Race tax harms African Americans [feedly]

Race tax harms African Americans
http://www.epi.org/blog/race-tax-harms-african-americans/

In Quartz, I described a rarely noticed but devastating development that is undermining African American working and middle class families—a racially disparate property tax system that, in many cities, extorts a premium from African American homeowners. This premium can be so large that families lose homes when cities foreclose on properties where taxes have become unaffordable.

This discriminatory race tax has arisen because homes in African American neighborhoods that lost value following the housing price bubble collapse in 2008 have, in the subsequent recovery, been slower to recover value than properties in white neighborhoods. In most cities, assessors are required to re-assess properties on a regular basis, but when they have failed to do so, homeowners in African American neighborhoods wind up paying more tax relative to their home values than homeowners in white neighborhoods.

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Lawsuit filed to block Fair Pay and Safe Workplaces Executive Order [feedly]

Lawsuit filed to block Fair Pay and Safe Workplaces Executive Order
http://www.epi.org/blog/lawsuit-filed-to-block-fair-pay-and-safe-workplaces-executive-order/

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One of President Obama's most important contributions to better pay and working conditions in the United States is his executive order on Fair Pay and Safe Workplaces, which he issued two years ago and is finally taking effect this month. The order, which addresses wage theft and on-the-job hazards, including sexual harassment and race discrimination, affects 25 million employees working for businesses that provide goods and services under contract to the federal government – businesses that range from janitorial services to ship builders.

The first provisions are set to take effect in two weeks – unless a lawsuit filed in Texas by various business groups succeeds in delaying or blocking enforcement of the rules.

Why is the Executive Order Needed?

The federal government purchases over $500 billion in goods and services from the private sector, and the firms it deals with employ about 20 percent of the nation's total workforce. It is important that the government chooses to deal with honest employers and that, when given a choice of two otherwise similar contractors, it chooses to do business with the one that demonstrates superior integrity and a greater inclination to obey the law. That is common sense.

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Messiness and automation [feedly]

Messiness and automation
http://www.digitopoly.org/2016/10/13/messiness-and-automation/

Tim Harford is the finest expositor of economic ideas today. That is a view I have held for a long time. While his first few books stayed within the economic view of puzzles his last two have moved beyond that tradition. Adapt looked at how failure breeds innovation. And now he has produced Messy a book that celebrates, well, mess. Now I would have loved to be snarky at this point and call the book a mess (ha ha) but it isn't. It is a beautifully organised set of stories to remind us how perfection is the enemy of the good and optimisation in the short-run can harm you in the long run. It is not something I can easily argue against since my book, The Disruption Dilemma, made essentially the same point albiet confined to the less sexy issue of management.

Let me, however, do more than other reviewers have done and honor the work by taking it seriously. The stories are all very well and good but what are we to make of all this? If we treat this as an economist would Harford is saying that if we have an objective function, B(1-m) that is a function of the share, m, of 'mess' (where m = 1 is complete disorganisation, or maximum entropy, and m = 0 is complete order), then B is not monotonically increasing. That is, even if we prefer complete organisation to complete mess, B(0) > B(1), there may be a point m* which maximises B; in other words, rather than subtitle his book "The Power Disorder to Transform our Lives" we would subtitle it more accurately that "Some Mess Can be Optimal" (and just watch the books fly off the shelves).

Even there the argument is somewhat more subtle because in Harford's mind there is a role for time and for uncertainty. B arises in each period and we choose m at each point of time. Most of the time, nothing exciting happens, and it is best to choose m = 0 to maximise B. But sometimes, with probability s, something bad happens and you need to do something that requires m > 0 in the past. In this situation, the best course of action is to keep m > 0 so as to deal with the exciting event.

This is abstract but let's put it in concrete terms as Harford did in this except in The Guardian. In that except, Harford examines automatic piloting systems that allow pilots to relax during flights. The interpretation of these systems is that they make pilot life simple (setting m = 0) which is, of course, great for any given flight. However, what if the automated system shuts off either accidentally or by design as it did for the doomed Air France Flight 447 a few years ago. Because the pilots lacked experience, they had trouble (in this case fatal trouble) in dealing with the situation of flying through a storm without automation. How might they have got that experience? By spending more time flying the plane. In other words, setting m > 0. Harford, like many others, sees this has a problem arising from automation — people lose skills.

