Why recessions followed by austerity can have a persistent impact [feedly]

Why recessions followed by austerity can have a persistent impact
http://mainlymacro.blogspot.com/2017/07/why-recessions-followed-by-austerity.html

Economics students are taught from an early age that in the short run aggregate demand matters, but in the long run output is determined from the supply side. A better way of putting it is that supply adjusts to demand in the short run, but demand adjusts to supply in the long run. A key part of that conceptualisation is that long run supply is independent of short run movements in demand (booms or recessions). It is a simple conceptualisation that has been extremely useful in the past. Just look at the UK data shown in this post: despite oil crises, monetarism and the ERM recessions, UK output per capita appeared to come back to an underlying 2.25% trend after WWII.

Except not any more: we are currently more than 15% below that trend and since Brexit that gap is growing larger every quarter. Across most advanced countries, it appears that the global financial crisis (GFC) has changed the trend in underlying growth. You will find plenty of stories and papers that try to explain this as a downturn in the growth of supply caused by slower technical progress that both predated the GFC and that is independent of the recession caused by it.

In a previous postI looked at recent empirical evidence that told a different story: that the recession that followed the GFC appears to be having a permanent impact on output. You can tell this story in two ways. The first is that, on this occasion for some reason, supply had adjusted to lower demand. The second is that we are still in a situation where demand is below supply.

The theoretical reasons why supply might adjust to demand are not difficult to find. (They are often described by economists under the jargon word 'hysteresis'.) Supply (in terms of output per capita) depends on labour force participation, the amount of productive capital in the economy, and finally technical progress, which is really just a catch all for how aggregate labour and capital combine to produce output. A long period of deficient demand can discourage workers. It can also hold back investment: a new project may be profitable but if there is no demand it will not get financed.

However the most obvious route to link a recession to longer term supply is through technical progress, which connects to the vast literature under the umbrella of 'endogenous growth theory'.This can be done through a simple AK model (as Antonio Fatas does here), or using a more elaborate model of technical progress, as Gianluca Benigno and Luca Fornaro do in their paperentitled 'Stagnation traps'. The basic idea is that in a recession innovation is less profitable, so firms do less of it, which leads to less growth in productivity and hence supply. Narayana Kocherlakota has promoted this idea: see herefor example.

The second type of explanation is attractive, in part because the mechanism that is meant to get demand towards supply - monetary policy - has been 'out of action' for so long because of the Zero Lower Bound (ZLB). (The ZLB also plays an important role in the Benigno & Fornaro model.) However for some this type of explanation currently seems ruled out by the fact that unemployment is close to pre-crisis levels in the UK and US at least.

There are three quite different problems I have with the view that we no longer have a problem of deficient demand because unemployment is low. The first, and most obvious, is that the natural rate of unemployment might be, for various reasons, considerably lower than it was before the GFC. The second is that workers may have priced themselves into jobs. In particular, low real wages may have encouraged firms to use more labour intensive techniques. If that has happened, it does not mean that the demand deficiency problem has gone away, but just that it is more hidden. (For anyone who has a conceptual problem with that, just think about the simplest New Keynesian model, which assumes a perfectly clearing labour market but still has demand deficiency.)

The third involves the nature of any productivity slowdown caused by lack of innovation. A key question, which the papers noted above do not directly address, is whether we are talking about frontier research, or more the implementation of innovation (for example, copying what frontier firms are doing). There is some empirical evidenceto suggest that the productivity slowdown may reflect the absence of the latter. This is very important, because it implies the slowdown is reversible. I have argued that central banks should pay much more attention to what I call the innovation gap (the gap between best practice techniques, and those that firms actually employ) and its link to investment and aggregate demand.

All this shows that there is no absence of ideas about how a great recession and a slow recovery could have lasting effects. If there is a problem, it is more that the simple conceptualisation that I talked about at the beginning of this post has too great a grip on the way many people think. If any of the mechanisms I have talked about are important, then it means that the folly of austerity has had an impact that could last for at least a decade rather than just a few years.

