J. Bradford DeLong's Blog, page 271

Eric Kleefeld: Destroying Your BASE: "Stephen Moore boast...

Eric Kleefeld: Destroying Your BASE: "Stephen Moore boasted in a piece at Heritage that the SALT move would raise taxes on the affluent in blue states���even after other tax cuts https://www.heritage.org/taxes/commentary/tax-plan-cut-everyone...

#shouldread

Bill Janeway: This Is How the Unicorn Bubble Will Burst: ...

Bill Janeway: This Is How the Unicorn Bubble Will Burst: "So-called 'unicorns' have become household names.... Bill Janeway... explains the lessons that all these companies must eventually learn and how the bubble will burst...

...So-called 'unicorns' have become household names in recent years. Multi-billion dollar companies like AirBNB, Uber, and WeWork have become known for phenomenal growth, extraordinary valuations, and a general dearth of profits. That means these companies have been reliant on accommodative financial conditions to maintain their growth. So how might this all come to an end? On this week���s Odd Lots podcast we speak with veteran investor Bill Janeway, a theorist-practitioner who not only studied economics under the students of John Maynard Keynes, but who has been a VC with Warburg Pincus for over 35 years. He explains the lessons that all these companies must eventually learn and how the bubble will burst...

#shouldread

Note to Self: Coffee with Brink Lindsey, co-author of T...

Note to Self: Coffee with Brink Lindsey, co-author of The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality https://books.google.com/books?isbn=0190627778: "Brink Lindsey and Steven M. Teles identify a common factor behind... breakdowns in democratic governance that allow wealthy special interests to capture the policymaking process for their own benefit...

Alfred lost. But a very good anti-NIMBY set of posters...

Brink Lindsey and Steve Teles: The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality https://books.google.com/books?isbn=0...

#books #NIMBYism

Monday Smackdown: Revisiting the Trump-McConnell-Ryan Tax Cut Debate

A year ago, during the Trump-McConnell-Ryan corporate tax cut debate, Greg Mankiw wrote that "a relevant exercise for my readers... [is assuming] the capital stock adjusts so that the after-tax marginal product of capital equals the exogenously given world interest rate r..." That was unprofessional. That is not a relevant model for a large country with a floating exchange rate. If you want an investment boom, cut the deficit���like Clinton-Mitchell-Gephardt did over 1993-1996.

Paul Krugman explains why: Paul Krugman: Why Was Trump���s Tax Cut a Fizzle?: "The blue wave means that Donald Trump will go into the 2020 election with only one major legislative achievement: a big tax cut for corporations and the wealthy. Still, that tax cut was supposed to accomplish big things. Republicans thought it would give them a big electoral boost, and they predicted dramatic economic gains. What they got instead, however, was a big fizzle...

...The political payoff, of course, never arrived. And the economic results have been disappointing.... There���s no sign of the vast investment boom the law���s backers promised. Corporations have used the tax cut���s proceeds largely to buy back their own stock rather than to add jobs and expand capacity. But why have the tax cut���s impacts been so minimal? Leave aside the glitch-filled changes in individual taxes, which will keep accountants busy for years; the core of the bill was a huge cut in corporate taxes. Why hasn���t this done more to increase investment? The answer, I���d argue, is that business decisions are a lot less sensitive to financial incentives ��� including tax rates���than conservatives claim. And appreciating that reality doesn���t just undermine the case for the Trump tax cut. It undermines Republican economic doctrine as a whole....

Changes in interest rates affect the economy mainly through their effect on the housing market and the international value of the dollar (which in turn affects the competitiveness of U.S. goods on world markets). Any direct effect on business investment is so small that it���s hard even to see it in the data. What drives such investment is, instead, perceptions about market demand.... Business investments have relatively short working lives.... There aren���t many potential business investments that will be worth doing with a 21 percent profits tax, the current rate, but weren���t worth doing at 35 percent, the rate before the Trump tax cut....

Proponents of the tax cut, including Trump���s own economists, made a big deal about how we now have a global capital market, in which money flows to wherever it gets the highest after-tax return.... The key word here is, however, ���appear.��� Corporations do have a strong incentive to cook their books... The vast sums corporations have supposedly invested in Ireland have yielded remarkably few jobs and remarkably little income for the Irish themselves....

