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September 9 - September 24, 2020
The Economist magazine once computed just how far the IMF’s forecasts were off on average over the period 2000–2014.12 For two years from the time of prediction (say, the growth rate in 2014 predicted in 2012), the average forecast error was 2.8 percentage points. That’s somewhat better than if they had chosen a random number between–2 percent and 10 percent every year, but about as bad as just assuming a constant growth rate of 4 percent.
Economists are more like plumbers; we solve problems with a combination of intuition grounded in science, some guesswork aided by experience, and a bunch of pure trial and error.
report by the Center for American Entrepreneurship found that, in 2017, out of the largest five hundred US companies by revenue (the Fortune 500 list), 43 percent were founded or co-founded by immigrants or the children of immigrants.
So one very big problem with the supply-demand analysis applied to immigration is that an influx of migrants increases the demand for labor at the same time it increases the supply of laborers. This is one reason why wages do not go down when there are more migrants. A deeper problem lies in the very nature of labor markets: supply-demand is just not a very good description of how they really work.
Americans still believe in this American dream, though as a point of fact, heredity plays a greater role in the fortunes of today’s Americans than it does in Europe.
High-skilled workers continue to move from poor states to rich states, but now low-skilled workers, to the extent they still move, seem to be moving in the opposite direction. These two trends mean that since the 1990s, the US labor market has become increasingly segregated by skill level. The coasts attract more and more educated workers, while the less well educated seem to concentrate inland, particularly in the old industrial cities in the east like Detroit, Cleveland, and Pittsburgh. This has contributed to the divergence in earnings, lifestyles, and voting patterns in the country and a
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The idea that more trade is good (on balance) is deeply engrained in anybody who went to graduate school in economics. In May 1930, over a thousand economists had written a letter encouraging President Hoover to veto the Smoot-Hawley bill. And yet there is something else economists do know but tend to keep closely to themselves: the aggregate gains from trade, for a large economy like the United States, are actually quantitatively quite small. The truth is, if the US were to go back to complete autarky, not trading with anybody, it would be poorer. But not that much poorer.
It is perhaps reassuring that previous waves of migrants to the United States experienced similar rejection before they were ultimately accepted. Benjamin Franklin hated the Germans: “Those who come hither are generally of the most ignorant Stupid Sort of their own Nation.… Not being used to Liberty, they know not how to make a modest use of it.” Jefferson thought the Germans were unable to integrate. “As to other foreigners it is thought better to discourage their settling together in large masses,” he wrote, “wherein, as in our German settlements, they preserve for a long time their own
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GROWTH ENDED ON October 16, 1973, or thereabouts, and is never to return, according to a wonderfully opinionated book by Robert Gordon.1
For the thirty-odd years that separated the end of the Second World War from the OPEC crisis, economic growth in Western Europe, the United States, and Canada was faster than it had ever been in history.
Making somewhat heroic assumptions, it is possible to guesstimate the contribution of these two factors. Robert Gordon reckons that rising education explains about 14 percent of the increase in labor productivity over the period, and the capital investment that gave workers more and better machines to work with explains a further 19 percent of the increase. The rest of the observed productivity improvement cannot be explained by changes in things economists can measure. To make ourselves feel better, economists have given it its own name: total factor productivity, or TFP. (The famous growth
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convergence. Countries scarce in capital and relatively abundant in labor, like most poor countries, will grow faster because they have not yet reached their balanced growth path. They can still grow by improving the balance between their labor and capital. As a result, we would expect the difference in GDP per worker across countries to be reduced over time.
Solow’s was what economists call an exogenous growth model, where the word “exogenous,” meaning driven by outside effects or forces, acknowledges our inability to do anything about the long-run growth rate. Growth, in short, is beyond our control.
Romer was describing a force that ensured technologies would constantly keep improving, and more so in countries pursuing pro-innovation policies. Unlike in Solow’s world, technological progress would no longer be some mysterious force we have no control over.
Top tax rates were above 77 percent for the period 1936–1964, and above 90 percent for about half of that period, mostly in the 1950s under a solidly right of center Republican administration. The top tax rate was brought down to 70 percent in 1965 by a more left-wing Democratic administration, and since then it has drifted down to mid 30 percent. Every Republican administration has tried to cut it down further and every Democratic administration has tried to raise it a little,
looking at growth rates since the 1960s, it is evident the low tax rate era ushered in by Reagan did not deliver faster growth. There was a recession in the beginning of the Reagan administration, followed by a catch-up phase when the growth rate went back to normal. Growth rates were a little higher during the Clinton years and declined afterward. Overall, if we take the long-run view (the ten-year moving average, which averages the ups and downs of the business cycle), economic growth has been relatively stable since 1974, remaining between 3 and 4 percent over the entire period. There is no
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There is absolutely no relationship between the depth of the cut between the 1960s and 2000s in a country and the change in growth rate in that country during the same period.
Within the United States, the experience of individual states is also telling. In 2012, Republican leaders in Kansas passed deep tax cuts, with the promise this would spur the economy. Nothing like that happened. Instead the state went broke and had to cut back on its education budget, the school week was cut to four days, and teachers went on strike.55
Using the thirty-one tax reforms since the war, the study shows that tax cuts benefitting the top 10 percent produce no significant growth in employment and income, whereas tax cuts for the bottom 90 percent do.56
in developed countries there is no evidence that the advent of the internet ushered in a new era of growth. The World Bank’s flagship publication, the World Development Report, in its 2016 edition on digital dividends, after much hemming and hawing, concluded that on the impact of the internet, the jury was still very much out.85
Bad banks hurt efficiency from both ends; because of them, savings rates are lower than they could be and savings are poorly managed.
