Tim Taylor: Building Worker Skills in a Time of Rapid Technological Change [feedly]

Building Worker Skills in a Time of Rapid Technological Change
http://conversableeconomist.blogspot.com/2019/04/building-worker-skills-in-time-of-rapid.html

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I'm congenitally suspicious of "this time is different" arguments, which often seem very quick to toss out historical experience for the sake of a lively narrative. So when I find myself in discussions of  whether the present wave of technological change is unprecedented or unique, I often end up making the argument that while the new technologies are obviously different in their specifics from older technologies, the fact of technology leading to very dramatic disruptions of labor markets is not at all new. To me, the more interesting questions are question how the economy, government, and society react to that ongoing pattern of technological change.

Conor  McKay, Ethan Pollack, and Alastair Fitzpayne offer a useful broad overview of these issues in "Automation and a Changing Economy," a two-part report written for the Aspen Institute Future of Work Initiative (April 2019).The first volume focuses on the theme "A Case for Action," with background on how technological change and automation has affected labor markets over time, while the second volume is "Polices for Shared Prosperity," with a list of policy options.

It may turn out to be true that the current wave of technological innovation is uniquely different in some ways. (It's very hard to disprove that something might happen!)  But it's worth taking a moment to acknowledge that technologies of the past severely disrupted the US labor market, too. For example, here's a figure showing shifts in the pattern of US jobs over time: the dramatic rise in white-collar jobs, with falls in other areas.

And of course if one goes beyond broad skill categories and looks in more detail at jobs, the necessary skill mix has been changing quite substantially as well. Remember that in the 1970s, word-processing was mostly on typewriters; in the 1980s, written communications involves mail, photocopying, and sometimes fax machines; in the 1990s, no one carried a smartphone. It's not just changes in information technologies and the web, either. Workers across manufacturing and services jobs have had to learn how to use new generations of  physical equipment as well.

Of course, we can noodle back and forth over how new technologies might have bigger effects on labor markets. The report has some discussion of these issues, and dinner parties for economists have been built on less. But the lesson I'd take away, to quote from the report, is: "Automation need not be any more disruptive in the future than it has been in the past to warrant increased policy intervention."

One key issue in navigating technological change is how workers can obtain the skills that employers want. And here a problem emerges, which is that although employers were a primary source of such training in the past, they have backed away from this role. The report notes (footnotes omitted):

Employers traditionally have been the largest source of funding for workforce training, but businesses are training fewer workers than in the past. From 1996 to 2008, the percentage of workers receiving employer-sponsored or on-the-job training fell 42 percent and 36 percent, respectively. This decline was widespread across industries, occupations, and demographic groups. ...  More recent data on employer-provided training has been mixed. Data from the Society for Human Resource Management suggests that employer-provided tuition assistance has been falling in recent years, from 66 percent of surveyed businesses offering tuition assistance benefits in 2008 down to 53 percent in 2017. Meanwhile, data from the Association for Training & Development suggests that employer training investments have been roughly flat over the last decade. ...

[A]s unions have lost power and membership, ... businesses have had a freer hand to hire already trained external candidates, often leading to fewer within-firm career pathways and  higher turnover. ...

Public sector investment has declined, too. For example, WIOA Title I state grants, which fund the core of the federal workforce development system, have been cut by over 40 percent since 2001. The program is currently underfunded by $367 million relative to its authorized levels. Government spending on training and other programs  to help workers navigate job transitions is now just 0.1 percent of GDP, lower than all other OECD countries except for Mexico and Chile, and less than half of what it was 30 years ago.

Why have employers backed away from providing training? The report notes:

Without intervention, business investment in workers may continue to decline. In a recent Accenture survey of 1,200 CEOs and other top executives, 74 percent said that  they plan to use artificial intelligence to automate tasks in their workplace over the next three years. Yet only three percent reported planning to significantly increase investments in training over the same time period.

In part, the decline in employer-provided training can be explained by changes in the employer-employee relationship over the past forty years. ... If businesses plan to retain employees over a long period, they will benefit more directly from their training investments. But as relationships between workers and businesses become less stable and short-term, businesses have a difficult time capturing the return on their training investments. The result is less investment in training even as the workforce requires greater access to skills training.

Recent legislation could accelerate this trend. Businesses often have to choose between using workers or machines to accomplish a task. The 2017 Tax Cuts and Jobs Act allows businesses to immediately expense the full cost of equipment purchases—including automation technology—rather than deduct the cost of the equipment over a period of time. By reducing the after-tax cost of investing in physical capital but not providing a similar benefit for investments in human capital, the legislation may further shift business priorities away from worker training.

