In particular, we discuss the emergence of a deflationary safety trap equilibrium which is an acute form of a liquidity trap. In this context, issuing public debt, swapping private risky assets for public debt, or increasing the inflation target, stimulate aggregate demand and output, while forward guidance is ineffective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets. When we endogenize the private securitization capacity, we show that in a safety trap there is a securitization externality that leads to underprovision of safe assets.
Afternoon Seminar: Genevieve Kenney on Medicare and Medicaid
http://hrms.urban.org/briefs/Gains-in-Health-Insurance-Coverage-under-the-ACA-as-of-March-2015.html
Thank you for a wonderful talk. A comment, and a question:
The comment: I have long had a bone to pick with Amy Finkelstein and company and their Oregon Medicaid study. They use “significant” in two different ways in their paper. Improvements in blood pressure and in blood sugar levels in their study were not statistically significant. Not a lot of people in the sample had high blood pressure or high blood sugar, and so the drops seen were not big enough to be confident in a statistical sense that they were not just the luck fo the draw. But the drops in blood pressure and in blood sugar levels were in line with what we expect to follow from prescribing first line lisinopril and metphormin to those who need them, and those drops are clinically significant. I’ve been trying to get them to say that the improvements in the physical health indicators they found were clinically but not statistically significant — but without conspicuous success.
The question: Back in 2009 the word from Nancy-Ann Min DeParle’s office in the White House was: Don’t worry about the federal-state nature of ObamaCare. Every governor will want to grab the credit for successfully bringing the self-employed, small business, and the working poor under the insurance umbrella. The Republican political infrastructure, especially, in the states is so beholden to insurance, physician, and other medical lobbies for their campaign financing that the idea of attempted state-level nullification was absurd.
Huge miscalculation.
Is our current situation in which ObamaCare has been implemented in Blue States, has been only 1/2 implemented in pink states, and is a horror show in deep red states, stable? And what difference is this implementation gap making not just for the health sectors but, indeed, for the economies of red-state America?
Must-Read: Frances Coppola: Colds, Strokes and Brad Delong
…The authorities did not recognise the stroke… thought it was simply a particularly nasty cold… put extra whisky in the hot toddies…. Just as the patient was beginning to show signs of improvement, it experienced a second stroke. This one was not as catastrophic as the first, but it seriously set back the patient’s recovery. Once again, the stroke was misdiagnosed, this time as a hospital-acquired infection…. Now, seven years after the first stroke and three years after the second, the patient is still partly paralysed down the left side and has a speech impediment….
Herein lies my beef with Blanchard. Hot toddies and antibiotics are not the right treatment for strokes. Nor is deep cleaning of hospitals, important though this is. But the economics profession’s toolkit seems to be limited to hot toddies, antibiotics and cleaning ladies…. And it justifies its limited diagnostic skills and inadequate toolkit by arguing that if only we keep warm and dry and eat well, we won’t catch colds or suffer strokes anyway…. I confess I find it difficult to see how a system that is normally far from equilibrium can be adequately represented by a general equilibrium model, but then I am not a mathematician. I am encouraged therefore to see that Borio seems to share my concerns (my emphasis):
Modelling the financial cycle raises major analytical challenges for prevailing paradigms. It calls for booms that do not just precede but generate subsequent busts, for the explicit treatment of disequilibrium debt and capital stock overhangs during the busts, and for a clear distinction between non-inflationary and sustainable output, ie, a richer notion of potential output–all features outside the mainstream….
So, sorry Brad, but I do not think I am wrong to say that the economics profession’s love affair with linear models must be ended. Multiple equilibria, disequilibrium and non-linearities are the new flame. Having said that, Brad’s last comment is spot on:The key questions of macroeconomic political economy then are not the questions of the construction of nonlinear multiple-equilibrium models that Frances Coppola wants us to study. They are, instead, the questions of why ideological and rent-seeking capture were so complete that North Atlantic governments have not deployed their fiscal and credit policy tools properly since 2008.
Indeed, if policymakers want to deny stroke patients essential treatment and force them back to work before they are properly recovered, there is not a great deal economists can do to stop them. Such is democracy….
Despite my criticisms, Olivier Blanchard deserves credit for acknowledging the hubris of the 1980-2008 economic paradigm, and for attempting to change it within his own organisation. Some of the IMF’s economic research in recent years under his leadership has been outstanding. He is indeed a vir illustris.
Must-Read: Eric Lonergan: Bond bubbles, MMT, and the Limits to Fiscal Policy
…The constraints on fiscal policy are determined by two factors: 1) can you print your own money, and 2) is unemployment already so low that fiscal stimulus is inflationary…. One of the things I dislike about the unthinking obsession with “expectations” in today’s monetary policy discourse is the suggestion that “inflation expectations” can suddenly–out of nowhere–go haywire. This a bit like the idea of bond panic. One day–for some unknown reason–the bond market is going to think that the government won’t raise future taxes, and panic…. But if the central bank can do QE, there cannot be sustained bond panic in the absence of a genuine inflation problem. Why? Because, as the BoJ is showing, faced with no inflation risk, the central bank can buy all the bonds.
