In Lieu of a Focus Post: March 2, 2015

Posted on by Brad DeLong

While I found things sufficiently intriguing to be worth a focus post today, I have not been able to get one into good enough shape to pass the quality bar imposed by my internal quality censor.

Therefore: In lieu of a focus post: Nick Bunker, Adam Ozimek, and Richard Freeman; Frances Coppola and Olivier Blanchard; Cosma Shalizi; Paul Krugman and Marty Feldstein; Tim Duy; Richard Reeves; and Janet Currie–all of whom are greatly worth paying detailed and careful attention to, and are among those whom one disagrees with at one’s intellectual peril:

My teacher the vir illustris Richard Freeman always said that unions in America surged upwards in tsunamis, and then were gradually eroded over time. Whatever union rank-of-file elected union leaders to do and whatever union leaders did, maximizing the growth opportunities of the firms in which they worked was not among them. And Richard went on to say that the surges were unpredictable save in a negative sense: the economic and the political fundamentals both had to be right for struck sparks to turn into bonfires of organization, and predicting when sparks would be struck was beyond our capacity. This is what Adam Ozimek and Nick Bunker have been discussing: Yes, a more unionized America would be a less unequal America, but minor changes in labor laws are likely only to affect the rate of erosion, and the stars aligning on the politics would require the stars aligning on the economic bargaining power of labor as well. And that seems—to Adam, to Nick, and to me—very difficult to envision, welcome as it would be (to me and Nick, at least).

I also found on the internet a fine rant by the engaged and thoughtful femina spectabilis Frances Coppola attacking another one of my teachers, the vir illustris Olivier Blanchard, saying that his:

call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone…

It’s not quite that bad: a more charitable reading of Olivier is that he wants to make the point that heart attacks have little in common with the common cold, and that do get out the defibrillator pads when the patient shows up with the sniffles will probably not end well. Nevertheless, I always thought that the MIT Economics Department made a hideous mistake when it decided not to replace Charlie Kindleberger with another financial-macro institutional historian, and that it then doubled down on that when it refused to pay what people—cough, cough, Anne McCants for example—were worth in order to get them to teach its students the institutionalist and Minskyite history that would have kept so many of its ex-students from being deaf and blind as 2008 approached.

On my own hard disk, I continue to circle around the problem of revising my teaching and lecturing materials on the economics of the government budget, but mostly, I admit, still spinning my wheels. And 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.

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). My view is that there is a deeper problem: it made sense for those of my great-great grandfathers who were rich to be hard-money guys. It made no sense for my rich grandfather to be—although he was. And it really makes no sense for my contemporaries to be. Yet an astonishing share of the rich among them are. A great puzzle.

Let me also note the estimable Tim Duy continue to watch a failure to communicate. 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. 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.

Richard Reeves harps upon an issue that has long concerned me. Back in the 1970s a top 0.01%er had about four times the income of a top 1%er. Today a top 0.01%er has sixteen times the income of a top 1%er. If you think—as I do—that the principal source of utilitarian satisfaction among the top 1%ers is their sense that they have “made it”, the fact that they now know people whose income bears the same relationship to theirs as their income bears to two-earner households making minimum wage is very unsettling. That was not try forty years ago, when even the top 0.01%ers were for the most part in the same consumption and life-style universe as the top 1%ers, or the top 5%ers for that matter. Our rich today feel poor—and are angry—because the existence of our superrich demonstrates that they really have not “made it” here in America.

Last, Janet Currie points out that the damage from a ruling adverse to the government in the King v. Burwell ObamaCare subsidies case is likely to carry a very heavy cost in terms of societal well-being along private health, public health, and economic growth dimensions. Fifty years ago Ronald Reagan argued against Medicare on the grounds that once we had Medicare we would find it financially unaffordable unless we drafted doctors into a low-wage socialist National Health Corps commanded by the Surgeon General, and that mass labor conscription could not be far behind. Ronald Reagan was, I think it is now generally agreed, overfearful and overwrought. And how you in any way enhance human freedom by causing an adverse-selection meltdown of the health-insurance markets those who do not work for large bureaucracies must buy in remains beyond me…