There are a number of ways one might seek to rebuild connections between employers and job training. The report suggests an employer tax break for spending money on employee training, similar to the tax break now given for investing in research and development. A complementary approach would be to build through a dramatic expansion of the community college system, which has the advantage that it can train workers for an multiple-employer industry that is locally prominent. Yet another approach is a considerable expansion of apprenticeships. Yet another approach would be much greater support for "active labor market policies," that assist workers with job search and training. 

A lot of the concern over adapting to technological change, and whether the economy is providing "good jobs" or devolving toward alternative "gig jobs,"seems to me rooted in concerns about the kind of attachment that exists between workers and employers.  It relates to the extent that workers feel engaged with their jobs, and to whether the worker and employer both have a plausible expectation that the job relationship is likely to persist for a time--allowing both of them to invest in acquiring skills with the possibility (or likelihood?) of a lasting connection in mind. 

Ultimately, it will matter whether employers view their employees as imperfect robots, always on the verge of being  replaced when the better robots eventually arrive, of whether they view their employees as worthy of investment in themselves. It's the difference between automation replacing workers, or complementing them. 

Paul Krugman: Purity vs. Pragmatism, Environment vs. Health [feedly]

I think PK makes a critically important point, again, in his critique of the POLITICS of Medicare For All. But I think he ends up in a position with a BIGGER political weakness than what he is criticizing. The critical point is, according to Gallup, that the 180 million persons with privately insured health care are 69% happy with their coverage, and over 80% happy with their actual health care. This becomes a potentially powerful constituency against Medicare For All once they are "informed" they will lose this coverage and be enrolled in a new massive federal program. And, of course, this would add considerable fuel to the already opposed interests of the insurance industry itself, and probably their employees too.  IF, Medicare For All candidates PROMISE that both coverage and/or health care will IMPROVE that would neutralize PART of that constituency. Labor would be the FIRST test group on how persuasive that argument is.

Implied in PKs argument is a plea for a mixed public private system to avert abrupt nationalization of a very large reservoir of capital so deeply embedded in the lives and institutions (not just corps) of the country. I think this comes under the category of Too Much Socialism for PK.

The problem with this argument, given the war waged by insurance and the rest of finance capital against Obamacare, is that there is no indication that the insurance industry has the slightest interest in bargaining over ANY of the reforms, including PKs preferred ones. Not only do they not want single payer, they also do not want half single payer, a condition which, from a biz point of view, is half-dead and dying. They smothered all mention of the public option in Obama's original proposals and collaborated with the endless Republican REPEAL votes. This makes the argument that there is no deal to be made with THIS country's insurance industry that gets to universal affordable coverage very powerful. Obviously, whoever is elected President is the lead negotiator general (if he/she has the troops). Having a socialist lead the negotiations could end up with the "public option" being the biggest, whatever form the process must actually take. Sanders is a good negotiator -- and capitalism did not collapse in Vermont under his leadership. 

Purity vs. Pragmatism, Environment vs. Health
https://www.nytimes.com/2019/04/11/opinion/green-new-deal-medicare-for-all.html

Paul Krugman

Right now there are two big progressive ideas out there: the Green New Deal on climate change and "Medicare for all" on health reform. Both would move U.S. policy significantly to the left. Each is sponsored by a self-proclaimed socialist: the Green New Deal by Alexandria Ocasio-Cortez and Medicare for all by Bernie Sanders. (Of course, neither of them is a socialist in the traditional sense.) Both ideas horrify not just conservatives but also many self-proclaimed centrists.

Yet while they may seem similar if you think of everything as left versus right, they're very different on another dimension, which you might call purity versus pragmatism. And that difference is why I believe progressives should enthusiastically embrace the G.N.D. while being much more cautious about M4A.

You see, for all its sweeping ambition, the Green New Deal is arguably an exercise in pragmatism — in the proposition that the perfect is the enemy of the good.

What's the perfect in this case? Climate-policy purists are focused on the notion of a carbon tax to discourage greenhouse gas emissions, and they look down on any proposal that doesn't put such a tax front and center.

What's wrong with a carbon tax as the centerpiece of climate policy? There are some narrow economic arguments for a broader range of public policies — for example, government support can be crucial for the development of new energy technologies.

Even more important, however, is the political economy. A carbon tax would hurt significant groups of people — and not just fossil-fuel billionaires like the Koch brothers. As a result, a carbon tax on its own is the kind of eat-your-spinach policy that technocrats love but many ordinary citizens hate, as illustrated by what just happened in France, where a planned fuel tax increase was withdrawn in the face of furious "Yellow Vest" protests.

