Sunday, August 22, 2021

PK: The Bad Economics of Fossil Fuel Defenders [feedly]

The Bad Economics of Fossil Fuel Defenders
Paul Krugman

(text only)

https://www.nytimes.com/2021/08/16/opinion/climate-change-republicans-economy.html

Global warming is fake news. Anyway, it isn't man-made. And doing anything about it would destroy the economy.

Opponents of action against climate change have always relied on multiple lines of defense: If one argument for doing nothing becomes unsustainable, they just retreat to another.

That's what we're seeing now, as conservatives argue against the Biden administration's push for climate-friendly public investment. As it happens, this push is taking place against a background of unprecedented heat waves, huge forest fires, severe drought in some places and catastrophic flooding in others — phenomena that scientists have long warned would become more common as the planet gets hotter.

Given these events, as The Times recently reported, Republicans have toned down their climate denial — in some cases pretending that they never denied the science in the first place. Thus Senator James Inhofe, the author of 2012's "The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future," is now claiming that he never called climate change a hoax.

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If experience is any guide, this new willingness to accept the reality of global warming won't last; the next time America has a cold snap, the usual suspects will go right back to denying climate change and attacking scientists. For now, however, they're focused on the immense economic damage that they claim will result if we try to limit emissions of greenhouse gases.

So let me offer four reasons not to believe a word they say on this subject.

First, the U.S. economy has consistently done better under Democratic presidents than under Republican presidents — a pattern so strong that even progressive economists admit that it's puzzling. Whatever the cause of this partisan disparity, a party devoted to the zombie doctrine that tax cuts solve all problems has no standing to lecture us on what's good for the economy.

Second, there is a remarkable inconsistency between conservatives' expressed faith in the power of private initiative and their assertion that climate policies will paralyze the economy. Businesses, the right likes to tell us, are engines of innovation and adaptation, rising to meet any challenge. Yet somehow the same people who laud private-sector creativity insist that businesses will shrivel up and die if confronted with new regulations or emission fees.

In fact, a number of studies have shown that government projections of the effects of new environmental or safety regulations consistently overestimate their costs, precisely because businesses respond to new rules and incentives by innovating, finding ways to reduce compliance costs. And industry projections of the adverse effects of regulation are far worse, typically overstating the costs to a ludicrous degree.

Third, history strongly refutes the notion that there's any necessary link between economic growth and greenhouse gas emissions.

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Consider the case of Britain, where modern economic growth began. British emissions of carbon dioxide have been falling for half a century, despite a growing economy. On a per-capita basis, Britain's CO₂ emissions are back down to what they were in the '50s — the 1850s, when real G.D.P. per person was only about one-ninth what it is today.

Finally, Republican insistence that we must remain dependent on fossil fuels is especially strange, given huge technological progress in renewable energy — progress so remarkable that the Trump administration tried to force power companies to keep using coal, which is no longer competitive on cost. Improved technology means that climate action looks far easier now than it did in, say, 2008, when John McCain called for a cap on greenhouse gas emissions, a position that would be disqualifying for anyone seeking the Republican presidential nomination today.

Of course, these facts won't change Republican minds. It's painfully obvious that politicians opposing climate action aren't arguing in good faith; they've effectively decided to block any and all measures to ward off disaster and will use whatever excuses they can find to justify their position.

Why has the G.O.P. become the party of pollution? I used to think that it was mainly about money; in the 2020 election cycle Republicans received 84 percent of political contributions from the oil and gas industry and 96 percent of contributions from coal mining.

And money is surely part of the story. But I now think there's more to it than that. Like pandemic policy, where the G.O.P. has effectively allied itself with the coronavirus, climate policy has become a front in the culture war; there's a sense on the right that real men disdain renewable energy and love burning fossil fuels. Look at the dishonest attempts to blame wind farms for Texas blackouts actually caused by freezing pipelines.

In any case, what you need to know is that claims that taking on climate change would be an economic disaster are as much at odds with the evidence as claims that the climate isn't changing.


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Thursday, August 19, 2021

Dean Baker: The $26 an Hour Minimum Wage

The $26 an Hour Minimum Wage

Dean Baker

That may sound pretty crazy, but that's roughly what the minimum wage would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first thirty years after a national minimum wage first came into existence in 1938.

That may sound pretty crazy, but that's roughly what the minimum wage would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first thirty years after a national minimum wage first came into existence in 1938.


Furthermore, a minimum wage that grew in step with the rapid rises in productivity in these decades did not lead to mass unemployment. The year-round average for the unemployment rate in 1968 was 3.6 percent, a lower average than for any year in the last half century.

The $26 an Hour World

Think of what the country would look like if the lowest paying jobs, think of dishwashers or custodians, paid $26 an hour. That would mean someone who worked a 2000 hour year would have an annual income of $52,000. This income would put a single mother with two kids at well over twice the poverty level.