Evening Must-Read: Nick Bunker: The Steep Path Forward for Unionization

Posted on by Brad DeLong

Nick Bunker: The Steep Path Forward for Unionization: “[Did] past research underestimated the role of the decline of unions in the rise of economic inequality[?]…

…Bruce Western… and Jake Rosenfeld… finds that about one-fifth to one-third of the increase in wage inequality can be explained by declining union membership…. Florence Jaumotte and Carolina Osorio Buitron…. Adam Ozimek… [however] makes a very important observation. How exactly will unions return to prominence?… What could make employment at unionized firms grow relatively faster compared to non-union firms?… Freeman… believe[s] that such an outcome is unlikely…. Yet… Freeman notes that increases in unionization rates in the past have come from large and sudden increases in union membership…. Increased unionization in the United States would almost certainly reduce wage and income inequality. But the pathway to a higher rate is steep. A sudden jump seems the only way up. But what will cause or even allow such an increase? That remains to be seen.

Evening Must-Read: Frances Coppola: The Failure of Macroeconomics

Posted on by Brad DeLong

Frances Coppola: The Failure of Macroeconomics: “My beef is with macroeconomics…

…Olivier Blanchard, the IMF’s chief economist, recently wrote:

We in the field did think of the economy as roughly linear… fluctuating, but naturally returning to its steady state….

Blanchard went on to observe that… macroeconomists… [saw] extreme tail risk events… as a thing of the past in developed countries…. Central banks could prevent or stop market ‘panics’ by flooding the place with liquidity. If you get the policy settings right, linear models will work….

The financial crisis drew to our attention… finance…. No industry that can cause such havoc when it goes wrong should ever be regarded as irrelevant or superficial…. Yet macroeconomists regarded… financial institutions… as so unimportant that they could safely be ignored. Representative agent models, flawed though they are, at least attempt to explain the behaviour of households and firms: but the behaviour of banks, and things that don’t call themselves banks but do bank-like things, stayed under the radar… made it impossible for mainstream economists to understand the significance of the build-up of credit that led to the financial crisis. The warnings came principally from people outside mainstream economics, particularly the followers of Hyman Minsky….

The most influential people in macroeconomics have spent their lives developing theories and models that have been shown to be at best inadequate and at worst dangerously wrong. Olivier Blanchard’s call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone…. Macroeconomics has indeed failed… because of confirmation bias and selection bias among macroeconomists. Who would have thought it?

The Budget: Distant Past, Near Present, and Far Future

Posted on by Brad DeLong

Over at Grasping Reality: U.S. Government Budget: Distant Past, Near-Present, and Distant Future: “It is time for me to reedit and revise this before I give it again…

How should it change? What does it say that no longer needs to be said? What does it not say that now needs to be said? Zimbabwe!: Here is a piece of currency, a dollar bill. It is from Zimbabwe. It is for $100,000,000,000,000 Zimbabwean dollars…

“The Cossacks Work for the Czar!”

Posted on by Brad DeLong

Over at Grasping Reality: Cosma Shalizi: Monday DeLong Smackdown: “The Cossacks Work for the Czar!”: “Empirically, through 2003, what the Fed responded to was not inflation…

…but averting the prospect of unemployment getting too low, and encouraging the election of Republican presidents–see http://utip.gov.utexas.edu/papers/utip_42.pdf. (It would be good to update that paper with another ten years of data.) The phrase ‘executive committee of the bourgeoisie’ comes to mind…

Evening Must-Read: Janet Currie: Obamacare and Long-Term Competitiveness

Posted on by Brad DeLong

Janet Currie: Obamacare and Long-Term Competitiveness: “The long-term economic consequences of uninsuring the many children now insured under the new health law are clear…

