Must-Read: Ezra Klein: Were the Questions at CNBC’s Debate Really so Hostile?

Posted on by Brad DeLong

Must-Read: As one moderately-senior editor once told me: “On an average day, I learn more from Ezra Klein than from their entire national news staff.” This is why:

Ezra Klein: Were the Questions at CNBC’s Debate Really so Hostile?: “Fox News moderators were more aggressive in their questioning…

…and more focused on creating conflict–but… its choice of targets, and its angles of attack, suggested it had the GOP’s best interests at heart…. [In] CNN’s Republican debate… it was clear… that… tough questions were meant to strengthen the GOP…. CNBC… focus[ed] its debate around economic policy, and so its angles of attack reflected critiques of the candidates’ plans on taxes, immigration reform, monetary policy, and more. But since the candidates’ plans on those issues tend to broadly reflect Republican thinking on those issues, the questions put CNBC in opposition to the Republican Party broadly….

Ted Cruz… lamented that the moderators weren’t asking substantive questions, when the questions, up till that point, were more substantive…. But he was right that the questions were different from those asked by other networks, harder for the assembled candidates to answer, and more embarrassing for them to flub…. CNBC, in focusing on policy concerns, picked a more journalistically important line of questioning, but one that the organizing party found much more offensive. The resulting backlash is the organizing party’s effort to remind CNBC and all other networks that, ultimately, it controls these debates, and media organizations that want to host a debate and benefit from the accompanying ratings and the prestige need to remember that they are meant to act as the party’s partner in these debates, not as its critic.

How readily can we get the long-term unemployed back to work?

Posted on by Bridget Ansel
Job interview by stokkete, veer.com

The debate about the Phillips curve and the amount of “slack” in the U.S. labor market has to do with the prospects of long-term unemployed workers. In the wake of the Great Recession of 2007-2009, the share of unemployed workers who were unemployed for 27 weeks or longer hit historical highs. In fact, the share is higher now than it was at its previous peak in June 1983. The question is whether the long-term unemployed are locked out of the labor market or if they can return to work in the short term.

Princeton economist Alan Krueger has argued that the long-term unemployed really shouldn’t be counted as part of labor market slack as they don’t influence wage growth. Stephen Williamson, Vice President at the Federal Reserve of St. Louis, presents historical data that show the long-term unemployed being more likely to drop out of the labor force. A National Bureau of Economic Research working paper released this week, however, presents evidence that we might be able to get long-term unemployed workers back into employment more readily than many have assumed.

With the high levels of long-term unemployment staying elevated as the labor market recovered from the Great Recession, many economists and commenters worried that these workers would be unable to find work again. Their story was that employers would discriminate against long-term unemployed workers and instead hire workers who had been unemployed for a shorter time or already had a job. Several papers backed up this concern, including one by economist Rand Ghayad, now of the Brattle Group. By sending out fake resumes to prospective employers—in which he varied how long these job seekers had been out of work, how frequently they switched jobs, and how much industry experience they had—Ghayad tried to figure out how much discrimination the long-term unemployed faced. His answer: quite a bit. Other research found similar results.

But the new working paper released this week finds some contradictory evidence. The paper, by economists Henry Farber of Princeton University, Dan Silverman of Arizona State University, and Till von Wachter of the University of California, Los Angeles, also uses a resume field experiment. In order to make sure they were looking just at the effects of unemployment length, the economists sent out resumes from women with college degrees looking for office administrative jobs. Unlike the earlier research, the economists find no connection at all between the likelihood a resume gets a call back from an employer and the length of unemployment on the resume. Other recent research also finds little relationship between the two, so Farber, Silverman, and von Wachter aren’t on an island by themselves.

What could explain the discrepancy between this new paper and the older research? The three authors compare their data and analysis to one of the earlier papers to see what factors could be driving the different results. While they don’t find a smoking gun, their analysis points to a difference in the ages of the fictitious workers whose resumes they sent out. The earlier research tended to have more resumes of younger workers while Faber, Silverman, and von Wachter focus on workers between their mid-30s and mid-50s. It could be that employers are more likely to brush aside concerns about long spells of unemployment if the worker has a longer resume. Or it could be, as the authors note, that their result only holds up for the specific group their experiment looks at.

This paper is part of a larger debate that certainly won’t get settled anytime soon. But these results should give us pause in thinking that employer discrimination against the long-term unemployed is a pervasive phenomenon across the labor market. And if there’s less discrimination, that means these workers are more likely to be able to get a job. In other words, this paper might give some of them new hope.