And, this is just for starting wages. Presumably workers would see their pay increase above the minimum as they stayed at their job for a number of years and ideally were promoted to better paying positions. If we assume that after ten or fifteen years their pay had risen by 20 percent, then these workers at the bottom of the pay ladder would be getting more than $60,000 a year.

While that is hardly a luxurious standard of living, it is certainly enough to support a middle-class life-style. For a two-earner couple this would be $120,000 a year. Imagine this is what people at the very bottom of the labor force could reasonably expect when they are in their thirties and forties.

Don't Try This at Home

The $26 an hour is useful as a thought experiment for envisioning what the world might look like today, but it would not be realistic as policy for local, state, or even national minimum wage without many other changes to the economy. A minimum wage this high would almost certainly lead to large-scale unemployment, and that would be true even if were phased in over five or six years.

The problem is that we have made many changes to the economy that shifted huge amounts of income upward, so that we cannot support a pay structure that gives workers at the bottom $52,000 a year. This is the whole point of my book Rigged [it's free], we have restructured the economy in ways that ensure a disproportionate share of income goes to those at the top. If the bottom half or eighty percent of the workforce got the same share they got fifty years ago, we would have an enormous problem with inflation.

Just to quickly run through the short list, we can start with my favorites, government-granted patent and copyright monopolies. Items like drugs, medical equipment, and computer software, which would all be relatively cheap in a free market, instead cost us huge amounts of money because of these monopolies. In the case of prescription drugs alone, patent monopolies and related protections may add more than $400 billion a year (roughly $3,000 per family) to our annual bill. In total, the cost from these protections can easily exceed $1 trillion a year (almost $8,000 per family).

And the beneficiaries from patent and copyright monopolies are overwhelming those at the top end of the income distribution. Many workers in the tech sector make high six or even seven figure salaries. Lucky winners can walk away tens or even hundreds of millions of dollars because of these government-granted monopolies. Bill Gates would probably still be working for a living if the government was not prepared to arrest anyone who made copies of Microsoft software without his permission.

And yes, there are other ways to finance creative work and innovation. We can pay people, sort of like we do with just about every other task in the economy. (Read chapter 5 of Rigged.)

Next, we have corporate governance. The story here is that we have tens, or ever hundreds, of millions of dollars going to CEOs, who don't produce value anywhere close to this amount. This is not a moral judgement about the worth of the CEO, the point is that in almost all cases it would be possible to pay a person $2 or $3 million, who would produce as much shareholder value as a CEO getting $20 million.

The reason we don't see downward pressure on CEO pay is that the corporate boards that most immediately determine CEO pay, are largely selected by the CEO and other top management. They have no incentive to lower CEO pay. From their vantage point, there is no downside to grossly inflated CEO pay (it's not their money), and there is no reason to risk antagonizing other board members by suggesting that their friend the CEO gets too much money.

Bloated CEO pay matters not only for the relatively small number of people who run major companies, but also for its impact on pat scales for those near the top. If the CEO gets $20 million, the chief financial officer may get $10-$12 million. And third tier execs may get $1-$2 million. [1]

The picture would look very different if CEOs got paid $2-$3 million, as would be the case if we had the same pay ratios between CEOs and ordinary workers as in the 1960s. In that case, the third-tier executives would probably be looking at mid or high six figure salaries, not millions of dollars a year.

The financial sector is another place where we structure the economy to give large sums to a small number of rich people. We have created a tax and regulatory structure that allows some people to get incredibly rich by making little or no contribution to the productive economy. For example, it would be hugely more efficient if we all had digital bank accounts with the Fed, from which we could make all our payments and where we could receive our monthly paycheck and other income, at virtually zero cost.

The most obvious reason that we don't have such a system is that it would deprive the banking industry of tens of billions in annual fees. There is no reason that we should not have a modest financial transactions tax along the lines of the 0.1 percent tax proposed by Senator Schatz. (Most other sectors have sales taxes, which are far higher.)  We can also make it difficult for public pension funds to hand billions in fees to private equity partners who do not produce higher returns. The same applies to private universities who seem to like having friends make millions off their endowments while losing the university money.

And, we have our doctors and other highly paid professionals, who make more than twice as much as their counterparts in other wealthy countries because we protect them from competition, both foreign and domestic. If we paid our doctors the same as doctors in Germany or France, it would save us close to $100 billion annually, or roughly $750 per family. If we subjected all our highly paid professions to the same sort of competition as our auto and textile workers, the savings could be twice as high.