So how do you make climate action politically feasible? The G.N.D. answer is to bundle measures to reduce emissions with a lot of other stuff people want, like big public investment even in areas with only weak direct relationships to climate change.

You could call the G.N.D. a proposal for economic transformation that includes climate action. But you could also call it a "Christmas tree," the traditional term for legislation festooned with lots of riders unrelated to the ostensible purpose in order to win political support.

The point is that climate action probably won't happen unless it's a Christmas tree — and the G.N.D.'s advocates are O.K. with that. In that sense, they're pragmatists despite their big ambitions.


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Medicare for all, by contrast, is an exercise in the proposition that we must not settle for anything less than the ideal.

Indeed, Sanders has explicitly refused to support Nancy Pelosi's proposal to enhance Obamacare, even though her proposal would expand health insurance coverage to millions of Americans and make it more affordable for millions more. His reasoning seems to be that making things better, even as an interim step, would undermine support for a more radical transformation.
Bernie Sanders on Wednesday introducing the Medicare for All Act.CreditManuel Balce Ceneta/Associated Press

To be fair, the simplicity of the pure single-payer, government insurance system Sanders advocates would have some advantages over the hybrid public-private systems that have been proposed by other progressives — for example, letting people keep private insurance if they want, but offering the option of Medicare buy-in.

You might say that single-payer is the system technocrats would choose if they had a free hand, with few political constraints. In fact, that's pretty much what happened in Taiwan, which asked a panel of experts to design its health care system, and ended up with single-payer.

On the other hand, international experience shows that universal coverage and high quality health care can be achieved in a variety of ways; technocrats may prefer single-payer, but it's not essential.

And the political obstacles to a Sanders-type plan are formidable. Almost 180 million Americans are covered by private health insurance, and many of them are satisfied with their coverage. Polling suggests that while the public reacts favorably to the slogan "Medicare for all," that support drops precipitously when people are informed that it would eliminate private insurance and require substantial tax increases.


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The Sanders view, however, is that a sufficiently determined leader can overcome these doubts and persuade many voters who are currently doing O.K. that radical change is nonetheless in their interests. I don't know of anything in recent history to justify this belief, but there it is.

My guess is that if Sanders does make it to the White House, he'll quickly find that he can't deliver on his grand vision, and will eventually try for a less purist alternative. And let's be clear: A lot more Americans will have affordable health care if any Democrat is elected than they will if Donald Trump retains the White House.

Still, it's important to realize that among Democrats, purity versus pragmatism is as important an axis as left versus right. And the two big progressive ideas are on opposite ends of that axis.

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman

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Baker: Why is Populism on the Rise and What do Populists Want? [feedly]

Progressives, liberals, even some conservatives, myself included, and including economists in each label, will agree with Baker's somewhat simplistic formulation. But all will, or should, feel a at least a twinge of a problem, an omission, a sense, that the "business leaders and elites" may be correct, in asserting that the fundamental direction of inequality trends are objective, systematic, an unchangeable tendency of globalization and technology. The omission is: this is the same as saying "there is a problem with the capitalist system". As other leading progressive economists have also been saying -- Piketty, Rodrik, DeLong, et al -- capitalism must by systematically reformed, and the solutions must be both national specific and global. All three folks named above are social democrats of various stripes. They are NOT advocating overthrowing capitalism, but they ARE now saying fundamental, structural reforms are required to stabilize tendencies that warn of unendurable catastrophes.

Why is Populism on the Rise and What do Populists Want?
http://cepr.net/publications/op-eds-columns/why-is-populism-on-the-rise-and-what-do-populists-want

Why is Populism on the Rise and What do Populists Want?

1 Comment

Dean Baker
The International Economy, Winter 2019

See article on original site

In the United States, the pay of a typical worker has badly trailed productivity growth over the last four decades, allowing only marginal improvements in living standards over this period. At the same time, a small number of people have gotten incredibly rich in the finance and tech sectors and by being top executives in major U.S. corporations. There is a similar, if somewhat less stark, picture in most other wealthy countries.

The standard story for this rise in inequality is that this is just the inevitable course of globalization and technology. While many in the elite may feel bad for those left behind, and even propose policies to help them, the line is that the rise in inequality is something that happened, not the result of conscious policy.

That is a lie. And the persistence of this lie is one of the reasons that populist politics has so much resonance in Europe and the United States.

There was nothing inevitable about who would be winners from technology and globalization. Those who won have been successful because they wrote the rules and run the institutions. It is that simple.

Starting with technology, the fact that people like Bill Gates can get incredibly rich is not only due to the fact that they may be smart and hardworking. People like Bill Gates can get incredibly rich because we have patent and copyright laws that give them monopolies over items like Windows. Without these government-granted monopolies, there would be far less money in software, pharmaceuticals, medical equipment, and many other important sectors of the economy.