But what are we to do here? How high do we have to set m to avoid the issues in Flight 447. There are millions of flights where the pilots get the benefit of B(0). What level of m will be required to move the needle on this small probability event and will the costs be too high? Harford doesn't tell us and he doesn't actually even phrase the question. After all, what we are talking about is trading off millions of pilot flight hours and utility with the lives of a couple of hundred passengers (and the utility reduction we all get from flying when we know it is not perfectly safe). No one other than economists like to even consider those trade-offs.

My point here is that I am not convinced on automation. To be sure, I agree that de-skilling is real and we lose options as a result of it. I am just not convinced that it is worth not using the technology because of it. The problem is that the shape of B matters. In particular, it may be multi-peaked with what we might call an "uncanny valley" where a little more mess does not good but lots of damage. That means we might not be talking about a little more mess in our lives as Harford claims (relying implicitly on concavity) but instead trading off a lot of mess versus a lot of order.

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Eastern Panhandle Independent Community (EPIC) Radio:Saturday on EPIC RADIO

John Case has sent you a link to a blog:



Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: Saturday on EPIC RADIO
Link: http://www.enlightenradio.org/2016/10/saturday-on-epic-radio.html

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Eastern Panhandle Independent Community (EPIC) Radio:Paris on the Potomac in Fall

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Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: Paris on the Potomac in Fall
Link: http://www.enlightenradio.org/2016/10/paris-on-potomac-in-fall.html

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Eastern Panhandle Independent Community (EPIC) Radio:Labor Beat Looks at the Jobs Report

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Blog: Eastern Panhandle Independent Community (EPIC) Radio
Post: Labor Beat Looks at the Jobs Report
Link: http://www.enlightenradio.org/2016/10/labor-beat-looks-at-jobs-report.html

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What Is the New Normal for U.S. Growth? [feedly]

Case: I will have more on this later, but the low growth trend is, as the below analysis does not state, but implies, evidence of a possibly profound shift in the political economy of advanced capitalist economies --  a shift that may undermine Keynesian policies addressing growth, the foundation of most progressive economic reforms, including those of the Hillary Clinton campaign. Those policies assume that public intervention to increase aggregate demand will stimulate desired levels of growth in the commodity-driven sector of the economy -- by far the largest sector. Such growth was the foundation of the New Deal, post war national social contract (including strong collective bargaining) that saw productivity increases reflected in both profits and wages. That era of rising incomes gave a powerful stimulus to the equality movement in the US as the ideals of shared wealth gained credibility. However a number of factors in addition to aggregate demand are undermining growth and investment rates in the commodity-driven economy, including: 1)  the economy of a services economy is very different from a production one -- especially the measurement of productivity; 2)  intangible products are shitty  commodities -- that can be, and are, easily stolen worldwide despite formidable legal protections -- sales and prices do not reflect this loss, which adds evidence of the absence of essential qualities of commodities inherent in reliable, trade-able goods; 3) the level of public goods and institutional services, increasingly required for scaled infrastructures, must necessarily consume greater quantities of the total labor and capital supply.

more later....

What Is the New Normal for U.S. Growth?
http://economistsview.typepad.com/economistsview/2016/10/what-is-the-new-normal-for-us-growth.html

An FRBSF Economic Letter by John Fernald:

What Is the New Normal for U.S. Growth?: Economic growth during the recovery has been slower on average than its trend from before the Great Recession, prompting policymakers to ask if there is a "new normal" for U.S. GDP growth.

This Economic Letter argues that the new normal pace for GDP growth, in real (inflation-adjusted) terms, might plausibly fall in the range of 1½ to 1¾%. This estimate is based on trends in demographics, education, and productivity. The aging and retirement of the baby boom generation is expected to hold down employment growth relative to population growth. Further, educational attainment has plateaued, reducing the contribution of labor quality to productivity growth. The slower forecast for overall GDP growth assumes that, apart from these effects, productivity growth is relatively normal, if modest—in line with its pace for most of the period since 1973.