 -- via my feedly newsfeed

Editor's Note: 

This commentary originally appeared in IZA World of Labor on July 10, 2017.

The unhappiness of the US working class

Carol Graham

The US is in crisis. The political divisions are crippling; income and opportunities are as unequally shared as they have ever been; and society is divided in terms of the different lives, hopes, and dreams that the rich and the poor have. The starkest marker of this crisis of societal ill-being is the rising rate of mortality due to premature deaths (suicide, opioids, and alcohol poisoning, among others) primarily among less educated whites. The trend of rising rather than falling mortality rates among an important demographic group is unique to the US among rich countries.



There are many explanations for this sad story, and they include differences across races, places, and jobs. My research finds that poor blacks and Hispanics are much more optimistic about their futures than are poor whites and, in turn, mortality rates have not increased the same way among minorities. Place is also important. Metropolitan areas on the coasts are, on average, much more economically vibrant and racially diverse, and have healthier behaviors and lower mortality rates than do rural areas in the heartland.

A critical factor is the plight of the white blue-collar worker, for whom hopes for making it to a stable, middle-class life have largely disappeared. Due in large part to technology-driven growth, blue-collar jobs in the traditional primary and secondary industries—such as coal mines and car factories—are gradually disappearing. Not coincidentally, the typical working-class, two-parent household is also disappearing. While differences in the prevalence of stable marriages had been most evident across racial (black-white) lines, they now sort by income levels, with single-headed households as common among poor whites as among other poor racial groups, and marriage rates at the top of the income distribution much higher across all races. With 25% of prime-age males predicted to be out of the labor force by 2050, the odds of solving the marriage market problem look even bleaker.



Yet the most difficult problem to solve in the decline of the white blue-collar worker may be the loss of identity and hope. This is a cohort that expected to live the American dream; with a high school education, one could remain in the occupation of one's (usually) father, do slightly better, and have a stable, middle-class existence. Discrimination gave blue-collar whites better access to those lifestyles than other groups. Today, minorities are gradually catching up and, perhaps due to their constant challenges in the past, they seem to be better at multitasking in the labor force. They are much more likely to take new low-skilled service jobs in sectors such as health, for example, than are whites, particularly white males. Minorities are also more likely to live in diverse, economically vibrant areas (usually urban), as well as to have stronger social support in families, communities, and churches. Blue-collar whites are more likely to live in places where identities, friendships, and social support were traditionally tied to the mine or the factory, and where distance and climate, in addition to fading employment opportunities, make it difficult to form new community ties and other forms of social support.




There is nothing in the nature of the tattered US social welfare system, meanwhile, which encourages societal support for those who fall out of the labor force or otherwise behind. Most of these programs are managed at the state level. Funding has been shrinking in the past decade, particularly in Republican states where, rather ironically, the needs of this cohort are the greatest. (The one exception is reliance on disability insurance in these same places, which has been increasing notably in the past decade.) The policies proposed by the current administration threaten to further dismantle safety nets and jeopardize access to health insurance at the same time.

While there are challenges for many low-skilled workers in changing economic times, and minorities still face significant disadvantages, among blue-collar whites, due to trends in the economy, the labor and marriage markets, and in health, the fall from the American dream has been a longer and harder one, at least in relative terms. The negative consequences, which include short-sighted voting trends, have implications for the entire society's well-being. The land where opportunity (in theory) and individual success are both paramount is woefully unequipped to deal with the challenge of large parts of its population falling into desperate straits.