Bottom Line: These Huge Welfare Checks Make a $26 an Hour Minimum Wage Impossible

To see how the bloated incomes for those at the top, make it impossible for those in the middle and bottom to get decent pay, imagine that the high-end incomes came in the form of government checks. Instead of Bill Gates getting his billions from Microsoft's patent and copyright monopolies, suppose their software sold at free market prices, but the government sent him billions of dollars each year to allow him to accumulate his current fortune.

Suppose we did the same with the pharmaceutical industry, sending top executives tens of billions annually, as all drugs were now being sold as cheap generics. And, the government paid out tens or hundreds of millions of dollars each year to private equity and hedge fund partners and other big winners in finance.

If we added this up, we would be increasing government spending on the order of $1-2 trillion annually, or $10 to $20 trillion over a ten-year budget horizon. If we did not offset this burst of spending on the country's richest people with some serious tax increases, we would be looking at very real problems with inflation -- too much money chasing too few goods and services, to take the classic storyline.

But, we did effectively have tax increases. We made the government's labor policy far more hostile to unions, radically reducing the unionized share of the workforce, as well as reducing the power of those who are organized. We also subjected our manufacturing workers to direct competition with the lowest paid workers around the world, putting serious downward pressure on what had been a relatively privileged segment of the labor market.

And, we removed the link between productivity and the minimum wage. Not only did the federal minimum wage not keep pace with productivity growth, it did not even keep pace with inflation. A person working at the minimum wage today is getting substantial lower pay than a worker did 53 years ago in 1968.

It would be a great story if we could re-establish the link between the minimum wage and productivity and make up the ground lose over the last half century. But we have to make many other changes in the economy to make this possible. These changes are well-worth making.

[1]It's amazing that many people can complain about share buybacks being used to manipulate the markets and thereby increase the value of top management's options, without recognizing that this is a story of management ripping off shareholders. If shareholders want top management to have more money, they could just pay them more money, they don't have to force them to commit stock fraud to increase their pay checks.


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Tuesday, August 17, 2021

The Pandemic Recession: What Was Different in Labor Markets? [feedly]

The Pandemic Recession: What Was Different in Labor Markets?
https://conversableeconomist.wpcomstaging.com/2021/08/16/the-pandemic-recession-what-was-different-in-labor-markets/

A detailed look at current unemployment vs "labor force participation rates.from Tiim Taylor

It felt back in September 2008, at least to me, as if the Great Recession erupted all at once. Sure, there had been some earlier warning signs about financial markets and subprime mortgages in late 2007, but in spring 2008, the consensus view (for example, in Congressional Budget Office forecasts) was that these housing market blips were only a modest threat to the overall US economy. But by comparison with the pandemic recession, the Great Recession practically happened in slow motion.

Here's a figure showing the monthly unemployment rate since 1970. The shaded areas show recessions, and you can see the rise in unemployment during each recession. The rise during the pandemic is much higher and faster; conversely, the decline in unemployment from its peak has was also much faster–indeed, unemployment in July 2021 was down to 5.4%, which is conventionally considered to be pretty good.

But the pandemic recession also had a shocking effect on labor force participation rates. To be counted as "unemployed," you need to be "in the labor force," which means that you either have a job or are looking for a job. If you aren't looking for a job, you are "out of the labor force" and thus are not counted as "unemployed." There are good reasons for this distinction about being in and out of the labor force: in conventional times, it wouldn't make sense to count, say, retirees or parents who are voluntarily staying home and looking after children as "unemployed," because they aren't looking for work. (Over time, the big inverted-U shape of labor force participation largely reflects the entry of women into the (paid) labor force, which topped out in the late 1990s, and then a gradual decline for both men and women since then.) But the pandemic recession is not a conventional time, and the sharp drop in labor force participation–together with what is so far only a very partial recovery–raises the likelihood that at least some of these people do want to get jobs in the future, when the time is right.

For completeness, here's a figure showing the rate of real (that is, adjusted for inflation) GDP growth, measured as the change from 12 months earlier (with data through the second quarter of 2021). Again, the pattern of a remarkably sharp drop and then a sharp recovery is apparent.

In the Summer 2021 issue of the Journal of Economic Perspectives, Stefania Albanesi and Jiyeon Kim take a deeper dive into some aspects of the pandemic recession and the US labor market in "Effects of the COVID-19 Recession on the US Labor Market: Occupation, Family, and Gender." (Full disclosure: I've been the Managing Editor of the JEP since the first issue in 1987.) They are focused in particular on what happened in 2020. But the evolution of the labor market at that time also suggests some of the future challenges. Here are a few themes that emerge.

In previous recent recessions, job losses for men tended to be greater than those for women. Indeed, married women usually increase their efforts in the (paid) labor market during recessions, which can be thought of as a way in which families adjust to the risk of income loss. But in the pandemic recession, women were more likely to lose jobs than men. For some discussion of this theme in earlier recessions in in JEP, see Hilary Hoynes, Douglas L. Miller, and Jessamyn Schaller. 2012. "Who Suffers during Recessions?" Journal of Economic Perspectives, 26 (3): 27-48.