All that matters then is what causes a sustained rise in inflation. The idea that the population wakes up one day and decides that because the national debt has gone through the Reinhart and Rogoff limit, or because a check from the Fed has arrived in the post, there is going to be a wild outbreak of inflation, is unconvincing…
Must-Read: Richard Mayhew: A Real Problem with the ACA
Weekend reading
This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. 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.
Links
Jordan Weissmann argues the top marginal tax rate should be much higher. [slate]
Ben Bernanke, who knows a thing or two about the topic, discusses the future of monetary policy. [brookings]
Matthew Weinzierl writes about fairness and the reasons for the income tax. [the conversation]
Simon Rabinovitch doesn’t think there’s a bubble in the Chinese stock market. At least not yet. [free exchange]
Josh Zumbrun digs into an IMF study about what caused the decline in oil prices: supply or demand? [wsj]
Friday figure
Figure from “Exploding wealth inequality in the United States,” by Emmanuel Saez and Gabriel Zucman
Breaking down the decline in the U.S. labor share of income
Understanding why the share of income going to labor is on the decline—a phenomenon stretching back several decades—is an increasingly popular area of economic research. There is some debate as to whether that labor share has declined at all, but in so much as there is agreement about the decline, the particular reason for it is very much debated. A new paper enters a different hypothesis into the debate by looking at how the labor share has changed within two large and different sectors of the U.S. economy, and how changes in technology may be the root cause of the shift.
The paper, by Francisco Alvarez-Cuadrado, Ngo Van Long, and Markus Poschke, all of McGill University, focuses on how differences between the manufacturing and service sectors might be responsible for the decline in the labor share in United States from 1960 to 2005. The U.S. economy, of course, underwent several major structural changes over this period of time amid the decline of labor’s share of income—one of the larger changes being the shift of employment from the manufacturing sector to the services sector. But why did that shift that happen?
The simple answer might be that economic activity shifted toward the service sector because this sector features a lower share of income going to labor, which would result in the aggregate labor share declining. But the authors find that the decline is more due to changes within sectorial labor shares rather than changes between the two sectors. In fact, the manufacturing sector started with a higher share of income going to labor in the 1960s, but the subsequent decline was much larger than the decline in the share of income going to labor in the service sector. So what accounts for the declining labor share if the cause is happening within the two sectors?
According to Alvarez-Cuadrado, Van Long, and Poschke the main factor is a difference in productivity between the two sectors. What they find is the importance of productivity growth depends on what specific kind of growth it is. The key factor, according to this analysis, is that the kind of productivity that the three economists call “labor-augmenting,”or the kind of productivity that does more to enhance the role of labor more than capital.
What the paper shows is that labor-augmenting productivity growth has been higher in the manufacturing sector than in the service sector. Workers with more education or skills are an example of labor-augmenting technological change. At the same time, the three economists find that the manufacturing sector more readily switches between the use of labor and capital than the service sector.
In economics speak, this phenomenon is explained by the elasticity of substitution, which is higher in manufacturing than in services industries, though both are lower than 1. This is particularly interesting given that any elasticity lower than 1 usually isn’t in line with a declining labor share.
What’s even more interesting about this new hypothesis is that technological growth is at the heart of the declining labor share of income. But the specifics show that it’s not the popular “robots” story that is often mentioned in these debates, where capital is displacing labor. Rather, in this new paper by Alvarez-Cuadrado, Van Long and Poschke, capital and labor are complements to each other, not substitutes. Their findings indicate that, technological growth has played a role in the declining share of income going to labor, but not in the way most would expect.
Things to Read on the Afternoon of April 16, 2015
Must- and Should-Reads:
- Must-Read: : Hottest Tax Idea in Washington Actually Terrible
- Must-Read: : The Mistakes Made by Most Development Reformers
- Must-Must-Read: : The Fed Can Be Patient About Raising Interest Rates
- : Europe’s Poisoned Chalice of Growth
- Must-Read: : The New Liberal Consensus Is a Force to Be Reckoned With
- Must-Read: : Research Summary
- : The Zombie Statistic [that Health Care Is Responsible for Just 10% of Overall Health] Revisited
- Must-Read: : Fixed Mindsets
Must-Read: Noah Smith: Fixed Mindsets
…She’s also a hedgehog. Meaning, of course, that she applies her One Big Idea to everything and anything, and tends to exaggerate its power and the evidence in favor of it. That’s OK. Most promoters of big good ideas are hedgehogs…. I think that as a society we’ve gotten good at recognizing hedgehogs and mentally correcting for the hedgehogginess…. Dweck makes it clear many times that natural ability does, in fact, matter. She states that among people of similar natural ability, having a growth mindset makes a big difference. What she is saying is that the marginal effect of the growth mindset on performance is large for most people, even though natural ability matters a lot in the average…
Must-Read: Marshall Steinbaum: Hottest Tax Idea in Washington Actually Terrible
…instead of taxing wealth or income, the government should encourage people to save by taxing only their spending… Rubio… Lee… Cardin…. Too bad they’re all wrong…. The theoretical arguments in favor of consumption taxes are typically based on the injustice of penalizing thrift by the poor. But those are just fables: Saving is overwhelmingly a pastime of the rich…. [It] might sound great in theory, but one that would be revenue and distributionally neutral would create tremendous smuggling opportunities and thus be impossible to enforce…