Must-Read: : Computer Science Meets Economics: “Constantinos Daskalakis,[‘s]… dissertation… proves that computing the Nash equilibrium for a three-person game…
…is computationally intractable…. Consequently, Daskalakis argues, it’s unlikely that the real-world markets modeled by game theorists have converged on Nash equilibria either…. When computer scientists run up against an intractable problem, their first recourse is to investigate the tractability of approximate solutions to it. After his doctoral thesis, Daskalakis focused on importing notions of approximation from computer science into economics. First, he published several papers examining the computation of approximate Nash equilibria. Some of those results were disheartening: For general games, even relatively coarse approximations are still intractably hard to find…
The gender wage gap in the United States has been “been intensively investigated for a number of decades, but also remains an area of active and innovative research.” So starts a new working paper by Francine D. Blau and Lawrence M. Kahn, both economists at Cornell University. The paper reviews quite a bit of research on the topic and lays out some facts on the gap, its decline over the years, and its continued existence. Given that last point, it’s worth digging into the research and facts presented by Blau and Kahn to grapple with the difference in wages paid to similar men and women.
The most common presentation of the gender wage gap is the “unconditional gap”, or the gap between the earnings of the typical woman and the typical man. The U.S. Bureau of Labor Statistics reports that in 2014, for instance, the median weekly earnings of a woman working full-time were 83 percent of the weekly earnings of a man working full-time. But as the BLS points out, this comparison doesn’t take into account the number of factors that can affect this difference such as education levels, length of time in the labor force, occupations, and many others.
That’s where research like that surveyed by Blau and Kahn comes into play. These more robust studies account for these factors in understanding the wage gap. So here, in short, is what Blau and Kahn find.
The wage gap, while still around, has declined significantly since the 1950s. But the decline hasn’t been consistent over time. While the 1980s saw strong convergence and reduction in the gender wage gap, the rate of reduction slowed down over the following 20 or so years. What’s more, the increases that women saw overall in educational attainment and labor market experience were significant reasons for both the wage gap decline as well as women’s entrance into higher-paying occupations.
Yet while improvements in human capital—as some economists might call the improvements in education and work experience—used to be important in pushing down the wage gap, these factors don’t explain the current gap. In 1980, these factors explained about 27 percent of the gender pay gap; by 2010, they only explained 8 percent. Contrast that decline in explanatory power to the role of industry and occupational segregation. While these forces explained about 20 percent of the gender wage gap in 1980, they explained 51 percent of the gap as of 2010. The gap today is smaller, but more of it is explained by differences in occupational and industry employment between men and women.
The portion of the gap that cannot be explained, however, is still a significant portion of the gap—about 38 percent in 2010. There are numerous potential causes of this unexplained gap, one of which is discrimination, conscious or unconscious. At the same time, “compensating differentials” could also be part of this unexplained gap. In essence, women could be making less because they are less willing to take unpleasant jobs, which offer higher compensation to make up for those features. Such an effect lines up with research by Harvard economist Claudia Goldin on how the returns to long hours within some occupations (think corporate law) increases the gender wage gap as men are more willing to work those hours. Of course, discrimination can also be a reason why women are less likely to work at these jobs. It’s difficult to fully untangle discrimination from other explanations why there are human capital, industrial, and occupational differences between men and women.
The gender wage gap has declined quite a bit since the days of Don Draper. But to borrow the title of Goldin’s paper, the “convergence” has entered its last chapter, requiring more emphasis on understanding the causes of—and figuring out a solution to—the wage gap.
Must-Read: Two takeaways this morning from Stan Fischer, and from Tim Duy reading Stan Fischer:
Because the Federal Reserve has no confidence in its ability to nudge the unemployment rate up to its long-run NAIRU level without overshooting and causing a recession, it must always attempt to glide down to the NAIRU from above–and must not follow policies that risk pushing unemployment below the NAIRU, whatever it really is:
: [Stan Fischer] Resisting Change?](https://twitter.com/TimDuy/status/694715619929780224): https://t.co/2g24mCkTzv
: @kocherlakota009 @TimDuy: “Good post…
…SF/EG (inadvertently?) communicate that 1.5-2% inflation is ‘good enough’ for them.
