Michael Kevane

A student shared a recent oped by Alan Blinder at the WSJ.

Andrew, Thanks for sharing! Something like this should be on the final, right? 😉  Actually, this is more about micro-level policies and supply side policies that we have not focused on.  I will note that [some] economists are generally pretty skeptical of this:

Mrs. Clinton also advocates widespread profit-sharing as a way to put more money into workers’ pockets. She would promote that goal both by using the presidential bully pulpit and by providing tax incentives for businesses that share profits. Since the scholarly evidence suggests that profit-sharing raises productivity, such tax breaks will partly pay for themselves.

If profit sharing were good for the bottom-line, then presumably many more companies would have adopted it. Like Silicon Valley firms do with stock options.  Anyway, an empirical issue, and the jury is very mixed about whether a big initiative would do much. But FDR encouraged us to experiment, and hopefully if she [Clinton] does do it it will be something that states can match (or opt out) so we get evidence for the effects, and learn something. Incidentally, the health care legislation also was partly designed to induce variation across states so we (the polity) could learn more about what programs are more/less effective.

Economists also pretty much agree that adult retraining has relatively low payoff (except for highly motivated adults… like you MBA students).   A good (somewhat old) discussion of the issues is by Lalonde.  As Blinder notes, early childhood interventions (like getting lead out of water) have enormous benefit-cost ratios by comparison. But young kids don’t vote.

I’ll also take issue with Blinder’s cavalier dismissal of protectionism… raising tariff (by being more aggressive in filing complaints of dumping and export subsidies through the WTO process) probably would have short term effects of raising employment and wages. The problem is that the mechanism it does this is often very inefficient- costs are raised for everyone else. Autoworkers would definitely benefit from a 30% tariff… but everyone who buys a new car has to pay, and much of the benefit goes to shareholders rather than workers.

Anyway, thanks Andrew… I should post this to my blog!

The IMF’s 2010 quota and governance reforms have finally become effective and will give emerging markets like BRICS more power and greater say at the lender of last resort. “The conditions for implementing the International Monetary Fund’s 14th General Quota Review, which delivers historic and far-reaching changes to the governance and permanent capital of the Fund, have now been satisfied,” the IMF said in a statement. China will have the third largest IMF quota and voting share after the United States and Japan, and India, Brazil and Russia will also be among the top 10 members of the IMF. The reforms were approved by the IMF’s Board of Governors in 2010. US foot-dragging on reforms to the institution had blocked changes meant to give more voting power to BRICS and other emerging economies, frustrating countries around the world. These reforms will double the IMF’s quota resources and reallocate the quota. That meant reducing the role of advanced European countries and Gulf states, and increasing that of emerging nations, particularly China.

Source: IMF Reforms: China, India, Brazil, Russia Get Greater Say | The BRICS Post

Fredrik Wulfsberg’s analysis of Norwegian data suggests it is because when inflation gets higher (i.e. 10-15% range) firms change prices much more frequently, and so presumably this is more confusing for consumers.

The main result in this paper is that the variation in the frequency of price changes is more important than the size of price changes when inflation is high and vola-tile, and for the transition from the high-inflation to the low-inflation regime. When inflation is low and stable, both the frequency and the size of price adjustments are important, but the size is more important than the frequency. Prices thus changed more often and in smaller steps when inflation was high and volatile, and less often but by larger steps when inflation was low

Source: Inflation and Price Adjustments: Micro Evidence from Norwegian Consumer Prices 1975–2004 – mac.20140095

The TFP indexes reveal the dramatic contraction of labor in the farm sector. Agricultural land, a component of capital, also fell steadily, except for a brief cessation in the 1970s, and by 2004 amounted to less than three-quarters of its 1948 value. In contrast, the sector’s use of equipment and of material inputs—energy, fertilizers, pesticides, and purchased services—increased considerably until the early 1980s. After that, materials inputs fluctuated but showed no strong growth, and equipment inputs declined. Between 1948 and 1979, the sector substituted expanded usage of equipment and agricultural chemicals for declining land and labor inputs. As a result, materials accounted for a significant share of agricultural output growth, even though growth in total factor productivity was also important. However, output continued to grow after 1979, while capital inputs declined and material inputs (including chemicals) grew very little, compared with levels in 1979. Consequently, growth in TFP accounted for all of the post-1979 expansion of output. There can be little doubt that productivity growth has been the engine of economic growth in post World War II agriculture. TFP growth sparked most of the gains in production between 1948 and 1979, with added capital and materials accounting for the remainder. After 1979, when inputs in total declined, TFP drove all of the substantial increase in aggregate agricultural production.