That doctrine is all about the supposed need to give the already privileged incentives to do nice things for the rest of us. We must, the right says, cut taxes on the wealthy to induce them to work hard, and cut taxes on corporations to induce them to invest in America. But this doctrine keeps failing in practice. President George W. Bush���s tax cuts didn���t produce a boom; President Barack Obama���s tax hike didn���t cause a depression. Tax cuts in Kansas didn���t jump-start the state���s economy; tax hikes in California didn���t slow growth. And with the Trump tax cut, the doctrine has failed again...

#shouldread #economicsgonewrong #smackdown #fiscalpolicy #globalization

New show premiering on FOX tomorrow: BE THE NEXT WHITE HO...

New show premiering on FOX tomorrow: BE THE NEXT WHITE HOUSE CHIEF OF STAFF!

#orangehairedbaboons #journamalism

Why Doesn't Italy Have Better Options?

2018-12-08

We begin with Adam Tooze laying out the issues:

Adam Tooze: Italy: How Does the E.U. Think This Is Going to End?: "Over the past 10 years, Italy���s gross domestic product per capita has fallen... unique among large advanced economies...

...More than 32 percent of Italy���s young people are unemployed. The gloom, disappointment and frustration are undeniable. For the commission to declare that this is a time for austerity flies in the face of a reality that for many Italians is closer to a personal and national emergency....

The two parties that make up the current Italian government, the League and the Five Star Movement, were elected in March to address this crisis. The League is xenophobic; Five Star is erratic and zany. But the economic programs on which they campaigned are hardly outlandish.... The Italian government���s budget forecasts are optimistic. But others, including the Bank of Italy and the Peterson Institute of International Economics, warn that Italy is caught in a trap: Anxieties about debt sustainability mean that any stimulus has the perverse effect of driving up interest rates, squeezing bank lending and reducing growth...

 

What would have to be the case for a stimulus to have this perverse effect���to actually manage to not boost the economy but rather squeeze bank lending and reduce growth?

 

Our Filing System: The Basic IS Framework

Back in the late 1990s Paul Krugman concluded that workings of the macroeconomy had changed: that we had started to see The Return of Depression Economics https://books.google.com/books?isbn=039304839X. He was right. This meant that the economic analytical tools that had been forged in order to understand the Great Depression of the 1930s had become the right place to start any analysis of what was going on in the business cycle. And so it has proven to be for the past twenty years,

Therefore we start with John Hick's 1937 IS-Equation, from his article "Mr. Keynes and the 'Classics': A Suggested Interpretation" https://tinyurl.com/20181208a-delong. The variable we place on the left-hand side is aggregate demand AD. The variable we place on the right-hand side is the long-term risky real interest rate r. In between are a large host of parameters drawn from the macroeconomy's behavioral relationships and from salient features of the macroeconomic environment and macroeconomic policy. We identity aggregate demand AD with national income and product Y, arguing that the inventory-adjustment mechanism will make the two equal at the macroeconomy's short-run sticky-price Keynesian equilibrium within a few quarters of a year.

Then we have not so much a model of the macroeconomy as a filing system for factors that we can and need to model, thus:

$ Y = AD = \mu(c_o + I_o + G) + \mu(x_fY^f + x_{\epsilon}{\epsilon}o + x{\epsilon}{\epsilon}rr^f) - \mu(Ir + x_{\epsilon}{\epsilon}_r)r $

To simplify notation, we will typically use "$\Delta$" to stand for changes in economic quantities generated by shifts in the economic policy and in the economic environment, and we will drop terms that are zero.

 

Applying Our Filing System to Italy Today

For the problem of understanding Italy today, the pieces of this equation that matter are:

$ {\Delta}Y = {\Delta}AD = \mu{\Delta}G + {\mu}x_{\epsilon}{\Delta}{\epsilon}o + {\mu}x{\epsilon}{\epsilon}r{\Delta}r^f - \mu(Ir + x_{\epsilon}{\epsilon}_r){\Delta}r $

The change in national income and product ${\Delta}Y$ equals the change in aggregate demand ${\Delta}Y$ equals the sum of:

the multiplier $\mu$ times the change in government purchases ${\Delta}G$
the multiplier $\mu$ times the foreign propensity to purchase our exports $x_f$ times the change in exchange speculator optimism or pessimism about the long-run soundness of the currency ${\Delta}{\epsilon}_o$
the multiplier $\mu$ times the foreign propensity to purchase our exports $x_f$ times the sensitivity of the exchange rate to interest rates ${\epsilon}_r$ times the change in the interest rate in the rest of the eurozone ${\Delta}r^f$
the multiplier $\mu$ times the sum of the interest sensitivity of investment $I_r$ plus the product of the foreign propensity to purchase our exports $x_f$ and the sensitivity of the exchange rate to interest rates ${\epsilon}_r$ all times the change in the interest rate ${\Delta}r$