Patent and copyright monopolies are explicitly policy levers to provide incentives for innovation and creative work. We can make them shorter and weaker if we choose, as opposed to longer and stronger, which has been the pattern over the last four decades. Pretending that the money going to the winners from these monopolies is natural is an absurdity that deserves nothing but ridicule. Instead, this is the accepted wisdom in intellectual circles.

The comparable wisdom about globalization is that manufacturing workers in rich countries lose because hundreds of millions of people can do the same work in the developing world for a fraction of the pay.

This is true, but it is also true that there are tens of millions smart and hardworking people in the developing world who would be prepared to work as doctors, dentists, and in other highly paid professions in the rich countries at a fraction of the pay of the people now in those positions. We structured our trade policy so manufacturing workers have to compete with workers in the developing world and doctors and dentists mostly do not.

We have structured our financial system to allow a small number of people to get tremendously rich at the expense of the economy as a whole. This was demonstrated most clearly in the wake of the collapse of the housing bubble when political elites raced to save the big banks from the consequences of their own actions, but there are many ways in which the rules have been structured to support a bloated financial sector.

And we have had macroeconomic policy that has needlessly kept millions of people from having jobs. It has also reduced the bargaining power of tens of millions who do have jobs. It is not surprising that policies designed to redistribute income upward would lead to resentment, especially when our elites pretend they do not exist. Until these policies are acknowledged and changed, populist anger is not likely to go away.

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Dean Baker: Medicare for 64 Year Olds Is a Step Toward Medicare for All [feedly]

The always clever Dean Baker with a "teachable moment" proposal....

Medicare for 64 Year Olds Is a Step Toward Medicare for All
http://cepr.net/publications/op-eds-columns/medicare-for-64-year-olds-is-a-step-toward-medicare-for-all

Dean Baker
Truthout, April 8, 2019

See article on original site

There is a renewed push for making a Medicare-type government program universal so that a public health care insurance system covers everyone in the country. This effort gained enormous momentum from Senator Bernie Sanders's 2016 campaign for the Democratic nomination, as well as from the continuing Republican attacks on Obamacare. A bill put forward by Washington Representative Pramila Jayapal, outlining a Medicare for All (M4A) plan, now has 107 co-sponsors — nearly half of the Democratic caucus in the House.

While this is great progress toward the goal of a universal Medicare-type plan, it still has a long way to go. For example, the supporters of Jayapal's bill could not agree on a financing mechanism, so the bill has a menu of options rather an actual financing proposal.

There is also serious pushback from other members of the Democratic caucus. Some of it undoubtedly reflects realistic political concerns that a quick switchover from the current system to M4A will not be popular in many districts.

Many people are satisfied with the insurance they have now and may be reluctant to support what they view as a big leap into the unknown. Perhaps these people can be convinced over time that a universal Medicare-type system will be at least as good for them, but they are not there now.

However, some of the pushback stems from the fact that many Democrats have long depended on campaign contributions from the health care industry. While the party has not gotten as much money as the Republicans, many members do get substantial contributions, which they are not prepared to abandon. Medicare for all 64 year olds is designed to call attention to these politicians.

If we accept that we are not likely to get to a universal Medicare system in a single step, the next question is: how can we find a way to phase in the system in a way that both minimizes disruptions and provides real benefits? Many have proposed lowering the age of Medicare eligibility from the current 65 to age 50 or 60. The idea is that we would bring in a large proportion of the pre-Medicare age population, and then gradually go further down the age ladder. (We can also start at the bottom and move up.)

This sort of age reduction approach is a reasonable incremental path, but going to age 50 or even age 60 would still be a considerable expense. There are over 60 million people in the age cohorts from 50 to 64. Including all these people in Medicare at a single step would be a very serious lift. Even the more narrow group from age 60 to 64 still has almost 20 million people. That would be a substantial expense.

However, we can make the first step even more gradual. We can just add people when they turn age 64 instead of the current 65. At first glance, this would be a bit less than 4 million people. Medicare's payments per enrollee (net of premiums) are roughly $11,500. That would translate into $46 billion annually, roughly 1.0 percent of the total budget.

This estimate is very conservative and likely overstates the actual cost for two reasons: First, many 64-year–olds will already have their insurance covered by the government. Roughly 20 percent of this age group is on Medicare as a result of being on Social Security disability. At least 10 percent more is covered by Medicaid. If we add people who are getting insurance as current or former government employees, we would almost certainly get over 40 percent already being insured through some government program, and possibly as high as 50 percent.