NRKocherlakota: “@TimDuy Problem: if 2% is the true symmetric…
…target of policy, the FOMC needs a U-Turn, not just a pause: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/1-21-16
Tim Duy: “@kocherlakota009 So…
…I don’t really believe the target is symmetric. Need to prove it to me.
NRKocherlakota: “@TimDuy Yes, and I worry that public/markets…
…have your same (reasonable!) doubts. SF’s and EG’s remarks don’t help assuage those doubts.
Lance Bachmeier: “@kocherlakota009 @TimDuy The strange thing…
…is that they’re lowering the [inflation] target after we’ve learned 2% is too low already.
Lance Bachmeier: “@kocherlakota009 @TimDuy I’m not even sure 2% is a ceiling…
…they want to prevent inflation from [even] reaching 2%.
: Resisting Change?: “Stanley Fischer[‘s]… speech… was both illuminating and frustrating…. Although his confidence is fading… he is resisting change…. The first source of my frustration… [is that] his definition of ‘accommodative’ depends upon a specific idea of the neutral Fed Funds rates. From the subsequent discussion:
Well, I think we have to wait to see…. We expect…. somewhere around 3 ¼, 3, 3 ½ percent, which is on average a bit lower than in the past. But we’ll be data-dependent….
If you don’t know the longer-run rate, how can you know how accommodative policy is? If the longer-run rate is close to 2 percent, then policy is less accommodative than you think it is. The endgame of policy is the dual employment/price stability mandate, not a specific level of interest rates…. [That the] Fed’s forecasts… have been foiled by oil and the dollar… would suggest a slower or delayed pace of rate hikes, but more on that later. As for market volatility and external events:
In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.
This is unimpressive…. The likely implications of the volatility are straightforward. The decline in longer term yields signals the Fed is likely to be lower for longer…. It seems that Fischer does not acknowledge the Fed’s role in minimizing the impact of similar bouts of volatility. They have responded by either easing via additional quantitative easing, or easing by delaying tightening…. When you fail to recognize your role, you set the stage for a policy error. They can’t use the logic that they should hike in March because past volatility had no impact on growth when that same volatility actually changed their behavior and thus the economic outcomes. I guess they can use that logic, but they shouldn’t. So is March on the table still?… I can tell a story where they push ahead on the labor data alone. Back to Fischer….
A persistent large overshoot of our employment mandate would risk an undesirable rise in inflation that might require a relatively abrupt policy tightening, which could inadvertently push the economy into recession. Monetary policy should aim to avoid such risks and keep the expansion on a sustainable track….
Policymakers fear that they cannot allow unemployment to drift far below the natural rate because they do not believe they could just nudge it back higher without causing a recession. They can only glide into a sustainable path from above… [thus] the Fed will resist holding rates steady…. Indeed, one voting member is already working hard to downplay recent events. Today’s speech by Kansas City Federal Reserve President Esther George:
While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets. Instead, a focus on economic fundamentals, such as labor markets and inflation, can help guard against monetary policy over- or under- reacting to swings in financial conditions. To a great extent, the recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond- buying policies focused on boosting asset prices as a means of stimulating the real economy. As asset prices adjust to the shift in monetary policy, it is to be expected that the pricing of risk will realign to this different rate environment…. If we wait for the data to provide complete confirmation before making a policy decision, we may well have waited too long….
Watch for policymakers to downplay the inflation numbers as well. Back to George:
Finally, inflation has remained muted as a result of lower oil prices and the strong U.S. dollar…. Yet… core measures of inflation have recently risen on a year-over-year basis. And although inflation rates… have hovered below the Fed’s goal of 2 percent, they have been positive and broadly consistent with price stability.
Note the ‘positive and broadly consistent’ line. And Fischer:
And our view of progress is what the law calls maximum employment and what we call maximum sustainable employment, and a 2 percent inflation rate. And when we get there—we’re there—we’re very close to there on employment, and on inflation the core number that came out this morning was 1.4 percent. You know, that’s not 2 percent. It’s not in another universe. It’s not a negative number. But inflation’s been pretty stable, and we’d like it to go up.