Subdued growth in the labor force

In thinking about prospects for economic growth, it is necessary to distinguish between the labor force and the larger population. Both are expected to grow at a relatively subdued pace; however, because of the aging of the population, the labor force is likely to grow even more slowly than the overall population.

Figure 1 shows that growth in the labor force has varied substantially over time and has often diverged from overall population growth. In the 1950s and 1960s, population (yellow line) grew more rapidly than the working-age population ages 15 to 64 (blue line) or the labor force (red line). In contrast, in the 1970s and 1980s, the labor force grew much more rapidly than the population as the baby boom generation reached working age and as female labor force participation rose. Those drivers of labor force growth largely subsided by the early 1990s. Since then, the labor force, working-age population, and overall population have all seen slower growth rates. Labor force participation fell sharply during the Great Recession, which held down labor force growth. But labor force growth has since rebounded to roughly the pace of the working-age population.

Figure 1
Slowing growth in working-age population and labor force

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Census Bureau, Congressional Budget Office (labor force projections).

Future labor force growth is likely to remain low for a couple of reasons. First, as shown in Figure 1, the population is now growing relatively slowly, and census projections expect that slow pace to continue. Second, these projections also suggest the working-age population will grow more slowly than the overall population, reflecting the aging of baby boomers. Of course, some of those older individuals will continue to work. Hence, the Congressional Budget Office (CBO) projects the labor force will grow about ½% per year (red dashed line) over the next decade—a little faster than the working-age population, but substantially slower than in the second half of the 20th century. I use their estimate as a basis for my assumption that hours worked will also grow at about ½% per year so that hours per worker do not change much.

Recent slow growth for productivity

Figure 2 shows growth in GDP per hour since 1947 broken into periods to reflect variation in productivity growth. This measure of productivity growth was very fast from 1947 to 1973 but much slower from 1973 to 1995. It returned to a fast pace from 1995 to 2004, but has slowed again since 2004. During the fast-growth periods, productivity growth averaged 2½ to 2¾%. During the slower periods, growth was only 1 to 1¼% and dropped dramatically lower in 2010–2015 (Fernald 2016 discusses this period).

Figure 2
Variation in productivity growth by trend period

Source: Bureau of Labor Statistics, Bureau of Economic Analysis.

Figure 2 is consistent with the view that the history of productivity growth has shifted between normal periods and exceptional ones (Gordon 2016, Fernald 2015, and David and Wright 2003). Unusually influential innovations—such as the steam engine, electric dynamo, internal combustion engine, and microprocessor—typically lead to a host of complementary innovations that boost productivity growth broadly for a time.

For example, productivity growth was exceptional before 1973, reflecting gains associated with such developments as electricity, the telephone, the internal combustion engine, and the Interstate Highway System (Fernald 1999). Those exceptional gains ran their course by the early 1970s, and productivity growth receded to a normal, modest pace.

Starting around 1995, productivity growth was again exceptional for eight or nine years. Considerable research highlighted how businesses throughout the economy used information technology (IT) to transform what and how they produced. After 2004, the low-hanging fruit of IT had been plucked. Productivity growth returned to a more normal, modest, and incremental pace—similar to that in 1973–95.

The past and future of GDP growth

GDP growth is the sum of growth in worker hours and GDP per hour. The blue line in Figure 3 shows how GDP growth fluctuated on average for each period mentioned in Figure 2. Before 2005, GDP growth since World War II was typically 3 to 4%. The dashed lines in the figure show two projections for future GDP. The higher estimate assumes productivity growth will return to its 1973–95 pace in the long run, while hours grow at the ½% per year pace projected by the CBO. In this scenario, GDP growth would average about 1¾%.

Figure 3
GDP scenarios with low labor force growth

Note: Annual percent change averaged over periods from Figure 2.
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, and author's calculations.

But productivity growth could easily be lower than in the 1973–95 period for two main reasons. First, productivity has grown a little more slowly from 2004–15 than in the 1973–95 period—and much more slowly since 2010 (Figure 2). Second, and perhaps more importantly, future educational attainment will add less to productivity growth. In recent decades, educational attainment of younger individuals has plateaued. This reduces productivity growth via increases in labor quality, which measures the combined contribution of education and experience. Labor quality has added about 0.4 percentage points to annual productivity growth since 1973. However, by early next decade, labor quality will contribute only about 0.10 to 0.20 percentage points to annual productivity growth (Bosler et al. 2016).