In addition, the Medicare costs for 64 year olds are likely to be far less than the overall average. On average people in this age group would have health care costs of around 70 percent of the over–65 population as a whole. But the least healthy portion of the 64-year-old population is likely already covered by either Medicare, as a result of disability, or Medicaid.

If we assume that the average costs for the people we are adding to the government's tab are half of the overall average for Medicare, this gets us $5,750 per person. If we assume that we are adding 60 percent of this age group, that comes to 2.4 million people. That gives us a total tab of $13.8 billion, less than 0.3 percent of total spending or one week of the military budget. It would be pretty hard to argue that this is too expensive.

Making this one–year reduction in the Medicare age would show how easily this can be done. It should open the door to further reductions in future years. It is also likely to be popular politically. People in their late 50s and early 60s will surely appreciate the fact that they are one year closer to qualifying for Medicare.

Of course, this is not the only thing that we should be doing as part of near-term health care reform. We should look to open Medicare to the population as a whole on a voluntary basis. We should also look to make the subsidies under the Affordable Care Act more generous. And, we should be looking to bring our payments for drugs, medical equipment and doctors more in line with payments in other wealthy countries.

However, lowering the Medicare age to 64 is a big first step. It is also a great test of which Democrats are opposed to Medicare for All because they fear the political consequences and which Democrats work for the health care industry.

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TripleCrisis: World Bank Financialization Strategy Serves Big Finance [feedly]

World Bank Financialization Strategy Serves Big Finance
http://triplecrisis.com/world-bank-financialization-strategy-serves-big-finance/

 

In case you need a quick refresher on "capital controls: check: https://www.investopedia.com/terms/c/capital_conrol.asp

By Jomo Kwame Sundaram and Anis ChowdhuryCross-posted at Inter Press Service.

The World Bank has successfully built a coalition to effectively advance its 'Maximizing Finance for Development' (MFD) agenda. The October 2018 G20 Eminent Persons Group's (EPG) report includes proposals to better coordinate various international financial institutions (IFIs) in promoting financialization.

MDB Midwives of Financialization

The MFD approach wants multilateral development banks (MDBs) to actively re-shape developing countries' financial systems to better 'complement' global finance. MDBs have already urged developing countries to encourage local institutional investors by redesigning pension systems along lines inspired by US private pensions. Thus, MDBs have been:

•    influencing what projects are deemed 'bankable', probably prioritizing large infrastructure over smaller projects.

•    enabling securitization to transform bankable projects into tradable securities, generating more revenues and strengthening global finance.

•    persuading developing country governments to finance subsidies and other 'de-risking' measures designed by MDBs to guarantee private financial profits.

•    determining how developing countries supply securities preferred by transnational banks and institutional investors.

G20 Financialization Proposals

The main G20 EPG proposals for collaboration to promote financialization include:

•    IFIs working together to increase the supply of bankable projects and to share data and information to support infrastructure data platforms needed to securitize MDB loans.

•    IFIs should provide risk insurance to increase the number of bankable projects stuck due to high political risk. This requires government guarantees against 'political risks' to be more attractive to re-insurers.

As securitization of MDB loans involves tradable assets with different credit ratings for investors with diverse 'risk appetites', MDBs are being urged to securitize both private and sovereign loans, and to retain stakes in junior tranches to induce private investments.

MDBs No Longer Development Banks?

While MDBs should follow recent advice for issuers to remain stakeholders by retaining shares of securitized tranches on their balance sheets, the implications are quite different when MDBs, and not private banks, securitize loans.

As originators, MDBs may politically pressure low- and middle-income country governments to provide de-risking instruments, including guaranteed income from securitized public-private partnership (PPP) infrastructure projects.

World Bank Guidance on PPP Contractual Provisions can burden states and citizens more than any trade or investment agreement or international law. States take on inordinate risk while its right to regulate in the public interest is fettered.

New Washington Consensus?

The Washington-based Center for Global Development (CGD) has similarly discouraged borrowing in its paper for the G20 EPG, 'More mobilizing, less lending'. Instead, it proposes augmenting MDB private sector windows with special purpose vehicles (SPVs).

The CDG also calls on MDBs to use sovereign lending to promote reforms to make projects financially viable and to help finance the public share of PPPs. Hence, MDBs are pressuring governments to support the MFD with their own fiscal resources.

The recommendations will also make it more difficult to manage systemic vulnerabilities arising from the envisaged securities, repo and derivative markets to be officially promoted.

Various options promoted by the CDG thus involve high risk, high leverage, financialized investors as partners in international development, exposing the MDBs themselves to the vulnerabilities of the MFD approach.

Checks and Balances?