Not in ‘another universe’ from 2 percent. Not negative. Sure we’d like it to go up, but are we really worried about it? Doesn’t sound like it to me.
Bottom Line…. I suspect market volatility and lack of inflation data keep them on hold in March and maybe April…. However (although not my baseline), I can tell a story where they feel like the employment data forces their hand. Especially so if they continue to downplay the inflation numbers. A substantial part of their policy still appears directed by a pre-conceived notion of ‘normal’ policy. This I think is the Fed’s largest error; the fact that the yield curve stubbornly resists being pushed higher suggests that the Fed’s estimates of the terminal fed funds rates is wildly optimistic. There appear to be limits to which the Fed can resist the global pull of zero (or lower) rates.
Must-Read: That the Fed would be facing significant chances of recession and would be moving in the opposite policy direction than its peers over the winter was a serious risk of beginning a tightening cycle in December, and a risk that has now risen from a possibility to a probability.
What was the countervailing serious risk that starting the tightening cycle in December took off the table? I really do not see it…
: Four Takes on the Fed Fumble: “Remember September? Markets seemingly couldn’t wait for the Federal Reserve to raise interest rates…
…Now, however, markets seemingly can’t wait for the Fed to definitively snip the fledgling tightening cycle in the bud. And a growing chatter wonders whether the Fed made a mistake…. Market pricing now implies nearly a two-thirds probability that Fed policymakers will get past next September without a single further rate rise. The change in market sentiment is easy enough to understand… financial turmoil in China… slide in global stock markets… sharp US growth slowdown…. There are (at least) four different ways one may assess the Fed’s actions. First, the plain ‘the Fed goofed up’ view… Paul Krugman, Brad DeLong and Larry Summers. Free Lunch readers will know that this column shares their view on this issue… Jed Graham….
A second, perhaps more interesting, take is that in hindsight the Fed shouldn’t have raised rates, but that it couldn’t have known this at the time…. A third take… the mistake was to create expectations that caused financial conditions to tighten long before December…. A fourth view… the Fed was right to hike but wrong in thinking it would then proceed to lift rates through this year…. But… the arguments for a rise were… for the beginning of a sustained if gradual process. If that is now derailed, it removes much of the rationale for the first increase.
It also leaves open the question of what to do next…. Should the Fed reverse course? That is the view of Narayana Kocherlakota…
Must-Read: : The Euro Area Crisis Five Years After the Original Sin: “Why did Europe fail to manage the euro area crisis?…
…Studying the EU/IMF program… imposed on Greece in May 2010–the original sin of the crisis–highlights both the nature of the problem and the difficulty in resolving it. The mismanagement can be traced to the flawed political structure of the euro area…. Undue influence of key euro area governments compromised the IMF’s role to the detriment of other member states and the euro area as a whole. Rather than help Greece, the May 2010 program was designed to protect specific political and financial interests in other member states. The ease with which the euro was exploited to shift losses from one member state to another and the absence of a corrective mechanism render the current framework unsustainable. In its current form, the euro poses a threat to the European project.
Recessions, despite the hopes of economists and policymakers during the Great Moderation, are still very much a part of our economic reality. But as this June will mark seven years since the end of the Great Recession, many economists and policymakers have turned their attention to the next recession. More specifically, they’re starting to think about the best ways to respond to a recession given the lessons learned from the last time and the changing economic environment. And while we know quite a bit more than we did in December 2007, there’s quite a bit of thinking left for us to do.
As past experience shows, trying to predict a recession is a bit of a fool’s errand. But by looking at the data, we might be able to predict what the recession will look like. Matthew C. Klein of FT Alphaville dug through data on the composition of economic growth (the National Income and Product Accounts) from the Bureau of Economic Analysis. He finds that the sections of the economy that fall the hardest during a recession seem fairly consistent: residential investment (housing); durable goods consumption (cars, trucks, furniture, etc.); and business investment in physical equipment. While they seem to show up consistently, their relative contribution varies quite a bit across business cycles.
As Klein points out, these sections of the economy are all quite credit-dependent. Households usually need to take out mortgages to finance home purchases or loans to buy cars, and businesses often finance investment by borrowing funds. So breakdowns in credit will cause these sectors to take a downswing and start a recession. Given that line of thinking, it follows that increasing the amount of credit in the economy will help counteract the effects of a recession.
