Morning Must-Read: Paul Krugman: TPP at the NABE

Posted on by Brad DeLong

Paul Krugman: TPP at the NABE: “As with many ‘trade’ deals in recent years, the intellectual property aspects are more important than the trade aspects…

…the US is trying to get radically enhanced protection for patents and copyrights… Hollywood and pharma rather than conventional exporters…. Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly–letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost… a distortion that makes the world a bit poorer. There is, of course, an offset in the form of an increased incentive to create knowledge…. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much…. Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?

Austerity, Gramscian Hegemony, and Hard Money: To the Re-Education Camp! Weblogging

Posted on by Brad DeLong

Ramblings picking up on: In Lieu of a Focus Post: March 2, 2015:

The kha-khan Cosma Shalizi smacks me down for seeing the Federal Reserve as afflicted by intellectual errors, rather than as a prisoner of Gramscian top 0.1% hegemony and the revolving door.

He has a point, a definite point.

In a good world the Janet Yellens and the Charles Evanses would be the vital center of the Federal Reserve, not its left wing. And they would be acting as its left wing, pointing out the manifold benefits of labor-force upgrading in a high-pressure economy, the extraordinary quiescence of core inflation, and the continued overoptimism of the Fed model.

In a closely-related piece, Paul Krugman tries to untangle why so many center-right and right-wing economists are so resistant to the elementary logic of Hicks (1937) and the IS-LM model—even those who, like Marty Feldstein, teach the IS-LM model to their students, and teach it very well (after all: he taught it to me).

Back in 2009 the sharp and thoughtful Mark Thoma wrote a good piece giving what seemed to me to be the correct answer to the inflationistas: He wrote that there was some reason to fear an outburst of inflation when and if the long run came in which the government budget constraint bound and yet congress was continuing to refuse to either:

  • curb the growth of public health care costs, or
  • raise taxes to pay for them.

But, he went on, the IS-LM logic meant that that was not a risk in the short run. And the cost of the stimulus program and how much debt was “monetized” by QE had at best a second decimal-place effect on the vulnerability of the U.S. to long-run inflation driven by the fiscal theory of the price level. The big enchilada was health-care costs:

Mark Thoma (March 2009): Economist’s View: Feldstein: Inflation is Looming: “Martin Feldstein is worried about inflation…

…Once we begin to recover, there are three ways to reduce… inflationary pressures…. We could simply reduce the money supply… by selling bonds to the public. Feldstein’s worry is that the Fed… won’t have enough government bonds to reduce the money supply… and nobody will want to purchase the private sector bonds…. The second choice is to raise taxes…. My inclination is to say good luck with that…. Third, we could reduce government spending…. Health care reform… is where the focus needs to be. The budget worries twenty years from now have little to do with the temporary stimulus measures we are taking today, going forward health care costs are the most important issue by far in terms of the budget, and everything else revolves around solving that problem. So am I worried about inflation? Somewhat…. If deficits persist, it could come down to a choice by the Fed to monetize the deficit–and risk inflation–or allow government debt to pile up and risk high interest rates…

That seemed and seems to me to be right, and that is driven by a coherent theoretical view: (i) an unemployment short-run until production returns to potential output, (ii) a medium run in which confidence and interest rates and full-employment growth rates depend on market assessments of how the long-run fiscal gap will be closed, and (iii) a long run in which, perhaps suddenly and unexpectedly, the fiscal theory of the price level binds.

The only thing wrong with Mark’s analysis back in 2009 that I saw then and that I see now–other than the short run being a very long time indeed, the bending of the health care costs curve occurring much more sharply than I had imagined possible, and a configuration of interest rates which raises the strong possibility that the long-run in which the fiscal theory of the price level binds has been put off to infinity–was that it missed the easiest way of shrinking the velocity of money in a recovery: raising reserve requirements. So I always had a very hard time figuring out what Feldstein and company were fearing at all…

Indeed, it seemed to me not to be coherent:

Martin Feldstein: “The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation….

There is ample historic evidence of the link between fiscal profligacy and subsequent inflation. But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions…. The potential inflationary danger is that the large US fiscal deficit will lead to an increase in the supply of money….