Must-Read: Robinson Meyer: The Decay of Twitter

Posted on by Brad DeLong

Robinson Meyer: The Decay of Twitter: “Anthropologists who study digital spaces have diagnosed that a common problem of online communication…

…is ‘context collapse.’ This plays with the oral-literate distinction: When you speak face-to-face, you’re always judging what you’re saying by the reaction of the person you’re speaking to. But when you write (or make a video or a podcast) online, what you’re saying can go anywhere, get read by anyone, and suddenly your words are finding audiences you never imagined you were speaking to. I think Stewart is identifying a new facet of this. It’s not quite context collapse, because what’s collapsing aren’t audiences so much as expectations. Rather, it’s a collapse of speech-based expectations and print-based interpretations. It’s a consequence of the oral-literate hybrid that flourishes online. It’s conversation smoosh…

Noted for Lunchtime on November 2, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Ken Rogoff: The Fed’s Communication Breakdown

Posted on by Brad DeLong

Must-Read: I guess I must be a foaming polemicist then :-)…

Ken Rogoff: The Fed’s Communication Breakdown: “Personally, I would probably err on the side of waiting longer…

…and accept the very high risk that, when inflation does rise, it will do so briskly, requiring a steeper path of interest-rate hikes later. But if the Fed goes that route, it needs to say clearly that it is deliberately risking an inflation overshoot. The case for waiting is that we really have no idea of what the equilibrium real (inflation-adjusted) policy interest rate is right now, and as such, need a clear signal on price growth before moving.

But only a foaming polemicist would deny that there is also a case for hiking rates sooner, as long as the Fed doesn’t throw random noise into the market by continuing to send spectacularly mixed signals about its beliefs and objectives. After all, the US economy is at or near full employment, and domestic demand is growing solidly…

I look at this graph:

A kink in the Phillips curve Equitable Growth

And I think: One always disagrees with the very sharp Ken Rogoff at one’s grave analytical peril…

But: Inflation expectations anchored at 2%/year, wage growth at 0%/year real, the prime-age employment-population ratio far below historical norms–that does not smell like an economy “at or near full employment” to me. And so I cannot see a “very high risk that, when inflation does rise, it will do so briskly”, or agree that “only a foaming polemicist would deny that there is also a case for hiking rates” not “sooner” but “right now”…

Intellectual Broker: (Trying to) Make Sense of Current (Small) Analytical Disagreements Between Paul Krugman and Larry Summers: Where Is the Can Opener?

Posted on by Brad DeLong

Larry Summers tweets:

David Wessel picks it up:

And I attempt to Twittersplain, with how much success I do not know:

Larry Summers: Where Paul Krugman and I differ on secular stagnation and demand: “Paul Krugman suggests that I have had some kind of change of heart on secular stagnation…

…and converged towards his point of view…. I certainly appreciate the gravity of the secular stagnation issue more than I did…. But I think Paul exaggerates the change in my views considerably. The topic… was: ‘North America faces a Japan-style era of high unemployment and low growth.’ Paul argued in favor. I opposed the motion–not on the grounds that the US economy was in good shape, but on the grounds that our demand deficiency problems should be easier to solve than Japan’s… [because] it is dimensionally much less than the problems that Japan faced in four respects. Japan’s problems were different in magnitude, different in the depth of their structural roots, different in the… perspective… relative to the rest of the world… different in the degree of resilience [of] their system…. Paul responded in part by saying:

The question is, are we going to be stuck in a state of depressed demand of the kind that Larry has talked about. Larry and I agree that that is what has been happening… I think Larry and I agree almost entirely on the economics, on what needs to be done….

I think we have both been focused on demand and the liquidity trap for a long time. There are, though, two areas where I have had somewhat different views from Paul. I believe that structural issues are often important for demand and growth…. Second, I have never related well to Paul’s celebrated liquidity trap analysis. It has always seemed to me be a classic example of economists’ tendency to ‘assume a can opener’. Paul studies an economy in liquidity trap that will, by deus ex machina, be lifted out at some point in the future. He makes the point that if you assume sufficiently inflationary policy after this point, you can drive ex ante real rates down enough to stimulate the economy even before the deus ex machina moment.

This is true and an important insight. But it seems to elide the main issue. Where is the deus ex machina? Where is the can opener? The essence of the secular stagnation and hysteresis ideas that I have been pushing is that there is no assurance that capitalist economies, when plunged into downturn, will over any interval revert to what had been normal. Understanding this phenomenon and responding to it seems the central challenge for macroeconomics in this era. Any analysis that assumes restoration of previous equilibrium is, from this perspective, missing the main issue. I was glad to see Paul recognize this point recently.  I suspect it will lead to more emphasis on fiscal rather than monetary actions in depressed economies.