Of course, flooding the economy with credit is another way of saying “expansionary monetary policy.” And in the current economic situation, monetary policy may not be able to perform like it used to. Research by Sumit Agarwal of the National University of Singapore, Souphala Chomsisengphet of the Office of the Comptroller of the Currency, Neale Mahoney of the University of Chicago, and Johannes Stroebel of New York University shows that the simple expansion of credit didn’t do much to boost consumption in the wake of the Great Recession.
And this is to say nothing of the fact that central banks, including the Federal Reserve, may have to use different tools than they did to fight the last recession. Short-term interest rates are still quite low and long-term rates continue to decline, meaning central banks across high-income countries have less room to cut. The secular decline of interest rates means the old method of simply cutting target interest rates, like the federal funds rate, may not work.
As Matthew Whittaker of the Resolution Foundation lays out in a report from last month about the economic situation in the United Kingdom, policymakers may need to consider negative interest rates, higher inflation targets, or even increased reliance on fiscal stimulus to help boost the economy. The times have clearly changed, so perhaps it’s time for the recession-fighting policy toolbox to change as well.
Must-Read: I think that this is completely right: expected returns on U.S. stocks right now are lower than average, but the gap between expected returns on stocks and on other assets is significantly higher than average:
: Are US Stocks Overvalued?: “Are stocks obviously overvalued?…
…The answer is no, and the reason is straightforward…. What matters for the valuation of stocks is the relation between future growth and future interest rates. Put another way, the equity premium… has if anything increased relative to where it was before the crisis…. The Shiller P/E ratio reached 26 late last year and is currently around 24, compared with a 60-year average of 20. This elevated Shiller P/E measure is commonly cited as an indicator that stocks may be overpriced, including by Shiller himself….
The deviations of the P/E from its historical average are in fact quite modest. But suppose that we see them as significant, that we believe they indicate the expected return on stocks is unusually low relative to history. Is it low with respect to the expected return on other assets?… [But] in all six cases, the equity premium is higher in 2015 than in 2005. Put another way, stock prices were more undervalued in 2015 than they were in 2005….
If you accept current forecasts, and you accept the notion that stocks were not overvalued in the mid-2000s, then you have to conclude that stocks are not overvalued today. If anything, the evidence from 150 years of data is that the equity premium tends to be high after a financial crisis, and then to slowly decline over the following decades, presumably as memories of the crisis gradually dissipate. If this is the case, then stocks look quite attractive for the long run…
: CHIPPING Away at Uninsurance: “The Arkansas Times named its person of the year…
…all the Arkansans who are newly insured. There was one vignette that stuck with me:
The average high school senior isn’t too worried about insurance coverage, but for Fairfield Bay native Crystal Bles, it was a priority…. While many young adults now rely on their parents’ insurance to stay covered until age 26–thanks to another change created by the Affordable Care Act–Bles’ parents were uninsured…. She ‘most definitely’ knew she needed coverage, she said, given her chosen area of study. ‘In welding, people tend to get injured.’… For young Arkansans like Bles, the private option has already become a fact of life [my emphasis]— a vital government service, funded by taxpayers and provided for taxpayers, just like public schools and food stamps, highways and Pell grants, law enforcement and libraries.
There have been numerous liberal attempts to slowly build… by proposals to lower Medicare eligibility age. The theory… is that taking the most expensive people off of the private market… will save money systemically and not face significant opposition as employers and private insurers will want to dump their most expensive covered lives to someone else… anything that shifts people from the most expensive part of the covered system (employer sponsored insurance) to a less expensive part (Medicare) is a big win. The final part of the theory… is that the change to Medicare for 60 year old individuals works well and is not too scary so the next slice of the salami….
What if we are trying to cut the salami from the wrong end? Kids are adorable, sympathetic and, after they start crawling, dirt cheap to cover. Kids use lots of low cost services but they are unlikely to need high cost services. What if the Childrens’ Health Insurance Program (CHIP) was expanded to be the most probable insurance to every kid between the ages of birth and nineteen?