I hold, with Rudi Dornbusch, that expansions do not die of natural causes. They are always assassinated–either by the Federal Reserve, or by something going badly wrong in asset markets that causes a collapse in risk-tolerance.
I do not see either of those on the horizon…
Must-Read: The question I always find myself going back and forward on is this: Do strong unions primarily reflect or primarily cause a high labor share of income? And I find my views on this question both disturbingly ungrounded in evidence and disturbingly volatile…
: The Decline of Labor; The Increase in Inequality: “Between the end of the Second World War and the early 1970s, the American labor movement was one of the reliable signposts…
…that defined the parameters of American life. But if history has taught us anything, it’s that the signposts of our culture, economics, and politics are continually evolving, even as we believe they will be perennially rooted…. No less a figure than Dwight Eisenhower assumed an America that would always have strong unions…. Timothy Noah, relying on the work of economists Claudia Goldin and Robert Margo, describes this period in his book about American inequality, The Great Divergence (2012), as one in which “incomes became more equal and stayed that way.” Union density peaked at about 1/3rd of the non-farm workforce in the decade following the second world war…. States like Alabama and Tennessee had “low” union density rates in the high teens that were equal to the “high” density rates of “union states” like Michigan today….
During the 1972 election, Meany’s AFL-CIO, enraged by George McGovern’s opposition to the Vietnam War and the influence of the New Left and the counter-culture that permeated his campaign, remained neutral rather than endorse the Democratic candidate. Organized labor was so important to the Democrats that the wily Republican president, Richard Nixon, had courted Meany over several rounds of golf and sought to identify the administration with what Nixon and his top aides took to be the cultural symbols of blue collar, white manhood. The Federation’s neutrality was his reward…. By the middle of the 1980s, history had fooled the present again: the “secure place” of American labor which Ike had spoken of so confidently in 1952, turned out to be, in fact, evanescent. By 1991, union density had declined to just 16%. (It is now about 11%.)… In 1978, despite the most massive lobbying drive in union history, Carter placidly watched a modest labor reform bill be filibustered to death by Republicans and Southern Democrats in an overwhelmingly Democratic Congress….
Why did this happen?… For some of the same structural, macro-economic reasons it has declined in almost every advanced country… but… also occurred for reasons intrinsic to the American political economy…. Just as labor and the economic base of much of its membership lost altitude, unions faced the egalitarian necessity to modernize themselves. This was not without complications. Title VII of the1964 the Civil Rights Act accelerated a much longer struggle by black workers to have full and equal representation within unions. Arguments against racial (and gender) discrimination, especially in building trades and manufacturing unions, that had mostly been ignored by the NLRB, gained salience before the new Equal Employment Opportunity Commission (EEOC)….
Labor… today… remains the most effective institutional bulwark against income inequality. Within its blue state zones of urban power, labor has, effectively, fought inequality via the “fight for 15” led by the still formidable SEIU, and promoted the passage of minimum wage laws in states and cities around the country. Unions, despite their inability to win legislation of direct benefit to themselves, still lead efforts to augment social insurance and regulate companies and banks…. Advancing beyond their previous racism and sexism, unions are, in significant ways, better advocates for such concern today than they were when George Meany was refusing to endorse the March on Washington and, then during the McGovern campaign, railing about the Democratic party being seized by “people named Jack who look like Jill and smell like johns.”…
The numbers of union members and the dollars in the stagnant paychecks of millions of American workers tell an unhappily congruent story. If, in subsequent years, union membership numbers don’t increase dramatically, workers’ paychecks aren’t likely to increase very much either.
Must-Watch: The big surprises that shocked me over the past decade were:
But there is also a third:
(3) The productivity slowdown–the fact that, even before 2008, the tide of rapid third-industrial-revolution productivity growth we saw starting in 1995 had ebbed. This I, still do not understand at all…
: Making Sense of the Productivity Slowdown: November 16, 2015: 8:30 am–3:45 pm (ET)…
…David J. Stockton will chair the first session (9:00–10:15 am), focused on understanding the US productivity slowdown…. John Fernald… Jaana Remes… Peter Orszag of Citi… Jacob Funk Kirkegaard… Kyoji Fukao… Marcel Fratzscher… Sebnem Kalemli-Ozcan… Chang-Tai Hsieh… David Ramsden… Lawrence H. Summers… Marcus Noland… Daniel Andrews… Jeremy Bentham… John Van Reenen… and Adam S. Posen, PIIE
Must-Read: It is not clear to me that inflation expectations would undergo a “rapid and dramatic shift” even if we had a “drastic regime change”. Or rather, as Stan Fischer told me when we were discussing Tom Sargent’s “Stopping Moderate Inflation” and “End of Four Big Inflations” papers, we say after the fact that we had a drastic regime change if and only if inflation expectations underwent a rapid and dramatic shift. It’s not something that one can do–especially living, as we do, not in Plato’s Republic but in Romulus’s Sewer…
: “Inflation Expectations Can Change Quickly…”: “One of the arguments for acting sooner rather than later on monetary policy…
…is that if the slack disappears, inflationary expectations will surge… [aA] in this quote from reader Peak Trader’s comment…. I am sure if there is a drastic regime change, one could see a rapid and dramatic shift in measured expectations; the question is whether that scenario is relevant and/or plausible…. I will let readers decide whether expectations turned on a dime. They seem pretty adaptive to me.