The tendency towards concentration in asset management (with economies of scale and scope) is likely to result in US-based asset managers allocating finance globally using considerable institutional investments from developing countries.

The G20 EPG is not unaware that its proposal — to transform developing country financial systems to contribute to the global supply of securities — involves significant systemic risks. Nevertheless, it claims to be seeking to secure the benefits of open financial markets while mitigating systemic vulnerabilities.

Thus, it has called on the IMF to: develop and manage a framework for managing volatile capital flows; create a resilient global 'safety net' that can effectively mobilize resources to address financial fragilities; and integrate financial surveillance with an effective early warning system.

However, the EPG paper does not make the shift to securitization conditional on mitigating systemic risks. As its proposed safeguards are largely unrealizable or ineffective, its financial instability concerns do not mean much.

Although recognizing the dangers and vulnerabilities involved at both national and international levels, including the loss of effective sovereign control over financing conditions, the IMF supports the EPG proposals.

Despite the experience of recent financial crises, the IMF continues to preach that freely floating exchange rates can effectively buffer capital flow volatility, while capital controls should only be used after exhausting all monetary and fiscal policy instruments.

Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.Triple Crisis welcomes your comments. Please share your thoughts below.

Triple Crisis is published by

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....and Trump too??

'

Austerity caused Brexit

Thiemo Fetzer 08 April 2019

A rich literature has emerged aiming to make sense of the causes behind the Brexit vote, but it has mainly been descriptive. This column uses regional-level data on spending and voting behaviour, as well as individual-level survey data, to argue that the austerity policies in place in the UK since 2010 were an important contributing factor to the vote to Leave.  Estimates suggest that the close-run referendum could have resulted in a victory for Remain had it not been for austerity.

Since the EU referendum in the UK, a rich but mainly descriptive literature has emerged aiming to make sense of the causes behind the Brexit vote (e.g. Miles 2016, Becker et al. 2016, O'Rourke 2016, Tomlinson 2017). Given the political meltdown in the UK, this is more imperative than ever.  An important cross-cutting observation is that Leave-voting areas have been 'left behind' and that the local populations are particularly reliant on the welfare state.  In a recent new paper (Fetzer 2018), I bring together broad and comprehensive evidence which suggests that austerity policies since 2010 are an important factor that contributed to the build-up of anti-establishment sentiment and helped shift the scales in the referendum in favour of Leave. 

Austerity in the UK since 2010

The austerity-induced reforms of the welfare state initiated by the Conservative-led coalition government since 2010 were extensive. Aggregate real government spending on welfare and social protection decreased by around 16% per capita. Spending on healthcare, being spared direct cuts, flatlined, but the ageing population profile of the population increased demand for the health care services. Further, spending on education contracted by 19% in real terms while expenses for pensions steadily increased, suggesting a significant shift in the composition of government spending.

Figure 1 Overall public sector spending in GBP per capita (real)

Source: Data are from HMRC and ONS. 

Austerity and voting behaviour: District-level estimates

At the district level, the level at which most welfare programmes are administered, spending per person fell by 23.4% in real terms between 2010 and 2015. The fall in spending varied dramatically across districts, ranging from 46.3% to 6.2%, with the sharpest cuts in the poorest areas (Innes and Tetlow 2015).

In 2013, it was estimated that many of the measures included in the Welfare Reform Act of 2012 would cost every working-age Briton, on average, around £440 per year (Beatty and Fothergill 2013).  The impact of the cuts was far from uniform across the UK, as is visualised in Figure 2 – it varied from £914 in Blackpool to just above £177 in the City of London. The overarching observation was that the most deprived areas were most severely affected by the cuts, as they had the highest numbers of people receiving benefits to begin with.

Figure 2 Distribution of the austerity shock

Note: The measure is expressed in financial losses per working-age adult per year, as simulated by Beatty and Fothergill (2013) and used in Fetzer (2018).

Using difference-in-difference at the district level, it can be shown that austerity had sizable and timely effects, increasing support for UKIP across local, national and European elections. The estimates suggest that the tight referendum could have resulted in a Remain victory had it not been for austerity. UKIP vote shares increased by between 3.5 to 11.9 percentage points due to austerity, and given the tight link between UKIP vote shares and an area's support for Leave, simple back-of-the-envelope calculations suggest that Leave support in 2016 could have been easily at least 6 percentage points lower.  