--

John Case
Harpers Ferry, WV

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Piketty: The CICI Comedy

The CICI Comedy

Thomas Piketty

Yet another deferral! The government of Emmanuel Macron and Edouard Philippe had already announced the postponement of the deduction of income tax at source till 2019 for totally opportunist reasons. The risk is that this elementary reform in tax modernisation, awaited in France for decades, may finally never see the light of day, even though the scheme was all ready to come into operation in January 2018. The government has now announced the postponement until 2019 of the replacement of the CICE (Tax Credit for Competitiveness and Employment/ Crédit d'Impôt pour la Compétitivité et l'Emploi) by a long-term reduction in the employers' contributions. This is despite the promise of this reform during the electoral campaign – and the fact that it had also been promised by François Hollande since 2014.

Let me be clear: these two deferrals are extremely disturbing and demonstrate the lack of preparation of the new government in matters of reform in France; or perhaps instead they are an indication of extensive preparation for a cynical approach to government with no real desire for reform.

Let's go back for a moment. When Hollande came into power in 2012, he began by suppressing – wrongly – the reductions in the employers' contributions which his predecessor had just set up. Then, a few months later, he invented the notorious CICE, a complex scheme which aimed to refund to corporations one year later, part of the employers' contributions paid one year before. The new system was totally incomprehensible for companies, who in most instances found they were receiving cheques without understanding why. Furthermore, this type of scheme is always characterised by chronic instability and almost total unpredictability several years ahead, which does not augur well for long-term decisions, including for the best informed corporations.

In reality the CICE only added a layer of complexity to a fiscal-social system which already had far too many. Nevertheless, the whole of François Hollande's technostructure – headed at the time by the present President of the Republic – was quite determined. It was considered a brilliant idea because that enabled the budgetary cost to be deferred to 2014 (the tax credit is re-imbursed one year later, unlike the reductions in contributions which would have been imputed to the State budget as from 2013.) This meant the government could have its cake and eat it: the European deficits would fall immediately and jobs would be created. Unfortunately it was not their lucky day: we had neither one nor the other, partly because of this complex waste of public money.

As early as 2014, François Hollande therefore came to the obvious conclusion. The CICE should be abolished and there should be a return to the long-term simplification of employers' contributions. The only problem is that apparently neither he, nor Emmanuel Macron today, had the slightest idea of how to get rid of this blot on the fiscal landscape which they themselves had created and which, in the mean time, had assumed considerable proportions (over 20 billion Euros per annum). The problem is that what constituted the attraction of the CICE in the eyes of its creators (the deferment of its cost in time) has now become a millstone round their necks. The cost in the year when the scheme is ended (let's assume, in 2018) will be double since the contributions paid in 2017 will have to be reimbursed and those due in 2018 will be reduced. However the political courage to do this is long overdue – otherwise this complex system will go on forever.

The most worrying aspect is that Macron – like Hollande in 2014-2015 moreover – seems to wish the employers to carry the can for the status quo. He has made an offer to employers: the replacement of 100 Euros of CICE by a reduction of 100 Euros in social contributions, knowing full well that the operation will automatically lead to an extra 30 Euros extra corporation tax (because the reductions lead to a rise in the taxable profits, unlike the CICE). Faced with a choice of this sort, it is quite obvious that corporations will always choose to maintain the CICE. This pathetic comedy will have to stop if the government really wants to right past wrongs. The 100 Euros of CICE should be replaced by a reduction in contributions of 140 Euros. The budgetary cost to the State would remain the same (given the extra income from corporation tax).

The saddest thing is that all this fiddling about prevents us from advancing the fundamental debate, namely the reform in our system of financing social protection which is over-reliant on contributions. But we still need to clarify the alternative sources of income. Some people consider that a correct approach would be a social VAT. But the cost for more modest incomes would be high. The only real alternative is a progressive CSG (Contribution Sociale Généralisée – social security surcharge) tax: this should involve all incomes (salaries in the private sector, wages in the public sector, retirement pensions, income from property) using a progressive scale based on the level of total income. Instead of refusing, as a question of principle, any reduction in contributions, the rebels in the Socialist Party would have done well to take up this debate.