Can somebody remind me: where was Neel Kashkari in September 2008 on letting Lehman go into uncontrolled bankruptcy?
Here it is plain to me that Keynes has simply not understood John Hicks–call this Keynes “Keynes the Pre-Hicksian”:
(1937): The General Theory of Employment: “There are passages which suggest that Professor Viner is thinking too much…
…in the more familiar terms of the quantity of money actually hoarded,and that he overlooks the emphasis I seek to place on the rate of interest as being the inducement not to hoard. It is precisely because the facilities for hoarding are strictly limited that liquidity preference mainly operates by increasing the rate of interest. I cannot agree that “in modern monetary theory the propensity to hoard is generally dealt with, with results which in kind are substantially identical with Keynes’, as a factor operating to reduce the ‘velocity’ of money.” On the contrary, I am convinced that the monetary theorists who try to deal with it in this way are altogether on the wrong track.
Again, when Professor Viner points out that most people invest their savings at the best rate of interest they can get and asks for statistics to justify the importance I attach to liquidity-preference, he is over- looking the point that it is the marginal potential hoarder who has to be satisfied by the rate of interest, so as to bring the desire for actual hoards within the narrow limits of the cash available for hoarding. When, as happens in a crisis, liquidity-preferences are sharply raised, this shows itself not so much in increased hoards–for there is little, if any, more cash which is hoardable than there was before–as in a sharp rise in the rate of interest, i.e. securities fall in price until those, who would now like to get liquid if they could do so at the previous price, are persuaded to give up the idea as being no longer practicable on reasonable terms. A rise in the rate of interest is a means alternative to an increase of hoards for satisfying an increased liquidity-preference.
Nor is my argument affected by the admitted fact that different types of assets satisfy the desire for liquidity in different degrees. The mischief is done when the rate of interest corresponding to the degree of liquidity of a given asset leads to a market-capitalization of that asset which is less than its cost of production…
It seems very clear that this Keynes has not yet read–or has not understood–John Hicks (1937), “Mr. Keynes and the ‘Classics’: A Suggested Interpretation”.
Keynes thinks that money demand consists of three terms:
For a given money supply, M, this gives us a money demand-money supply equation:
M = kPY + S – jr
Jacob Viner wants to take this equation and rewrite it in quantity-theory terms as an LM-curve relation:
kPY = M – S + jr
Y = [M – S + jr]/Pk
Y = (M/P)V, with V = [1-(S/M)-(jr/M)]/k
An increase in Keynes’s liquidity preference S is thus a reduction in the velocity of money V associated with any interest rate r. This is what Viner means when he writes that:
In modern monetary theory the propensity to hoard is generally dealt with, with results which in kind are substantially identical with Keynes’, as a factor operating to reduce the ‘velocity’ of money.
And he is correct.
Keynes says he disagrees. He claims that the key effect of a rise in liquidity preference is not to reduce the velocity of money–to produce “increased hoards”–but rather to raise the interest rate r. And working through the IS-curve relation:
Y = C + I
C = co + (cy)Y
I = io – (ir)r
Y = [co + io]/(1-cy) – [ir/((1-cy)]r
This rise in r reduces real spending Y.
Keynes is right when he says that an increase in liquidity preference S reduces Y working through the IS-curve relationship. But Keynes is wrong when he says that implies that Viner is wrong. Viner is right too. The LM-curve and the IS-curve relations jointly determine Y and r. You can use either. In fact, you have to use both in order to get an answer, even if you are not aware that you are using both. That is what Hicks made clear. But Keynes does not know it. And I see no signs that Viner knows it either.