Now we need an extra equation: a country with a freely-floating exchange rate $\epsilon$:

$ {\Delta}{\epsilon} = {\Delta}{\epsilon}o + {\epsilon}r({\Delta}r^f - {\Delta}r) $

the change in the exchange rate ${\Delta}{\epsilon}$ is equal to the change in exchange speculator optimism or pessimism about the long-run soundness of the currency ${\Delta}{\epsilon}o$ minus the sensitivity of the exchange rate to interest rates ${\epsilon}r$ all times the change in the interest rate ${\Delta}r$. But Italy does not have a freely-floating exchange rate: Italy is in the eurozone. So

$ {\Delta}{\epsilon} = 0 $

therefore:

$ {\Delta}r = \frac{{\Delta}{\epsilon}o}{{\epsilon}r} + {\Delta}r^f $

And the rewritten relevant parts of the IS equation are:

$ {\Delta}Y = {\Delta}AD = \mu{\Delta}G + {\mu}x_{\epsilon}{\Delta}{\epsilon}o + {\mu}x{\epsilon}{\epsilon}rr^f - \frac{\mu(Ir + x_{\epsilon}{\epsilon}r){\Delta}{\epsilon}o}{{\epsilon}r} - \mu(Ir + x_{\epsilon}{\epsilon}_r){\Delta}r^f $

$ {\Delta}Y = \mu{\Delta}G - \frac{{\mu}I_r}{\epsilon_r}\Delta\epsilon_o -{\mu}I_r{\Delta}r^f $

Thus the change ${\Delta}Y$ in national income and product that follows a fiscal expansion with higher government purchases ${\Delta}G$ will be positive as long as:

$ {\Delta}G > \frac{I_r}{\epsilon_r}\Delta\epsilon_o + I_r{\Delta}r^f $

The shift to more expansionary fiscal policy will indeed boost demand, production, and employment unless this equation fails to hold.

 

Conclusion

What conclusions can we draw from this equation?

First, we conclude that taking on unsustainable debt���or rather debt perceived as unsustainable���could indeed fail to boost demand, production, and employment if the reaction ${\Delta}{\epsilon}o$ to ${\Delta}G$ is too large. The natural thing, therefore, would be for the IMF and the European Union to step in with short-term support and guarantees to ensure that the market reaction ${\Delta}{\epsilon}o$ coupled with a longer-term structural adjustment program to guarantee that debt repayment will in fact take place.

Second, that the European Union���which controls ${\Delta}r^f$���could assist by switching to an easier money-tighter fiscal policy mix itself and so creating a negative value for ${\Delta}r^f$.

Why would the European Union want to assist in these ways? Well, it wants a prosperous Italy, doesn't it? And it wants an Italy that stays in the eurozone, doesn't it? why would the IMF want to assist in these ways? Well, that is its job, isn't it?

If the past ten years ought to have taught the Great and Good of Europe anything, it is that ensuring prosperity, growth, and high employmennt is job #1. Figuring out how to dot the financial i's and cross the financial t's is distinctly secondary. But, as Adam Tooze writes, instead the Great and Good of Europe seem to wish to "hold the line on debt and deficits" without offering anything "positive in exchange, such as a common European investment and growth strategy or a more cooperative approach to the refugee question". He calls this, with great understatement, "a high-risk and negative strategy".

I cannot see how anyone can disagree.

 

#highlighted #globalization #eurozone #monetarypolicy

Github:

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Claire Montialoux and Ellora Derenoncourt: Minimum Wages ...

Claire Montialoux and Ellora Derenoncourt: Minimum Wages and Racial Inequality: "The earnings difference between black and white workers fell dramatically in the United States in the late 1960s and early 1970s... the extension of the minimum wage played a critical role...