…the importance of early childhood health care for the least advantaged kids among us–on their future workforce productivity, their contributions to our national tax base, their educational attainment, and their declining use of government income supports…. Mirror the… research… I conducted with… Sandra Decker… and Wanchuan Lin…. Medicaid coverage for children born between 1985 and 2005 resulted in a better health trajectory for those kids as they because adolescents and young adults…. What will happen if less-well-off kids today do not get the affordable health care they need to become successful contributors to our economy over the coming decades?…. Children who gained public health insurance in the 1980s and 1990s… the federal government will have recouped at least 56 cents for each dollar spent on childhood health care…. Better public health care among low-income children in the 1980s and 1990s resulted in higher graduation rates from high school and college for these kids…. We already know the empirical long-term economic benefits of expanded health care for those least able to afford it–and can say with strong confidence that taking away health insurance for these five million now covered under Obamacare would harm our economy.

Evening Must-Read: Richard Reeves: Wealth, Inequality, and the ‘Me? I’m Not Rich!’ Problem

Posted on by Brad DeLong

Richard Reeves: Wealth, Inequality, and the ‘Me? I’m Not Rich!’ Problem: “The real action is at the tip-top, or the tippetty-tip-top. Think not the 1% but the 0.1% or even 0.01%…

…The problem might be political rather than economic. The soar-away wealth of those at the pinnacle of the distribution can start to make the people just below them feel distinctly middle-class. I’ve just played the part of Straight Man Scholar in a sketch on “The Daily Show” poking fun at the struggles of those only just scraping into the top 1% with a family wealth of $4 million or more. “Daily Show” correspondent Hasan Minhaj became a faux class warrior on behalf of those struggling to get by with just one or two homes and having to share a private jet…”

Evening Must-Read: Tim Duy: Game On

Posted on by Brad DeLong

Tim Duy: Game On: “Bottom Line: The Fed’s confidence in the US economy is driving them closer to policy normalization…

…The labor market improvements are key – as long as unemployment is falling, confidence in the inflation outlook is rising. The more important message, however, is as the timing of the first rate hike draws closer, the level of uncertainty is rising. And it is not just about the timing of that rate hike. The Fed is sending a clear message that the subsequent path of rates is also very uncertain, and they don’t think that uncertainty is being taken seriously by market participants. In their view, financial markets are too complacent about the likely path of interest rates.

Obamacare and long-term U.S. economic competitiveness

Posted on by Bridget Ansel

The legal arguments before the U.S. Supreme Court this week in King vs. Burwell may well decide whether a key provision of the Affordable Care Act remains in effect for millions of Americans who now rely on Obamacare for affordable health insurance. But if this elite jury of nine judges is still out on the legal question before the court, the long-term economic consequences of uninsuring the many children now insured under the new health law are clear.

Several new research papers document the importance of early childhood health care for the least advantaged kids among us—on their future workforce productivity, their contributions to our national tax base, their educational attainment, and their declining use of government income supports. These robust findings mirror the results of research that I conducted with economists Sandra Decker of the National Center for Health Statistics and Wanchuan Lin of Peking University. We found that Medicaid coverage for children born between 1985 and 2005 resulted in a better health trajectory for those kids as they because adolescents and young adults, and thus improved their ability to be productive contributors to our economy.

What will happen if less-well-off kids today do not get the affordable health care they need to become successful contributors to our economy over the coming decades? Well, the best economic research shows that current government health care programs, including those recently expanded under Obamacare, already ensure many of these kids will be better and more productive citizens. So lets parse the data.

The first paper, by economists David Brown and Ithai Lurie of the U.S. Treasury Department, and economics professor Amanda Kowalski of Yale University finds that children who gained public health insurance in the 1980s and 1990s under the expanded Medicaid and the Children’s Health Insurance Program paid more in cumulative taxes by age 28, collected less in payments from the Earned Income Tax Credit, and (among the women in the group) attained higher cumulative wages. The three authors estimate that when these now young adults reach the age of 60 the federal government will have recouped at least 56 cents for each dollar spent on childhood health care.

The second paper, by economists Laura Wherry at the University of California-Los Angeles, Sarah Miller at the University of Michigan, Rober Kaestner at the University of Illinois, and Bruce Meyer at the University of Chicago, shows that providing public health insurance to low-income children results in fewer hospitalizations and emergency room visits in adolescence and adulthood. Their findings strongly suggest that substantial health care savings are in the cards for this group of Americans—a welcome boon as the U.S. economy struggles with reducing the cost of health care in our society.