Source: USDA ERS – Productivity Growth Drives Expanded Agricultural Production

Based on more complete information about recent years, the government also revised last year’s growth rate up slightly to 2.6 percent — the best so far since the severe recession ended in 2009. But that’s still well below the gains the American economy recorded in the mid-2000s, let alone the booming late 1990s. Over all, the economy expanded at an annualized rate of 1.2 percent in the second quarter, the Commerce Department reported Friday morning, just slightly better than the 0.8 percent pace recorded in the first quarter. The major drags were plunging business spending and excess inventories. Besides the drop in corporate investment, weaker government spending also held back growth, reinforcing a trend that has hobbled the recovery in recent years. Consumer behavior was resilient in the spring: Household spending rose at an annualized rate of 4.2 percent. “The consumer is doing all the heavy lifting,” said Nariman Behravesh, chief economist at IHS Markit. “Aside from technology and software, business spending was bad and housing was also surprisingly weak, which is payback for gains in recent quarters.”

Source: Weak Spending by Businesses Hinders 2nd-Quarter Growth – The New York Times

The results show that during the period 1980–2012, with the exception of Nigeria and Cote d’Ivoire productivity growth was not the hardcore of the growth observed in the ECOWAS countries but the growth was driven by factor accumulation. In addition, the contribution of labour to growth was positive but low in all the countries, the contribution of capital was negative in Cote d’Ivoire and Nigeria but positive in the other countries and that of total factor productivity was negative in Burkina Faso, Cape Verde, Ghana, Guinea, Mali, Niger and Senegal. The policy implication of this result is that in order to enhance long run economic growth in ECOWAS countries there is need to exert more efforts at raising productivity of factors of production. This requires more efforts at building human capacity for labour to be more effective and more investment in infrastructure, especially energy, in order to make capital more productive.

Source: Growth Accounting in ECOWAS Countries: A Panel Unit Root and Cointegration Approach – Springer

Nice graphic from WSJ.  The source and article worth reading is here.

A short note from the St. Louis Fed suggests that much of the decline is anticipated demographic change and inevitably reversal of the extremely high participation rates in the early 2000s (A Closer Look at the Decline in the Labor Force Participation Rate)

The BLS-projected change in the aggregate LFP rate between 2010 and 2020 can be broken into two components: (1) the change in the age composition of the population, and (2) the change in the LFP rates of different age groups. We found that the change in the age composition of the population accounted for most (2.18 out of 2.20 percentage points) of the decline in the aggregate LFP rate over the period. Specifically, this 2.18-percentage-point contribution to the LFP rate decline was mostly driven by a 3-percentage-point decrease in the population share of those 45-54 years old. In contrast to the 2.18-percentage-point decline in the LFP rate that resulted from changes in the age composition of the population, the change in the aggregate LFP rate due to the changes in the LFP rates of different age groups is almost zero on net. It is important to note that this value is the result of dissimilar dynamics of individual groups rather than consistent behavior of the population. For example, the largest contributions to the increase in the aggregate LFP rate are posted by those 55-64 years old (0.63 percentage points) and 65-74 years old (0.65 percentage points). Yet the increases in the LFP rates of these older workers are almost completely nullified by the decreases in the LFP rates of those 16-19 years old (–0.55 percentage points) and 20-24 years old (–0.44 percentage points).

Elisabeth Jacobs at the Washington Center for Equitable Growth, attributes some of the decline to the stalling and reversal of women’s labor force participation, due to the U.S. not reforming labor market institutions to make them more family-friendly.  (Her prepared testimony is an excellent introduction to the issues.)

Women’s labor force participation was driving the overall upward trend in labor force participation through 2000, so the plateau and then decline in women’s participation in the ensuring years is an important factor for explaining the national trend. Understanding why women’s labor force participation has stalled is key to reversing the downward trends in the national rate. In 1990, the United States had the sixth-­‐highest female labor force participation rate amongst 22 high-­‐income OECD countries. By 2010, its rank had fallen to 17th. Why have other high-­‐income countries continued their climb while the United States has stalled? Research by economists Francine Blau and Lawrence Kahn suggests that the absence of family-­‐friendly policies such as paid parental leave in the United States is responsible for nearly a third of the U.S. decline relative to other OECD economies. As other developed countries have enacted and expanded family-­‐friendly policies, the United States remains the lone developed nation with no paid parental leave.

Jacobs, and others, note how important this issue is.  People who participate in the labor force- who have jobs- pay taxes.  The tax revenue funds lots of incredibly valuable public goods and social services.  Fixes to increase labor force participation are thus often very cost-effective from a public finance point of view.  Too often we neglect this perspective.  To take an obvious example: the United States’ comparatively huge incarceration rate takes out of the labor force hundreds of thousands of potential taxpayers, and adds a large cost (supporting those same prisoners).  How inefficient is that, especially when we know that a large fraction of those incarcerated are no significant danger to the public (minor drug and traffic offenses)?

Moreover, the other group whose participation is declining consists of some of the most marginal and vulnerable (to incarceration and addiction) members of our society. According to the Council of Economic Advisers:

Participation rates by educational attainment, previously quite similar, have diverged since the 1960s. In 1964, 98 percent of prime-age men with a college degree or more participated in the workforce, compared to 97 percent of men with a high school degree or less. In 2015, the rate for college-educated men had fallen slightly to 94 percent while the rate for men with a high school degree or less had plummeted to 83 percent.

So let’s ask our Presidential candidates what they hope to accomplish to increase labor force participation, and decide whether to support them based on their answers.