...The 1966 Fair Labor Standards Act extended federal minimum wage coverage to agriculture, restaurants, nursing homes, and other services which were previously uncovered and where nearly a third of black workers were employed. We digitize over 1,000 hourly wage distributions from Bureau of Labor Statistics industry wage reports and use CPS micro-data to investigate the effects of this reform on wages, employment, and racial inequality.... Wages rose sharply for workers in the newly covered industries. The impact was nearly twice as large for black workers as for white. Within treated industries, the racial gap adjusted for observables fell from 25 log points pre-reform to zero afterwards.

Using a bunching design, we find no effect of the reform on employment. We can rule out significant dis-employment effects for black workers. The 1966 extension of the minimum wage can explain more than 20% of the reduction in the racial earnings and income gap during the Civil Rights Era. Our findings shed new light on the dynamics of labor market inequality in the United States and suggest that minimum wage policy can play a critical role in reducing racial economic disparities...

#shouldread

An excellent paper from Fukui, Nakamura, and Steinsson ab...

An excellent paper from Fukui, Nakamura, and Steinsson about how how the American feminist revolution supported business-cycle recoveries in rather 1970s and 1980s. Back then there was a huge reservoir of women who would take jobs, and had not preciously held jobs only because of the lagging of social structure behind economic and cultural change. Thus increases in demand in recovery focused on this industrial reserve army could very easily find good matches between unfilled jobs and unemployed workers: Masao Fukui, Emi Nakamura, and Jon Steinsson: Women, Wealth Effects, and Slow Recoveries: "A female-biased shock generating a 1% increase in female employment leads to only a 0.15% decline in male employment (and this estimate is statistically insignificant). In other words, our estimates imply very little crowding out of men by women in the labor market.... 70% of the slowdown in recent business cycle recoveries can be explained by female convergence...

Business cycle recoveries have slowed in recent decades. This slowdown comes entirely from female employment: as women���s employment rates converged towards men���s over the past half-century, the growth rate of female employment slowed. We ask whether this slowdown in female employment caused the slowdown in overall employment during recent business cycle recoveries. Standard macroeconomic models with 'balanced growth preferences; imply that this cannot be the cause, since the entry of women 'crowds out' men in the labor market almost one-for-one. We estimate the extent of crowd out of men by women in the labor market using state-level panel data and find that it is small, contradicting the standard model. We show that a model with home production by women can match our low estimates of crowd out. This model���calibrated to match our cross-sectional estimate of crowd out���implies that 70% of the slowdown in recent business cycle recoveries can be explained by female convergence.... A female-biased shock generating a 1% increase in female employment leads to only a 0.15% decline in male employment (and this estimate is statistically insignificant). In other words, our estimates imply very little crowding out of men by women in the labor market...

#shouldread #gender #businesscycles #macro

Nick Bunker: "To use the language of Clarida���s speech, ...

Nick Bunker: "To use the language of Clarida���s speech, Powell seems to be signaling they being data dependent by updating estimate of r-star, not the current health of economy...

#shouldread

It is a surprise to most economists to learn that the out...

It is a surprise to most economists to learn that the outbreak of inflation in the 1970s was not due to central bankers and governments trying to exploit the Phillips curve to run a high-pressure economy. The most important shocks were the oil shocks. The second most important shocks were those that caused the productivity growth slowdown. The third most important shocks were Johnson���s and Nixon���s unwillingness to listen to their economic advisers, and Martin���s and Burns���s unwillingness to pull a Volcker. Perhaps it is because it is such a surprise that so few have learned it, and how many forget it immediately after it is pointed out to the. And since the 1970s be strong belief that another 1970s is always and everywhere looking around the corner has been very damaging: and since the 1970s the strong believe that another 1970s is always been everywhere looking around the corner has been very damaging: Paul Krugman (2011): The Demand-Side Temptation: ���[Nick] Rowe goes on to suggest that demand-side logic is dangerous... could lead to irresponsible policies. Well, there have been times and places.... But what I think Nick misses is the power of the contrary narrative, of the notion of the government as being like a family that must tighten its belt when the rest of us do, of the evils of printing money (hey, I can���t do that, why can Bernanke?)...

...As so often, Keynes was there first:

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority...

Add to this the Kalecki notion that captains of industry want governments to believe that it���s all about being nice to business, which makes them hostile to any active policy, and I think you have a rough explanation of the fact that right now hostility to demand-side policies, rather than demands for more, rule our discourse...

#shouldread #economicsgonewrong #inflation #economichistory #monetarypolicy