Paul Krugman: Liquidity Traps, Temporary and Permanent: “Larry Summers reacts to an offhand post of mine, seeking to draw a distinction between our views…

…I actually don’t think our views differ significantly now, but he’s right that what he has been saying differs from the approach I took way back in 1998. And I’ve both acknowledged that and admitted that the approach I took then seems inadequate now…. Japan now looks like an economy in which a negative natural rate is a more or less permanent condition. So, increasingly, does Europe. And the US may be in the same boat, if only because persistent weakness abroad will lead to a strong dollar, and we will end up importing demand weakness. And if we are in a world of secular stagnation–of more or less permanent negative natural rates–policy becomes even harder.

And I commented on Paul’s webpage thus: But, as I was tweeting to David Wessel, you scorn the Confidence Fairy while having some hope for the Inflation-Expectations Imp, while he scorns the Inflation-Expectations Imp but has some hope for the Confidence Fairy, no? And he has more hope for pump-priming small fiscal expansion to trigger virtuous circles and give the economy escape velocity, no? Small differences relative to those of the two of you vis-a-vis Rogoff, Mankiw, Feldstein, Bernanke, and, I think, even Blanchard. But differences, no?…

Must-Read: Paul Krugman: I do not think that word…<

Posted on by Brad DeLong

Must-Read: When did the default definition of “expansionary fiscal policy” become not (1) “the government hires people to build a bridge”, but rather (2) “the government borrows money from some people and writes checks to others, thus raising both current financial assets and expected future tax liabilities”? Or, rather, for what communities did it become (2) rather than (1), and why?

Or, perhaps, when did the deficit become the off-the-shelf measure of the fiscal-policy stance, rather than some other measure that incorporated some role for the balanced-budget multiplier?

This is something I really ought to know, but do not. It is bad that I do not know this:

Paul Krugman: I do not think that word…: “…means what Tyler Cowen and Megan McArdle think it means…

…The word in question is ‘spending.’ Tyler’s latest on temporary versus permanent government consumption clarifies… the confusion…. By ‘government spending’… I mean the government actually, you know, buying something–say, building a bridge. When Tyler says

The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be ‘net wealth’ even when they are not,

the only way that makes sense is if he’s thinking of a rebate check. If the government builds a bridge, the boost to aggregate demand comes not because people are ‘tricked’ into feeling wealthier, but because the government is building a bridge. The question then is how much of that direct increase in government demand is offset by a fall in private consumption because people expect their future taxes to be higher; obviously that offset is smaller if they think the bridge is a one-time expense than if they think there will be a bridge built every year. That’s why temporary government spending has a bigger effect…. I guess there’s an alternative theory of what Tyler is talking about–maybe he doesn’t consider the wages of the bridge-builders count, that only what they do with those wages matters…

Or, rather, that all government expenditure is wasteful, and you might have well have simply handed out checks rather than forced people to engage in pointless useless make-work.

Must-Read: Zarek C. Brot-Goldberg et al.: What Does a Deductible Do?: The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics

Posted on by Brad DeLong

Must-Read: Yes. When the stakes are large, the pricing structure is complex, transparency absent, and opportunities for social learning spotty, people are really lousy consumers. Why do you ask?

Zarek C. Brot-Goldberg et al.: What Does a Deductible Do?: The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics: “Measuring consumer responsiveness to medical care prices is a central issue…

…in health economics and a key ingredient in the optimal design and regulation of health insurance markets. We study consumer responsiveness to medical care prices, leveraging a natural experiment that occurred at a large self-insured firm which forced all of its employees to switch from an insurance plan that provided free health care to a non-linear, high deductible plan. The switch caused a spending reduction between 11.79%-13.80% of total firm-wide health spending ($100 million lower spending per year)…. Spending reductions are entirely due to outright reductions in quantity. We find no evidence of consumers learning to price shop after two years in high-deductible coverage. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services)…. Consumers respond heavily to spot prices at the time of care, and reduce their spending by 42% when under the deductible, conditional on their true expected end-of-year shadow price and their prior year end-of-year marginal price. In the first-year post plan change, 90% of all spending reductions occur in months that consumers began under the deductible, with 49% of all reductions coming for the ex ante sickest half of consumers under the deductible, despite the fact that these consumers have quite low shadow prices. There is no evidence of learning to respond to the true shadow price in the second year post-switch.

Accelerating wage growth has yet to show up

Posted on by Bridget Ansel

Another quarter has gone by, and accelerating wage growth has yet to show up.