The link between fiscal deficits and money growth is about to be exacerbated by ‘quantitative easing’, in which the Fed will buy long-dated government bonds…. When the economy begins to recover, the Fed will have to reduce the excessive stock of money…. This will not be an easy task since the commercial banks may not want to exchange their reserves for the mountain of private debt that the Fed is holding and the Fed lacks enough Treasury bonds with which to conduct ordinary open market operations. It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation…

Feldstein–and Greenspan, and Taylor, and Asness, and all the rest–clearly thought in 2009 and 2010 that U.S. Treasuries were trading way high, in an enormous bubble, and there was an enormous market opportunity to profit with relatively little risk by shorting long-term Treasuries and buying secondarily equities and primarily gold as inflation hedges. I often wonder to how many people they gave this advice, how many of the people they gave it to took it, and what has happened to their portfolios since. But I digress…

As I looked back on the situation in 2009 and 2010–with a dead housing credit channel, and the increasing likelihood of a recovery characterized not as a V or as a U but as an L–I find myself thinking that Marty Feldstein and the others had turned all their smarts to trying to find reasons not to believe the IS-LM models that they (or at least Feldstein and Taylor) had taught, and not to believe that the marginal investor in financial markets was not-stupid. That fiscal and monetary ease would bring back the 1970s in short order was their conclusion. The task was to think of not-implausible reasons and mechanisms that would make this so.

The corollary, of course, is that for them the only good policies are hard-money austerity policies; and the only good portfolios are those that assume a departure from hard-money austerity will produce inflation.

So perhaps there is a deeper problem somewhere…

It made sense for those of my great-great grandfathers who were rich back before World War I to be hard-money guys. The investment vehicles open to them were land that pretty much had to be rented out at fixed nominal rents, bonds that paid fixed nominal yields, and equities where–unless you ran the business–you were quite probably a fool soon to be parted from his money by financial engineering. But it made no sense for my rich grandfather after World War II to be a hard-money guy. He had a much bigger portfolio of assets to invest in: equities backed by more-or-less honest accounts, land that the coming of automobiles and superhighways and the move to the sunbelt meant could be developed as suburbs, as well as leveraged resource speculations. He profited immensely from investments in all of these. Yet, in his heart of hearts, he remained a hard-money guy.

And it really makes no sense for my contemporaries to be hard-money believers. Yet an astonishing share of the rich among them are.

A great and enduring puzzle…

So: To the re-education camp! I have a lot of rethinking to do–but not about IS-LM, hysteresis, or the fiscal theory of the price level; rather, about the connecting-belts between asset values, wealth levels, and people’s ideal interests of what proper monetary and fiscal policy should be.

Wish me luck!

How to get high-achieving, low-income students into selective schools

Posted on by Nick Bunker

College, while not a silver bullet, is still important. Yes, more U.S. workers attaining higher education seems unlikely to significantly reduce income inequality in the near future. But higher levels of education could be beneficial in multiple ways—by increasing productivity and economic growth as well as increasing social mobility.

Let’s concentrate here on that last benefit, mobility, which presumes that access to and attendance at colleges and universities is open to all students with the necessary drive and ability. Unfortunately, plenty of research finds that presumption to be false. Yet new research shows that some optimism is still warranted about expanding the reach of higher education due to new evidence about whether and how low-income students apply and attend selective colleges.

David Leonhardt late last year noted in The Upshot that schools have become more concerned about increasing economic diversity over the past decade or so. Yet many top colleges continue to fail at having an economically diverse student population. So why are these types of universities—think Bucknell, Washington University in St. Louis, and Providence College —so lacking in students from lower-income backgrounds?

The answer might be as simple as this—these students just don’t apply. Research by economists Caroline Hoxby of Stanford University and Christopher Avery of Harvard University shows that many high-achieving students from low-income households don’t apply to selective schools for which they are qualified. Instead, these students apply to and eventually attend schools at which they are overqualified, as measured by their scores on standardized tests.

So how can policymakers get these high-achieving, low-income students to apply to more competitive schools, if at all? Follow-up research by Hoxby and economics and education professor Sarah Turner of the University of Virginia looks at how giving students information about the college application process and the schools they might be a good fit for given their grades and scores influences their decision making. They find that, perhaps not shockingly, better information about the selective schools boosted the application rate of these high-achieving, low-income students to these schools.

But what exactly about this information got these students to apply? Hoxby and Turner released a short paper earlier this year that digs into the data. They find that after receiving information from what they term their “information intervention,” known as the Expanding College Opportunities project, students were more likely to apply when they knew schools had high graduation rates and students with test scores and GPAs that were similar to their own.