Must- and Should-Reads:
Might Like to Be Aware of:
Must-Read: : Reviving Economic Growth: Policy Proposals from 51 Leading Experts: “If you could wave a magic wand and make one or two policy or institutional changes…
…to brighten the U.S. economy’s long-term growth prospects, what would you change and why? That was the question asked to the 51 contributors to this volume. These essays originally appeared in conjunction with a conference on the future of U.S. economic growth held at the Cato Institute in December 2014. Brink Lindsey, Vice President for Research at the Cato Institute and editor of this volume, is pleased to share this insightful and provocative collection with a new audience.
The motivation for asking that question should be clear enough to anyone who has been following the dreary economic news of the past few years. Since the Great Recession of 2008–2009, the U.S. economy has experienced the most stubbornly disappointing expansion since World War II. Reviving Economic Growth offers a wide-ranging exploration of policy options from an eclectic group of contributors. Think of this collection as a brainstorming session, not a blueprint for political action. By bringing together thinkers one doesn’t often see in the same publication, the editor’s hope is to encourage fresh thinking about the daunting challenges facing the U.S. economy—and, with luck, to uncover surprising areas of agreement that can pave the way to constructive change.
Must-Read: It is all in the framing: is the human the robot’s assistant, or the robot’s boss? Does the human merely help the robot by helping in all the edge cases? Or does the robot handle routine matters leaving the human free to spend more time exercising their judgment? It can go either way, depending on the details, in which is the devil…
: “Robot Helpers”: “As AIs take on a growing role in the workplace, a new role is opening up for humans…
…The robot’s assistant…. AI trainers who work as ‘robot’s helpers’ already exist at… Facebook, virtual assistant start-up Clara Labs, and Interactions, a company that builds AI to handle customer service calls…. AI trainers are helping a new digital assistant called M, which works as a concierge service to make reservations, order delivery, and send reminders through Facebook messenger. The product is being trialled in San Francisco, and a host of humans work to make sure that M’s recommendations are solid and that tables have been booked at the right restaurant. ‘We’ve invented a new kind of job,’ Facebook spokesman Ari Entin told the New Scientist. Though an AI personal assistant might be able to handle most requests, it’s handy to have a human around to decipher confusing wording, check for accuracy, and—in the case of Interactions, which takes instructions by voice—make sense of mumbled comments. In short, humans can help when the robot isn’t sure…
Three years after the passage of the Jumpstart Our Business Startups (JOBS) Act, the U.S. Securities and Exchange Commission has formally adopted one of the act’s more significant reforms—allowing companies to crowdsource their funding through the internet. Previously, only “accredited” investors could participate in these sorts of fundraising opportunities.
Expanding this opportunity to a wider audience seems attractive on first blush. Why wouldn’t we want more people to have a chance at investing in the next big thing? Or to boost the amount of investment in young firms? But it’s not exactly clear how crowdfunding would do these things without causing further complications.
Steve Case, a partner at the venture capital fund Revolution Growth and a proponent of the JOBS Act, wrote a post celebrating the finalization of the crowdsourcing rule. In his pitch for the regulation, Case points out that early-stage venture capital funding in the United States is not very diverse in terms of gender and race—the vast majority of funding goes to companies headed by white men. He also notes that the companies that receive funding are not evenly spread out across the country: 75 percent of funding goes to Massachusetts, New York, and California.
Although these are clear problems that should be addressed, crowdfunding may not be the answer. What Case is arguing, in essence, is that opening up the pool of potential investors will by itself increase the pool of potential entrepreneurs. Case just assumes that the increase in potential funding will grow the number of entrepreneurs and make them more diverse. But there’s no reason to think that amateur investors will put more time and effort into finding potential companies to invest in than the professionals at venture capital firms.
This brings up another point about crowdfunding firms that should make us more skeptical about this idea. If these crowdfunding opportunities act as a substitute for regular investing or retirement savings, that could be a huge risk for many households. Startups have a high failure rate, so funds invested in a single firm have a good chance of disappearing. There’s a reason why professional venture capital firms have funds that allow them to invest in a number of startups, so they are more likely to hit upon a winner. Given how unprepared many Americans appear to be for retirement, implicitly favoring even riskier investments doesn’t seem prudent.
For those concerned about the decline in the U.S. startup rate, increased crowdfunding isn’t obviously a solution to this problem, which we don’t even know the root cause of yet. It could be that fewer people feel like they have a cushion to fall back on, which could be causing them to take fewer risks. It could also be that the increased consolidation of older, bigger firms is making it harder for newer companies to break through. At best, crowdfunding could boost investments in some small firms while putting the savings of more Americans at risk. That’s a big bet to take.