In the poorest countries, there is a large gap between the wages of public- and private-sector employees. In the poorest countries, public-sector workers earn more than double the average wage in the private sector. And this is not counting generous health and pension benefits.118 This kind of difference can throw the entire labor market into a tailspin. If government-sector jobs are so much more valuable than private-sector jobs, but also very scarce, it is worthwhile for everybody to wait around and queue for those jobs.
Robert Solow was right. Growth seems to slow down as countries get to a certain level of per capita income. At the technological frontier, that is to say in the rich countries, TFP growth is largely a mystery. We do not know what propels it. And Robert Lucas and Paul Romer were right too. For the poorer countries, convergence is not automatic. This is probably not mainly because of spillovers. It is more that TFP is much lower in poorer countries, to a significant extent because of market failures. And therefore to the extent that business-friendly institutions have something to do with fixing
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According to the World Bank, of 101 middle-income economies in 1960, only 13 had become high income by 2008.122 Malaysia, Thailand, Egypt, Mexico, and Peru all seem to have trouble moving up.
even the IMF, so long the bastion of growth-first orthodoxy, now recognizes that sacrificing the poor to promote growth was bad policy. It now requires its country teams to include inequality in factors to take into consideration when providing policy guidance to countries and outlining conditions under which they can receive IMF assistance.123
Even if the total number of jobs does not fall, the current wave of automation tends to displace jobs that require some skills (bookkeepers and accountants) and increase the demand, either for very skilled workers (software programmers for the machines) or for totally unskilled workers (dog walkers, for example), which are both much more difficult to replace with a machine.
As software engineers become richer, they have more money to hire dog walkers, who have become relatively cheaper over time, since there is little alternative employment for those with no college education. Even if people remain employed, this leads to an increase in inequality, with higher wages at the top and everyone else pushed to jobs requiring no specific skills; jobs where wages and working conditions can be really bad.
the idea that tax rates need to be low to avoid disaster is of recent vintage. In the United States, the top marginal tax rate was above 90 percent from 1951 to 1963. It declined afterward, but remained high. Under Presidents Reagan and George H. W. Bush, top tax rates came down from 70 percent to less than 30 percent. Bill Clinton pushed them back up, but only to 40 percent.
Despite the fact that there is no evidence massive tax cuts for the rich promote economic growth (we are still waiting for the promised turnaround in growth in both the US and the UK), at the time the evidence was much less clear. Since growth had stopped in 1973, the natural reaction was to turn to the critics of the Keynesian macroeconomic policies of the 1960s and 1970s, such as the (right-leaning) Chicago school of economics professors and Nobel Prize–winners Milton Friedman and Robert Lucas.
In the 1980s, while growth remained sluggish, inequality exploded. Thanks to the outstanding and painstaking work of Thomas Piketty and Emmanuel Saez, the world now knows what happened: 1980 is the year Reagan was elected. It is also almost exactly the year the share of national income that goes to the richest 1 percent reverses fifty years of decline and starts a relentless climb in the United States. In 1928, at the end of the Roaring Twenties, the richest 1 percent captured 24 percent of the income. In 1979, that number was about a third as big. In 2017, the last year to be included at the
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If there had been any trickle-down effect of lower taxes, as its advocates claimed, one would expect wage growth to have accelerated in the Reagan-Bush years. But the opposite happened.
Financial sector employees are now paid 50–60 percent more than other workers with comparable skills. This was not true in the 1950s, 1960s, or 1970s.47 This rise in earnings is a big piece of the overall shift in top incomes.
As the 2008 global crisis unfolded, caused in large part by a combination of irresponsibility and incompetence on the part of the masters of finance, a study reported that 28 percent of Harvard college graduates of recent cohorts opted for jobs in finance.54 That ratio was 6 percent in 1969 and 1973.55
When tax rates on the very top income are 70 percent or more, firms are more likely to decide that paying stratospheric wages is a waste of their money and cut back the top salaries. With these tax rates, the board faces a stark trade-off: at a 70 percent marginal tax rate, a dollar in salary is only thirty cents in the pocket for the manager, versus a whole dollar for the firm.
Salary caps in professional sports are hardly the product of some Nordic idealism. Clearly, the main rationale of the salary caps is to control costs. It is what a cartel of team owners does to limit how much of the proceeds go to players and, by implication, increase the amount that goes to them. But it has the virtue, and this is the stated reason for the caps, that it ensures some degree of equity between the teams, making the season much more interesting to watch. Unlimited money creates too much inequality, with the result that within a league only a few teams ever have a real chance of
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Along with the general stagnation at the bottom, intergenerational mobility has declined sharply in the US. Mobility is now substantially lower in the United States than it is in Europe. Within the OECD, the child from the bottom quintile most likely to remain stuck in the bottom quintile is from the US (33.1 percent), while the least likely is from Sweden (26.7 percent). The average for continental Europe is below 30 percent. The probability of moving to the top quintile is 7.8 percent in the US, but close to 11 percent on average in Europe.80
There is no evidence that cash transfers make people work less.30
The Alaska Permanent Fund has distributed, since 1982, a yearly dividend of $2,000 per person per year. It seems to have no adverse impact on employment.38