What’s particularly interesting is that students also are more likely to apply when they learned about the actual net price of college. When students are applying to a college or university, they can see the gross price of tuition, before financial aid is considered. It’s only after admission to the school that they’ll know the net tuition. The Expanding College Opportunities intervention gives students an estimate of how much financial aid students at their income level could expect to receive from the selective school before knowing whether they had gained admission. Students are more likely to say they will apply after learning the probable net cost.

So low-income students, who in the end will pay quite less than the sticker price of college, avoid applying to these selective schools because of a lack of knowledge about the gap between the gross and the net price. Perhaps schools interested in increasing economic diversity could post a menu of tuition prices for different family income levels. Or the government could require disclosure of these prices if policymakers deem it important enough.

Afternoon Must-Read: Mark Thoma: Weblogging

Posted on by Brad DeLong

Mark Thoma: Weblogging: “I began blogging… due to dissatisfaction with how economic issues were being presented in the mainstream media….

…Blogs have changed this. The reporting today on economic issues is so much better than it was then, and that is due in no small part to the interaction between reporters, the public, and academics willing to blog and put complicated, technical matters into terms that the general public can understand. Reporters have access to a much broader array of informed voices than ever before…. A few people who wrote about economics in the blogosphere, mostly non-economists, have moved on and I wish them the best of luck. But economics blogging isn’t dead, far from it…

Afternoon Must-Read: Cardiff Garcia: Jobs, Automation, Engels’ Pause and the Limits of History

Posted on by Brad DeLong

Cardiff Garcia: Jobs, Automation, Engels’ Pause and the Limits of History: “Median wages and living standards are stagnant… having decoupled from productivity growth for several decades…

Income inequality has climbed…. High profits have not been redeployed as significantly more investment. Anecdotal evidence of remarkable new technologies suggests that the effects on the economy will be profound, but it’s not clear how…. Sound familiar?… I’m talking about the UK in the first four decades of the nineteenth century, a period that economic historian Robert C Allen has labeled “Engels’ Pause”…. The lazy-but-common retort to the idea that technological advancement would massively displace workers has long been to accuse the fear-monger of having perpetuated the lump of labour fallacy. Luddites!…

The issue is worthy of serious discussion even without perfect foresight. The place to start is by asking what’s different about current trends versus those of the past…. Carl Frey and Michael Osborne….

Technology in the 21st century is enabling the automation of tasks once thought quintessentially human: cognitive tasks involving subtle and non-routine judgment. Through big data, the digitisation of industries, the Internet of Things and industrial and autonomous robots, the world around us is changing rapidly as is the nature of work across occupations, industries and countries…

Technology is infiltrating jobs that were thought to have resided safely in the realms of human thought and interaction…. Previously, automation technology replaced human muscles and the tiny brain space needed for simple computations. Now it might begin to substitute for the squishier non-mathematical parts of the human mind. If so, then people will be running short of “quintessentially human” qualities that are useful in work. Creativity, subjective cultural judgment and empathy would still be there, but we can’t all become entertainers, art critics and psychologists….

A few points are useful to keep in mind when thinking through history’s lessons for the issue of jobs and automation. 1. The sample size provided by history is very small…. 2. To whatever extent history can be of use, its lessons are unclear…. 3. If something radically new is happening or is about to happen, there’s a chance we won’t know for sure until well after the process has started…

A Note on Communications with the Federal Reserve: Focus

Posted on by Brad DeLong

Adding to a point made in In Lieu of a Focus Post: March 2, 2015 (Brad DeLong’s Grasping Reality…):

Let me note that the estimable Tim Duy continues to watch a failure to communicate:

  1. Financial markets think that the Federal Reserve will either delay the interest-rate liftoff for at least another year or two or, if they do lift-off, find themselves reversing course within eighteenth months to try to restart a stalled economy.

  2. The Federal Reserve thinks financial markets have lost their moorings with reality, and that it will soon be appropriate to raise interest rates in a strengthening economy in which secular stagnation considerations are at best third-order.

  3. Elementary optimal-control considerations strongly militate for waiting to tighten: stimulating the economy at the zero lower bound is difficult; restraining the economy away from the zero lower bound is easy.

  4. The decision to adopt a 2% per year rather than a 3% per year or a 4% per year inflation target was driven in large part by belief in the Great Moderation; since we no longer believe in the Great Moderation, that decision should be rethought.

