one natural point of comparison is the tight labor market of the late 1990s. For the entire 1998-2000 period, the employed share of the prime-age population (ages 25 through 54) was at least 81 percent, reaching 81.9 percent in April of 2000. In the most recent business cycle, the prime-age employment rate was above 80 percent during the final quarter of 2006 and first quarter of 2007. A full employment standard of 81 percent therefore lies somewhere in between the peaks of the last two business cycles.

Some of the brightest news in today’s employment report is that the employed share of the prime-age population moved to 77.7 percent, up from 77.4 percent in December. At recent rates of employment growth, however, the United States is not likely to obtain full employment until at least 2020. From 2013 to 2014, the employed share of the prime-age population grew by about 0.8 percentage points. Projecting that annual increase from today into the future, the prime-age employment rate should reach a full employment benchmark of 81 percent four years from now, at the beginning of the year 2020. (See figure below.)

The projection is more pessimistic if we use employment growth over the more recent 2014-2015 period, when employment growth slowed somewhat, and the employed share of the prime-age share of the population grew by about 0.5 percentage points. Under this more pessimistic scenario, the nation will not reach a full employment benchmark of 81 percent until 2022.

Last month’s increase in the prime-age employment rate is excellent progress. But as part of its mandate to promote full employment, the Fed should consider the projected progress of the labor market as it considers slowing the rate of employment growth.