The types of occupations where jobs were lost were different in the pandemic recession. For example, back in the Great Recession there was a large loss of construction jobs, which disproportionately affected men. Forsome discussion of the job losses for men in the Great Recession in JEP, see Charles, Kerwin Kofi, Erik Hurst, and Matthew J. Notowidigdo. 2016. "The Masking of the Decline in Manufacturing Employment by the Housing Bubble." Journal of Economic Perspectives, 30 (2): 179-200.

Here's a sample of the discussion from Albanesi and Kim:

During 2020, women—especially those with children—experienced a substantial reduction in employment compared to men, contrary to the pattern that prevailed in previous recessions. Both labor demand and supply factors likely contributed to this behavior. Women are more likely to be employed in service-providing industries and service occupations. These tend to be less cyclical compared to goods-producing industries and production occupations that employ a larger share of men, and Albanesi and S¸ahin (2018) show that this accounts for most of the difference in the loss
of employment during recessions since 1990. … However, during the COVID-19, infection risk was most severe in the service sector, leading to a large reduction in demand for services, due to government imposed mitigation measure and customer response to infection risk. The
overrepresentation of women in service jobs likely accounts for a sizable fraction of their decline in employment relative to men.

Another unique factor associated with the pandemic recession was the increased childcare needs associated with the disruptions to school activities, which may have contributed to a reduction in labor supply of parents. Why was it mothers in particular who responded to the lack of predictable in-person schooling activities in households where fathers were also present? Gender norms likely played a role. But from the perspective of an economic model of the family, this response should
also be driven by differences in the opportunity cost as measured by wages. In the United States and other advanced economies, there is a substantial "child penalty" that reduces wages for women when, and even before, they become mothers and throughout the course of their lifetime. The penalty is driven by a combination of occupational choices, labor supply on the extensive and intensive margin, that begin well before women have children (Kleven, Landais, and S√łgaard 2019; Adda, Dustmann, and Stevens 2017). … In a recent sample of such work, Cortes and Pan (2020) estimate that the long-run child penalty—three years or more after having the first child—for US mothers is 39 percent, and they also find that child-related penalties account for two-thirds of the overall gender wage gap in the last decade. Given the child penalty, most working mothers at the start of the pandemic were likely to be earning less than their partners, and for those couples the optimal response to the increased child supervision needs was for mothers to reduce labor supply.

What do these patterns imply for the prospects of a more complete labor market recovery?

  1. The pandemic-related decline in service jobs has also offered a strong incentive to push harder toward automating such jobs where this is possible. As a result, the labor market recovery from the pandemic will not be as simple as employers just restoring the previous jobs as demand increases.
  2. The question of parents, day-care, and schools seems likely to remain fraught into this next school year, which will affect ability and willingness of parents to work.
  3. The sudden shift to home-based work cuts in several directions. On one hand, the greater availability of working-from-home may benefit certain workers, and parents in particular, by offering more flexibility. On the other side, one can imagine a two-tier labor market emerging, where the jobs that are viewed by employers as of central importance happen with a large component of personal interaction at an office, and the jobs that are viewed as peripheral, using short-term contracts, happen at home.

The US labor market is not just recovering from the pandemic recession, but along dimensions of occupation, family, and gender, it may also be reshaping itself in ways that are very much still evolving.

I should add that the Summer 2021 issue of JEP includes two other articles about the pandemic recession.

Marcella Alsan, Amitabh Chandra, and Kosali Simon discuss "The Great Unequalizer: Initial Health Effects of COVID-19 in the United States" (Journal of Economic Perspectives, 35:3, 25-46). Everyone knows that the pandemic hit the elderly harder. These authors point out that if you look at "excess deaths" by age group, the pandemic hit tended to hit hardest among those that were already disadvantaged–which is a common pattern in past pandemics, too.

Joseph Vavra writes about "Tracking the Pandemic in Real Time: Administrative Micro Data in Business Cycles Enters the Spotlight" (Journal of Economic Perspectives, 35:3, 47-66). His essay focuses on how economists have been making increasing use of private-sector real-time data. He writes:

Thus, a number of economists turned to private-sector micro data to try to understand the recession while it was still unfolding: for example, data on employment patterns from the payroll processing firm ADP and the scheduling firm Homebase, data on bank accounts and credit card payments from sources like the JPMorgan Chase Institute and firms that provide financial planning services like mint.com and SaverLife, and even data on locations of cell phone users from firms like PlaceIQ and SafeGraph. The use of administrative micro data from these and other sources allowed pandemic-related research to be produced in nearly real-time and the scope for analysis of individual behavior, which would be impossible using traditional aggregate data.


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