  5. The inconsistent behavior of the employment-to-population ratio and the unemployment rate makes for more than the usual amount of uncertainty about what exactly “full employment” is–and that, too, strongly militates for waiting to tighten.

Yet the Federal Reserve in its internal decision-making processes appears to be focusing 100% on (2), and 0% on (1), (3), (4), and (5). And that raises the question of why: Just what are the internal decision-making committee processes within the Federal Reserve that are leading to such an outcome? Ex ante, I would have expected many individual members of the FOMC to be very unhappy with such a possibly-premature tightening–what is the reason that they are not? That the Federal Reserve has failed to make its thinking clear enough to me for me to get where they are coming from seems to me to be a major failure–but whether of their communications policy or of my comprehension I am not sure…

Things to Read at Lunchtime on March 10, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Florence Jaumotte and Carolina Osorio Buitron: Power from the People: “While causality is difficult to establish, the decline in unionization appears to be a key contributor to the rise of top income shares. This finding holds even after accounting for shifts in political power, changes in social norms regarding inequality, sectoral employment shifts (such as deindustrialization and the growing role of the financial sector), and increases in education levels. The relationship between union density and the Gini of gross income is also negative but somewhat weaker. This could be because the Gini underestimates increases in inequality at the top of the income distribution. We also find that deunionization is associated with less redistribution of income and that reductions in minimum wages increase overall inequality considerably…”

  2. Trevon Logan and John Parman: The Rise of Residential Segregation: “The sweeping rise in both urban and rural segregation across communities in every region implies a significant drop in social interactions between black and white residents. Consider a city like Chicago… 1880 to… 1940…. Black residents rose from 1.2% to 7.7% of the… population. Unsurprisingly… 1% of white households had a black neighbour in 1880…. The percentage of white households with a black neighbour declined to only 0.4% in 1940…. The percentage of black residents with a white neighbour declined from 66% to only 5% over this period. This dramatic decline in opposite-race neighbours could have profound impacts on the evolution of racial biases and ultimately become self-reinforcing…. Changing racial attitudes requires interactions between the races. In this respect, the sweeping rise of residential segregation patterns over the 20th century may very well have created an environment that has allowed racial prejudices to harden and lead to the stubbornly persistent racial inequalities we see today.”

  3. Jonathan Chait: How the White House Learned to Be Liberal: “Dan Pfeiffer… has been involved from the outset in navigating the central contradiction at the heart of Obama’s public persona: He ran as a figure who could overcome partisan polarization, yet he has instead presided over more of it despite accomplishing the majority of the substantive agenda he promised. Obama and his spokespeople have spent most of their administration quietly at war with the conventional wisdom in Washington over the cause of this failure…. Structural forces… rising polarization… the disintegration of restrictions on campaign finance… the news media… people select only sources that will confirm their preexisting beliefs. All of this combined makes communication with Republicans mostly hopeless…. Demographic change will eventually force Republicans to compete with Democrats for some of the same voters, reopening a national political conversation…. The original premise of Obama’s first presidential campaign was that he could reason with Republicans…. It took years for the White House to conclude that this was false, and that, in Pfeiffer’s words, ‘what drives 90 percent of stuff is not the small tactical decisions or the personal relationships but the big, macro political incentives.’ If you had to pinpoint the moment this worldview began to crystallize, it would probably be around the first debt-ceiling showdown, in 2011…. Ever since Republicans took control of the House four years ago, [Obama’s] attempts to court Republicans have mostly failed while simultaneously dividing Democratic voters. Obama’s most politically successful maneuvers, by contrast, have all been unilateral and liberal…. ‘There’s never been a time when we’ve taken progressive action and regretted it.’ This was deeply at odds with the lesson Bill Clinton and most of his aides (many of whom staffed Obama’s administration) had taken away from his presidency. But by the beginning of Obama’s second term, at least, the president seemed fully convinced…”

Should Be Aware of:

Lunchtime Must-Read: Florence Jaumotte and Carolina Osorio Buitron: Power from the People

Posted on by Brad DeLong

Florence Jaumotte and Carolina Osorio Buitron: Power from the People: “While causality is difficult to establish, the decline in unionization appears to be a key contributor to the rise of top income shares…