The Employment Cost Index, a measure of wage growth updated every three months, shows that wages and salaries for U.S. private-sector workers grew at a 2.1 percent annual rate for the third quarter of 2015. If that rate sounds familiar, it’s because annual U.S. nominal wage growth has been stuck at around 2.0 percent to 2.2 percent for the past several years. Despite some signs earlier this year that wage growth had been accelerating, that optimism hasn’t been borne out yet. Wage growth is still trucking along with no sign of acceleration. (See Figure 1.)

Figure 1

It’s worth pointing out that the measures above are in nominal terms, as they don’t account for inflation. The reason why the graph looks at nominal growth rates instead of inflation-adjusted rates is so we don’t confuse trends in inflation for a strengthening labor market.

For example, inflation in the United States has been quite low throughout the recovery from the Great Recession. By looking at nominal wage growth, we can see if employers are actually starting to bid up wages, a sign that the labor market is getting tighter. We would adjust nominal wages for inflation if were interested in determining whether living standards are on the rise. But to understand the health of the labor market, we need to focus on nominal growth. While a lack of nominal wage growth certainly sounds like a bad thing, though, there is a positive aspect to this trend. The current slow, steady nominal wage growth is a sign of insufficient aggregate demand and a remaining slack in the labor market. There are many U.S. workers who currently want more work but can’t get a job or extra hours. In other words, these workers can conceivably join the ranks of the full-time employed again. Wage growth is tepid because they are still a significant amount of working sitting on the sideline. Employment can go higher, and the unemployment rate can go much lower. Short-term policy can bring these workers into the mix. The issue, of course, is that policymakers would have to actually take those steps—or at least not step on the brakes of currently supporting policy.

John Maynard Keynes in His High Wicksellian Mode in 1937: Today’s History of Economic Thought

Posted on by Brad DeLong

Today’s History of Economic Thought: Here we have John Maynard Keynes in his High Wicksellian mode:

  • The natural rate of interest depends on unstable and flutuating opinions about the future yield of capital-assets.
  • The market rate of interest depends on the supply of money and the unstable and fluctuating propensity to hoard–liquidity preference.
  • Thus we have large-scale fluctuations in investment (unless a central bank can neutralize fluctuations in liquidity preference and also make the market rate dance in time with the fluctuating natural rate)
  • Add in the multiplier, and we have unemployment business cycles.

This was, I think, the article that made the Swedes whimper: “Why are the citations to Knut Wicksell missing?”

John Maynard Keynes (1937): The General Theory of Employment: “Money, it is well known, serves two principal purposes…

…By acting as a money of account it facilitates exchanges without its being necessary that it should ever itself come into the picture as a substantive object. In this respect it is a convenience which is devoid of significance or real influence. In the second place,it is a store of wealth.

So we are told, without a smile on the face. But in the world of the classical economy, what an insane use to which to put it! For it is a recognized characteristic of money as a store of wealth that it is barren; whereas practically every other form of storing wealth yields some interest or profit.

Why should anyone outside a lunatic asylum wish to use money as a store of wealth? Because, partly on reasonable and partly on instinctive grounds, our desire to hold Money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. Even though this feeling about Money is itself conventional or instinctive, it operates, so to speak, at a deeper level of our motivation. It takes charge at the moments when the higher, more precarious conventions have weakened. The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude.

The significance of this characteristic of money has usually been overlooked; and in so far as it has been noticed, the essential nature of the phenomenon has been misdescribed. For what has attracted attention has been the quantity of money which has been hoarded; and importance has been attached to this because it has been supposed to have a direct proportionate effect on the price-level through affecting the velocity of circulation. But the quantity of hoards can only be altered either if the total quantity of money is changed or if the quantity of current money-income (I speak broadly) is changed; whereas fluctuations in the degree of confidence are capable of having quite a different effect, namely, in modifying not the amount that is actually hoarded, but the amount of the premium which has to be offered to induce people not to hoard. And changes in the propensity to hoard, or in the state of liquidity-preference as I have called it, primarily affect, not prices, but the rate of interest; any effect on prices being produced by repercussion as an ultimate consequence of a change in the rate of interest.

This, expressed in a very general way, is my theory of the rate of interest. The rate of interest obviously measures–just as the books on arithmetic say it does–the premium which has to be offered to induce people to hold their wealth in some form other than hoarded money. The quantity of money and the amount of it required in the active circulation for the transaction of current business (mainly depending on the level of money-income) determine how much is available for inactive balances, i.e. for hoards. The rate of interest is the factor which adjusts at the margin the demand for hoards to the supply of hoards.