The third paper, by economists Sarah Cohodes of Harvard University and Cornell University’s Samuel Kleiner, Michael Lovenheim, and Daniel Grossman, shows that better public health care among low-income children in the 1980s and 1990s resulted in higher graduation rates from high school and college for these kids, again indicating that the long-run economic benefits of public health insurance are substantial.

None of these studies examined the health of kids enrolled in public health programs due to Obamacare specifically—the program is too new for these kinds of long-term studies—but the further expansion of eligibility for low-income children through Medicaid and the Children’s Health Care Program is one of the things at stake in the Supreme Court’s oral arguments in King vs Burwell next week and the final decision sometime this summer.

What could happen should the Supreme Court decide in effect to shut down the federal health insurance exchange operating in 34 states without their own exchanges? Among the results could be more than 5 million enrollees in the joint state-federal Children’s Health Insurance Program without health insurance, estimates the Children’s Health Fund, a provider of mobile health care for homeless and low-income children. We already know the empirical long-term economic benefits of expanded health care for those least able to afford it—and can say with strong confidence that taking away health insurance for these five million now covered under Obamacare would harm our economy.

—Janet Currie is the Henry Putnam Professor of Economics and Public Affairs at Princeton University and directs the Program on Families and Children at the National Bureau of Economic Research. Her views expressed in this column are her own.

The steep path forward for unionization

Posted on by Bridget Ansel

The decades-long decline of unions in the United States is a long-studied phenomenon, but now several academics are wondering whether past research underestimated the role of the decline of unions in the rise of economic inequality. The new research also raises the ancillary question of how could unions rise again to prominence to help reduce inequality.

A variety of research shows that the decline in unionization was a significant factor in the rise in income inequality in high-income countries. A recent paper by sociologists Bruce Western of Harvard University and Jake Rosenfeld of the University of Washington is widely cited. Their research finds that about one-fifth to one-third of the increase in wage inequality can be explained by declining union membership.

Similarly, a recent essay by International Monetary Fund economists Florence Jaumotte and Carolina Osorio Buitron previews their new research that finds the decline in unionization also affects top-level inequality in the industrialized economies. According to Jaumotte and Buitron, “the decline in unionization explains about half of the 5 percentage point rise in the top 10 percent income share” in these nations.

But Adam Ozimek, an economist at Moody’s Analytics, makes a very important observation. How exactly will unions return to prominence? Ozimek cites a variety of research that shows employment growth at unionized firms is slower than employment at nonunionized firms. Specifically he cites a paper by Harvard University economist Richard Freeman that makes this point—for the unionization rate to increase, employment at unionized firms would have to increase faster than employment at non-unionized firms.

So what could make employment at unionized firms grow relatively faster compared to non-union firms? The results Freeman cites would have us believe that such an outcome is unlikely. A steady increase in the unionization rate seems unlikely.

Yet in the same paper, Freeman notes that increases in unionization rates in the past have come from large and sudden increases in union membership. So a sudden reform of labor law might make unionization much easier. Or a sharp increase in demand for unionization might happen. Or a combination of both—a more likely scenario—could happen.

In the mid-20th century, labor union were an integral part of the U.S. economy. More than 30 percent of private-sector workers were members of unions and some of the most successful industries of the time, namely the auto industry, were highly unionized. Early in the 21st century, the status of unions isn’t so strong. Less than 7 percent of private-sector workers are members of unions and once highly unionized sectors have seen their heydays.

But one advantage that unions do have moving forward is that the growing industries in the U.S. economy are seemingly less likely to move abroad in the same way heavily unionized manufacturing jobs did over the past several decades. In this regard, service-sector jobs may be more likely to stick around.

The take-away is this: Increased unionization in the United States would almost certainly reduce wage and income inequality. But the pathway to a higher rate is steep. A sudden jump seems the only way up. But what will cause or even allow such an increase? That remains to be seen.