…This finding holds even after accounting for shifts in political power, changes in social norms regarding inequality, sectoral employment shifts (such as deindustrialization and the growing role of the financial sector), and increases in education levels. The relationship between union density and the Gini of gross income is also negative but somewhat weaker. This could be because the Gini underestimates increases in inequality at the top of the income distribution.
We also find that deunionization is associated with less redistribution of income and that reductions in minimum wages increase overall inequality considerably…

Morning Must-Read: Trevon Logan and John Parman: The Rise of Residential Segregation

Posted on by Brad DeLong

The most important paper I have read this year so far, at least as far as changing my view of our history and thus of where we are today:

Trevon Logan and John Parman: The Rise of Residential Segregation: “The sweeping rise in both urban and rural segregation across communities in every region implies a significant drop in social interactions between black and white residents…

The rise of residential segregation VOX CEPR s Policy Portal

Consider a city like Chicago… 1880 to… 1940…. Black residents rose from 1.2% to 7.7% of the… population. Unsurprisingly… 1% of white households had a black neighbour in 1880…. The percentage of white households with a black neighbour declined to only 0.4% in 1940…. The percentage of black residents with a white neighbour declined from 66% to only 5% over this period. This dramatic decline in opposite-race neighbours could have profound impacts on the evolution of racial biases and ultimately become self-reinforcing…. Changing racial attitudes requires interactions between the races. In this respect, the sweeping rise of residential segregation patterns over the 20th century may very well have created an environment that has allowed racial prejudices to harden and lead to the stubbornly persistent racial inequalities we see today.

The U.S. job skills mismatch and up-skilling

Posted on by Nick Bunker

In the immediate wake of the Great Recession of 2007-2009 the slow pace of job growth and the stubbornly high unemployment rate sparked fears that these problems in the U.S. labor market were structural. One main worry was that  there was a gap between the particular set of skills that employers wanted and the skills that workers actually had. The truth of that narrative at the time was questionable and stronger employment growth since 2014 has alleviated these concerns over time.

But there remains something puzzling in the labor market data. The number of job openings have increased 111 percent since the end of the Great Recession compared to an increase of 41 percent for new hires, according to the Job Openings and Labor Turnover Survey from the U.S. Bureau of Labor Statistics. And the so called Beveridge Curve—a relationship between the unemployment rate and the jobs openings rate—still hasn’t shifted back to its pre-recession position. So is there at least some truth to the skills-gap hypothesis?

Examined through the lens of the Beveridge Curve, research shows that to be unlikely. A paper published by the Federal Reserve Bank of Boston breaks down the relationship between unemployment and job openings. What Rand Ghayard and William Dickens, the authors, find is that the shift in the relationship (the Beveridge Curve) is almost entirely driven by long-term unemployment. The relationship between the short-term unemployment rate and the openings rate hasn’t changed at all. That finding goes against what’d we expect if there were a skills mismatch—namely that recently unemployed workers are just as readily employed as before.

But what would explain the stronger growth in job openings compared to new hires? The answer might be that there is a mismatch between the skills employers ask for and the skills most workers boast. This is not because workers are the ones lacking in the desired skills but rather due to employers raising the bar as more people look for work.

New research by Alicia Sasser Modestino of Northeastern University, Daniel Shoag of the Harvard Kennedy School, and Joshua Ballance of the Federal Reserve of Boston find exactly that development. Their paper looks at what happened to employer requirements for positions during the Great Recession and the resulting recovery. What they find is that an increasing supply of unemployed workers leads to an increase in the requirements for jobs that employers posted. With a larger pool of talent to pick from, employers get to pick the cream of the crop.

To account for macroeconomic factors that could confound their analysis, the authors look at the return of veterans from the Iraq and Afghanistan wars. Their return was an increase in supply of workers that serves as a sort of natural experiment. Modestino, Shoag, and Ballance find that requirements went up more in occupations where veterans were more likely to be employed, exactly what would happen if we think an increase in the supply of workers leads to upskilling. They estimate that the increase in the supply of the job seekers accounts for about 30 percent of the increase in the requirements employers posted from the beginning of the recession in 2007 to the labor market bottom in 2010.

So the mismatch, as it is, really doesn’t come from unmet demand but rather from increased supply. And it’s not about a long-term trend of underinvestment in skills and talents but rather the result of a downswing in the U.S. economy. So when the new data on job openings are released later this morning by the Bureau of Labor Statistics, we’d all do well to remember this story.