The response to austerity: Individual-level evidence

While working with aggregate data is appealing, it also comes with some caveats, as the estimated effects could be masking a host of other mechanisms. However, the political effects of austerity are also detectable when turning to individual-level data from the Understanding Society Study and the British Household Panel Study. In particular, individuals who were exposed to welfare reforms increasingly shifted to UKIP once they had experienced the benefit cut. Further, dissatisfaction with political institutions as a whole increased – they were more likely to perceive "that public officials do not care", that they are "not having a say in what the government does" and that their vote is "unlikely to make a difference". Each of these factors in turn, are tightly linked to Leave sentiment. These can be studied since the most recent USOC survey wave also includes the EU referendum question.

One example of a reform I study in the paper is the 'bedroom tax' – officially termed the under-occupancy penalty. This reform implied reductions to housing benefits for households living in social housing that are judged to live in accommodation that is too large relative to their needs if they have a 'spare' bedroom. The results suggest that households exposed to the bedroom tax increasingly shifted towards supporting UKIP, experienced economic grievances as they fell behind with their rent payments due to the cut to housing benefits, or, in some cases, avoided the benefit cut by moving to less spacious housing.

Broader context

By curtailing the welfare state, austerity has likely activated a broad range of existing economic grievances that developed over a long time. It is not only the UK where economic distress has been linked to increasing support for right-wing political platforms (e.g. Arzheimer 2009, Dehdari 2018). Identifying and quantifying the relative contributions of the factors behind the underlying economic grievances, especially among the low-skilled, is an active field of research. 

For example, Colantone and Stanig (2018) suggest that, by intensifying competition, trade integration with low-income countries has hurt manufacturing goods-producing areas in the UK, which is why voters in these areas were more likely to vote Leave. Similar evidence linking economic hardship due to trade-integration to populist or extreme voting has been documented in the context of the US (Autor et al. 2016) and Germany (Dippel et al. 2017). 

Similarly, evidence is accumulating that some forms of immigration do have small, but detectable, effects on labour markets by curtailing wage growth at the bottom end of the wage distribution (for evidence from the UK, see Becker and Fetzer 2018 and Dustmann et al. 2013; for the US see Ottaviano and Peri 2006). 

Similarly, there is some evidence suggesting that automation, by reducing demand for low-skilled workers, can also suppress wage growth among the low-skilled (Graetz and Michaels 2018). In the historical context, this type of (manual) labour-saving technological progress has been linked to political unrest (Caprettini and Voth 2017). The rise of the gig economy, zero-hours contracts, and so on may also push people to become reliant on the welfare state to top up their salaries. Each of these factors is likely to exacerbate the economic cleavages between the well-educated and those with low human capital – a phenomena which has been referred to as the 'growing skill bias' in labour markets (Acemoglu 1998, Autor et al. 2003).

The natural implication is well-known to economists – trade integration, or globalisation more broadly, and the welfare state are complements. In order to maintain continued public support for globalisation, for example, policy needs to deliver solutions for the losers from globalisation. This could take the form of continued investment in education and training, and designing a welfare system that can help individuals transition into new jobs.   

References

Arzheimer, K (2009), "Contextual Factors and the Extreme Right Vote in Western Europe, 1980–2002", American Journal of Political Science 53(2).

Autor, D H, F Levy and R J Murnane (2003), "The Skill Content of Recent Technological Change: An Empirical Exploration", The Quarterly Journal of Economics 118(4): 1279–1333.

Autor, D H, D Dorn, G Hanson and K Majlesi (2016), "Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure", NBER Working Paper No. 22637.

Beatty, C and S Fothergill (2013), "Hitting the poorest places hardest: The local and regional impact of welfare reform", Centre for Regional Economic and Social Research, Sheffield Hallam University.

Becker, S O and T Fetzer (2018), "Has Eastern European Migration Impacted UK-born Workers?", Cage Working Paper No. 376.

Becker, S O, T Fetzer and D Novy (2016), "The fundamental factors behind the Brexit vote", VoxEU.org, 31 October.

Caprettini, B and J Voth (2017), "Rage against the machines: Labor-saving technology and unrest in England, 1830-32", CEPR Discussion Paper 11800.

Colantone, I and P Stanig (2018), "Global Competition and Brexit", American Political Science Review 112(2): 201-218.

Dehdari, S H (2018), "Economic Distress and Support for Far-Right Parties - Evidence from Sweden".

Dippel, C, R Gold, S Heblich and R Pinto (2017), "A new approach to identifying causal mechanisms: With an application to the effect of trade on labour markets and politics", VoxEU.org, 12 April.

Dustmann, C, T Frattini and I P Preston (2013), "The Effect of Immigration along the Distribution of Wages", The Review of Economic Studies 80(1): 145–173.

Fetzer, T (2018), "Did austerity cause Brexit?", CAGE Working Paper 381.

Graetz, G and G Michaels (2018), "Robots at Work".