On its own, then, reduced labor quality growth suggests marking down productivity and GDP projections by at least two-tenths of a percentage point and possibly more. The lower dashed line in Figure 3 shows future GDP growth assuming that productivity growth net of labor quality grows at its 1973–95 pace, while labor quality grows at the slower pace of 0.2%. By this projection, GDP growth per hour would be only a little above 1½%.

At first glance, a pace of 1½ to 1¾% seems very low relative to history. But the main reason for the slow pace is demographics: Growth in the 1973–95 period would have been equally slow had hours grown only ½% per year. The red line shows how fast GDP would have grown in that scenario, holding productivity growth at its actual historical pace by period but using the slower pace of growth for hours that the CBO expects in the future. For example, in the 1973–95 period, GDP grew at nearly a 3% pace. But if hours had grown only ½% per year, then GDP growth would have been about 1¾%.

The major source of uncertainty about the future concerns productivity growth rather than demographics. Historically, changes in trend productivity growth have been unpredictable and large. Looking ahead, another wave of the IT revolution from machine learning and robots could boost productivity growth. Or, as Fernald and Jones (2014) suggest, the rise of China, India, and other countries as centers of frontier research might lead to more innovation. In such a case, as Fernald (2016) discusses, the forecast here could reflect an extended pause before the next wave of transformative productivity growth. But, until such a development occurs, the most likely outcome is a continuation of slow productivity growth.

Conclusions

Once the economy recovers fully from the Great Recession, GDP growth is likely to be well below historical norms, plausibly in the range of 1½ to 1¾% per year. The preferred point estimate in Fernald (2016), who examines these issues in even more detail, is for 1.6% GDP growth. This forecast is consistent with productivity growth net of labor quality returning over the coming decade to its average pace from 1973–95, which is a bit faster than its pace since 2004. In the past we have seen long periods with comparably modest productivity growth. But we have not experienced such modest productivity growth combined with the types of changes in demographics and labor quality that researchers are expecting.

This slower pace of growth has numerous implications. For workers, it means slow growth in average wages and living standards. For businesses, it implies relatively modest growth in sales. For policymakers, it suggests a low "speed limit" for the economy and relatively modest growth in tax revenue. It also suggests a lower equilibrium or neutral rate of interest (Williams 2016).

Boosting productivity growth above this modest pace will depend primarily on whether the private sector can find new and improved ways of doing business. Still, policy changes may help. For example, policies to improve education and lifelong learning can help raise labor quality and, thereby, labor productivity. Improving infrastructure can complement private activities. Finally, providing more public funding for research and development can make new innovations more likely in the future (Jones and Williams, 1998).

John Fernald is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.

References

Bosler, Canyon, Mary C. Daly, John G. Fernald, and Bart Hobijn. 2016. "The Outlook for U.S. Labor-Quality Growth." FRB San Francisco Working Paper 2016-14.

David, Paul, and Gavin Wright. 2003. "General Purpose Technologies and Productivity Surges: Historical Reflections on the Future of the ICT Revolution." InThe Economic Future in Historical Perspective, eds. Paul A. David and Mark Thomas. Oxford: Oxford University Press.

Fernald, John G. 1999. "Roads to Prosperity? Assessing the Link between Public Capital and Productivity." American Economic Review 89(3), pp. 619–638.

Fernald, John G. 2016. "Reassessing Longer-Run U.S. Growth: How Low?" FRB San Francisco Working Paper 2016-18.

Fernald, John G., and Charles I. Jones. 2014. "The Future of U.S. Economic Growth." American Economic Review Papers and Proceedings 104(5, May), pp. 44–49.

Gordon, Robert. 2016. The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton, NJ: Princeton University Press.

Jones, Charles I., and John C. Williams. 1998. "Measuring the Social Return to R&D." Quarterly Journal of Economics 113(4), pp. 1119–1135.

Williams, John C. 2016. "Monetary Policy in a Low R-star World." FRBSF Economic Letter 2016-23 (August 15).

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

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