What conclusion can we draw from all this? In the first instance, it is not enough to declare oneself a reformer to really be one. Absolute power goes to the head and leads people to lose touch with reality. The French style of presidency with its courts and courtiers does not help. The next thing is that it would be easier for the left to oppose the right and the centre constructively if they began by making proposals. Finally, the time has come to say farewell to the present macromania and discuss fundamentals. This is the best contribution that could be made toward the success of the five-year mandate and the country.

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John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

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How Market Power Leads to Corporate Political Influence [feedly]

How Market Power Leads to Corporate Political Influence
http://economistsview.typepad.com/economistsview/2017/07/how-market-power-leads-to-corporate-political-influence.html

From ProMarket:

How Market Power Leads to Corporate Political Influence, by Asher Schechter: Neoclassical economic theory assumes that firms have no power to influence the rules of the game. A new paper by Luigi Zingales argues: This is true only in competitive product markets. When firms have market power, they will seek and obtain political influence and vice versa.

In 2016, the advocacy group Global Justice Now published a report showing that 69 of the world's largest 100 economic entities are now corporations, not governments. With annual revenues of $485.9 billion, Walmart topped all but nine countries. As the world's corporations continue to grow bigger and more profitable, so does the power and influence they wield: multinational corporations employ vast armies of lobbyists, lawyers, and PR people across borders and continents, and they have more than enough resources to capture regulators and elected representatives the world over.

Yet, the prevailing economic definition views firms as merely "a nexus of contracts" with "no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between two people." How is it possible to reconcile these two views? A new paper by Luigi Zingales (Faculty Director of the Stigler Center and one of the editors of this blog) tries to bridge this gap.

The Medici vicious circle

The neoclassical model of the firm, notes Zingales, is a reasonable description of firms operating in highly competitive markets, where firms have little incentives and fewer resources to distort the rules of the game. Little incentives because in a neoclassical framework firms are relatively small, and thus the costs of these activities tend to exceed their share of the benefits. Fewer resources, because a competitive market does not provide firms with abnormal profits to spend in lobbying activities. 

The opposite is true in concentrated markets, where firms enjoy sufficiently high profits to spend in lobbying activity. Some market power is particularly important to gain political influence when cash bribes are relatively rare, writes Zingales. In such an environment, firms gain political power through promises of future benefits. Only if firms have significant market power do they have rents to allocate. At the same time, firms' promises of future rents are credible only to the extent that firms are expected to be around in the future, a prospect greatly enhanced by the existence of some barrier to entry in the markets in which they operate. Thus, firms can gain political power only when they have significant market power. ...

 -- via my feedly newsfeed

Enlighten Radio:Enlighten Radio Update

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Blog: Enlighten Radio
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Enlighten Radio:The Poetry Show -- today's theme: Gettysburg!

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Post: The Poetry Show -- today's theme: Gettysburg!
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Re: [socialist-econ] Dani Rodrik:The G20’s Misguided Globalism

Very interesting article.  Of course, Rodrik takes the Case position that trade policy must be accompanied by strong domestic policy that "pays the losers" and ensures broad participation in the benefits of trade.

On Jul 8, 2017 11:27 AM, "John Case" <jcase4218@gmail.com> wrote:

The G20's Misguided Globalism

Dani Rodrik

• 
    

HAMBURG – This year's G20 summit in Hamburg promises to be among the more interesting in recent years. For one thing, US President Donald Trump, who treats multilateralism and international cooperation with cherished disdain, will be attending for the first time.

Trump comes to Hamburg having already walked out of one of the key commitments from last year's summit – to join the Paris climate agreement "as soon as possible." And he will not have much enthusiasm for these meetings' habitual exhortation to foreswear protectionism or provide greater assistance to refugees.

Moreover, the Hamburg summit follows two G20 annual meetings in authoritarian countries – Turkey in 2015 and China in 2016 – where protests could be stifled. This year's summit promises to be an occasion for raucous street demonstrations, directed against not only Trump, but also Turkey's Recep Tayyip Erdoğan and Russia's Vladimir Putin.