Innes, D and G Tetlow (2015), "Delivering Fiscal Squeeze by Cutting Local Government Spending", Fiscal Studies 36(3): 303–325

Miles, D (2016), "Brexit realism: What economists know about costs and voter motives", VoxEU.org, 3 August.

O'Rourke, K (2016), "Brexit: This backlash has been a long time coming", VoxEU.org, 7 August.

Ottaviano, G I P and G Peri (2006), "Rethinking the Effects of Immigration on Wages", NBER Working Paper No. 12497.

Tomlinson, J (2017), "Brexit, globalisation, and de-industrialisation", VoxEU.org, 21 April.

--

John Case
Harpers Ferry, WV

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Krugman: Why Does Trump Want to Debase the Fed? [feedly]

Why Does Trump Want to Debase the Fed?
https://www.nytimes.com/2019/04/08/opinion/fed-herman-cain-stephen-moore.html

 -- via my feedly newsfeed
Why Does Trump Want to Debase the Fed?

The tax cut fizzled; send in the clowns!

Paul Krugman

As far as I know, the Federal Reserve — the world's most important economic policy institution — doesn't have an anthem. But if it were to adopt one now, the choice would be obvious: "Send In the Clowns."

You see, the Fed's governing board currently has two vacancies, and Donald Trump has proposed filling those vacancies with ludicrous hacks. If he succeeds, one of our few remaining havens of serious, nonpartisan policymaking will be on its way toward becoming as corrupt and dysfunctional as the rest of the Trump administration.

Stephen Moore and Herman Cain are, of course, completely unqualified — I say "of course" because their lack of qualifications is, paradoxically, a key qualification not just for Trump but for the G.O.P. in general.

There are plenty of genuine monetary experts with conservative political leanings, some of them quite partisan. But modern Republicans have shown consistent disdain for such experts, perhaps because of a sense that anyone with real expertise or an independent reputation might occasionally be tempted to take a stand on principle.

There's no risk that either Moore or Cain will ever take such a stand. In fact, what seems to have recommended both men to Trump was their evident willingness to completely reverse their policy views when politically expedient.

Both were hard-money men during the Obama years, demanding higher interest rates despite very high unemployment. Both have now taken to berating the Fed for failing to print more money in the face of low unemployment — because that's what Trump wants.

That said, there's a difference between the two men.

I wrote about Moore a couple of weeks ago, noting that he has long been a prominent fixture in the conservative movement; he is, basically, a classic right-wing hack who tries (incompetently) to impersonate an economic expert. Cain, on the other hand, is a spam king whose business model involves making his email list available to direct marketers.

Put it this way: In recent years Moore has been out there predicting magical results from tax cuts, putting out fake economic numbers, and giving speeches to FreedomFest. At the same time, Cain has been offering a platform for peddlers of get-rich schemes and cures for erectile dysfunction. So it says something about what Trump wants that he apparently sees the two men as equally valuable allies.

What does Trump want? His attempted beclowning of the Fed follows, I'd argue, from the fact that his one major legislative success, the 2017 tax cut — which he predicted would be "rocket fuel" for the economy — has turned out to be a big fizzle, economically and, especially, politically.


It's true that U.S. economic growth got a bump for two quarters last year, and Trumpists are still pretending to believe that we'll have great growth for a decade. But at this point last year's growth is looking like a brief and rapidly fading sugar high.

Meanwhile, the tax cut remains unpopular, partly because few people perceived personal benefits, partly because voters appear to be less concerned about paying too much than with the sense that the rich — the prime beneficiaries of the Trump cut — are paying too little.

Some leaders might see such disappointments as reasons to make a course correction. But this is Trump: When the going gets tough, he blames someone else. Everything would have been great, he insists, if the Fed hadn't thwarted his plans.

There's a good argument to be made that the Fed misjudged the economy's strength, that it raised interest rates too fast and that the economy would be doing somewhat better if it hadn't. In fact, it's an argument I agree with.

But that's not what Trump is saying. He wants the Fed to act as if we were still in a deep depression; he wants it both to cut rates and to resume the emergency policies it pursued — and he denounced — when we had more than twice as much unemployment as we do today. This would, he insists, turn the economy into the "rocket ship" he originally promised.

You don't have to be a gold bug or even an inflation hawk to see these demands as deeply irresponsible. Indeed, they sound a lot like the "macroeconomic populism" that has repeatedly led to economic disaster in Latin America, with Venezuela the latest example.

Running the printing presses to fight a depression, as the Fed did after the financial crisis, is prudent and sensible; running them because you refuse to accept the reality that your policies aren't delivering an economic miracle is different, and always ends badly.