Now let us proceed to the next stage of the argument. The owner of wealth, who has been induced not to hold his wealth in the shape of hoarded money, still has two alternatives between which to choose. He can lend his money at the current rate of money-interest, or he can purchase some kind of capital-asset. Clearly in equilibrium these two alternatives must offer an equal advantage to the marginal investor in each of them. This is brought about by shifts in the money-prices of capital-assets relative to the prices of money-loans. The prices of capital-assets move until, having regard to their prospective yields and account being taken of all those elements of doubt and uncertainty, interested and disinterested advice, fashion, convention and what else you will which affect the mind of the investor, they offer an equal apparent advantage to the marginal investor who is wavering between one kind of investment and another.

This, then, is the first repercussion of the rate of interest, as fixed by the quantity of money and the propensity to hoard, namely, on the prices of capital-assets. This does not mean, of course,that the rate of interest is the only fluctuating influence on these prices. Opinions as to their prospective yield are themselves subject to sharp fluctuations, precisely for the reason already given, namely, the flimsiness of the basis of knowledge on which they depend. It is these opinions taken in conjunction with the rate of interest which fix their price.

Now for stage three. Capital-assets are capable, in general, of being newly produced. The scale on which they are produced depends, of course, on the relation between their costs of production and the prices which they are expected to realize in the market. Thus if the level of the rate of interest taken in conjunction with opinions about their prospective yield raise the prices of capital-assets, the volume of current investment (meaning by this the value of the output of newly produced capital-assets) will be increased; while if, on the other hand, these influences reduce the prices of capital-assets, the volume of current investment will be diminished.

It is not surprising that the volume of investment, thus determined, should fluctuate widely from time to time. For it depends on two sets of judgments about the future, neither of which rests on an adequate or secure foundation–on the propensity to hoard, and on opinions of the future yield of capital-assets. Nor is there any reason to suppose that the fluctuations in one of these factors will tend to offset the fluctuations in the other. When a more pessimistic view is taken about future yields, that is no reason why there should be a diminished propensity to hoard. Indeed, the conditions which aggravate the one factor tend, as a rule, to aggravate the other. For the same circumstances which lead to pessimistic views about future yields are apt to increase the propensity to hoard.

The only element of self-righting in the system arises at a much later stage and in an uncertain degree. If a decline in investment leads to a decline in output as a whole, this may result (for more reasons than one) in a reduction of the amount of money required for the active circulation, which will release a larger quantity of money for the inactive circulation, which will satisfy the propensity to hoard at a lower level of the rate of interest, which will raise the prices of capital-assets, which will increase the scale of investment, which will restore in some measure the level of output as a whole.

This completes the first chapter of the argument, namely, the liability of the scale of investment to fluctuate for reasons quite distinct (a) from those which determine the propensity of the individual to save out of a given income and (b) from those physical conditions of technical capacity to aid production which have usually been supposed hitherto to be the chief influence governing the marginal efficiency of capital.

If, on the other hand, our knowledge of the future was calculable and not subject to sudden changes, it might be justifiable to assume that the liquidity-preference curve was both stable and very inelastic. In this case a small decline in money-income would lead to a large fall in the rate of interest, probably sufficient to raise output and employment to the full. In these conditions we might reasonably suppose that the whole of the available resources would normally be employed;and the conditions required by the orthodox theory wouldbe satisfied.

My next difference from the traditional theory concerns its apparent conviction that there is no necessity to work out a theory of the demand and supply of output as a whole. Will a fluctuation in investment, arising for the reasons just described,have any effect on the demand for output as a whole, and consequently on the scale of output and employment? What answer can the traditional theory make to this question? I believe that it makes no answer at all, never having given the matter a single thought; the theory of effective demand,that is the demand for output as a whole, having been entirely neglected for more than a hundred years.

My own answer to this question involves fresh considerations. I say that effective demand is made up of two items–investment-expenditure determined in the manner just explained, and consumption-expenditure. Now what governs the amount of consumption-expenditure? It depends mainly on the level of income. People’s propensity to spend (as I call it) is influenced by many factors, such as the distribution of income, their normal attitude to the future and-though probably in a minor degree–by the rate of interest. But in the main the prevailing psychological law seems to be that when aggregate income increases, consumption-expenditure will also increase, but to a somewhat lesser extent. This is a very obvious conclusion…

John Maynard Keynes (1937), “The General Theory of Employment”, Quarterly Journal of Economics 51:2 (February), pp. 209-223 http://www.jstor.org/stable/1882087