The G20 has its origins in two ideas, one relevant and important, the other false and distracting. The relevant and important idea is that developing and emerging market economies such as Brazil, India, Indonesia, South Africa, and China have become too significant to be excluded from discussions about global governance. While the G7 has not been replaced – its last summit was held in May in Sicily – G20 meetings are an occasion to expand and broaden the dialogue.

The G20 was created in 1999, in the wake of the Asian financial crisis. Developed countries initially treated it as an outreach forum, where they would help developing economies raise financial and monetary management to the developed world's standards. Over time, developing countries found their own voice and have played a larger role in crafting the group's agenda. In any case, the 2008 global financial crisis emanating from the United States, and the subsequent eurozone debacle, made a mockery of the idea that developed countries had much useful knowledge to impart on these matters.

The second, less useful idea underpinning the G20 is that solving the pressing problems of the world economy requires ever more intense cooperation and coordination at the global level. The analogy frequently invoked is that the world economy is a "global commons": either all countries do their share to contribute to its upkeep, or they will all suffer the consequences.

This rings true and certainly applies to some areas. Addressing climate change, to take a key problem, does indeed require collective action. Cutting carbon dioxide emissions is a true global public good, because every country, left to its own devices, would rather free ride on others' cuts while doing very little at home.

Similarly, infectious diseases that travel across borders require global investments in early-warning systems, monitoring, and prevention. Here, too, individual countries have little incentive to contribute to those investments and every incentive for free riding on others' contributions.

It is a small step from such arguments to consider the G20's bread-and-butter economic issues – financial stability, macroeconomic management, trade policies, structural reform – in the same vein. But the global-commons logic largely breaks down with such economic problems.

Consider the topic that will be on all G20 leaders' minds in Hamburg (except for Trump's, of course): the threat of rising trade protectionism. A new report from Global Trade Alert warns that the G20 has failed to live up to its previous pledges on this issue. So far, Trump's bark has been worse than his bite on trade. Nonetheless, the report argues, the thousands of protectionist measures that still impede US exports in other countries may well give Trump the excuse he needs to increase barriers of his own.

Yet the failure to maintain open trade policies is not really a failure of global cooperation or a result of insufficient global spirit. It is essentially a failure of domestic policy.

When we economists teach the principle of comparative advantage and the gains from trade, we explain that free trade expands the home country's economic pie. We trade not to confer benefits on other countries, but to enhance our own citizens' economic opportunities. Responding to other countries' protectionism by erecting barriers of our own amounts to shooting ourselves in the foot.

True, trade agreements have not brought benefits to a large number of Americans; many workers and communities have been hurt. But the skewed and unbalanced trade deals that produced these results were not imposed on the US by other countries. They were what powerful US corporate and financial interests – the same ones that support Trump – demanded and managed to obtain. The failure to compensate the losers was not the result of inadequate global cooperation, either; it was a deliberate domestic policy choice.

The same goes for financial regulation, macroeconomic stability or growth-promoting structural reforms. When governments misbehave in these areas, they may produce adverse spillovers for other countries. But it is their own citizens who pay the greatest price. Exhortations at G20 summits will not fix any of these problems. If we want to avoid misguided protectionism, or to benefit from better economic management in general, we need to start by putting our own national houses in order.

The reality, as a latter-day Caesar might put it, is that the fault is not in our trade partners, but in ourselves.Worse still, the knee-jerk globalism that suffuses G20 meetings feeds into the populists' narrative. It provides justification for Trump and like-minded leaders to deflect attention from their own policies and lay the blame on others. It is because other countries break the rules and take advantage of us, they can say, that our people suffer. Globalism-as-solution is easily transformed into globalism-as-scapegoat.

--

John Case
Harpers Ferry, WV

The Winners and Losers Radio Show

7-9 AM Weekdays, The Enlighten Radio Player Stream, 

Sign UP HERE to get the Weekly Program Notes.

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