Branko Milanovic: Ricardo, Marx, and Interpersonal Inequality [feedly]

Ricardo, Marx, and Interpersonal Inequality
https://www.globalpolicyjournal.com/blog/21/05/2020/ricardo-marx-and-interpersonal-inequality

Branko Milanovic on the emergence of the study of interpersonal inequality.

It is a question often asked: what do Ricardo and Marx have to say about interpersonal inequality of income? The answer is, strictly speaking, very little. In writings of neither Ricardo nor Marx does inequality in personal incomes feature at all, and I even think that the concept of what we call "interpersonal inequality" or "size distribution of incomes" does not appear.  

 

The reason why this is the case is both simple and revealing. Ricardo and Marx were concerned with functional (between factors of production) distribution of income, that is with the distribution of net product between workers, capitalists and landlords (the three big classes introduced by Adam Smith). In Ricardo, this concern was such that he wrote on page 1 of The Principles, the famous sentence that the principal problem of political economy is to study the distribution between "proprietors of land, the owners…of capital and the labourers". Actually, the entire book is organized around that idea. Marx likewise (with a few exceptions) dealt with functional distribution only.

 

The omission of interpersonal distribution is revealing of the type of society that Ricardo and Marx had in mind. To see this consider the decomposition of a standard inequality measure like Gini coefficient. It is decomposed into three components: the gap between mean incomes of different groups into which we break a society, inequality within each of these groups, and the "overlap" term which is non-zero when some members of a mean-poorer group have higher incomes than some members of a mean-richer group.

 

Now, consider a society which is strictly segregated into classes such that (say) capitalists are rich and workers are poor. Interpersonal inequality looked at through the lenses of a Gini coefficient will not include the overlap term because of a tacit assumption shared by both Ricardo and Marx that all capitalists are richer than all workers (and if landlords are included that they are richer than the other two groups). If in addition, all workers are paid subsistence, the within-group inequality for them will be zero. Capitalists and landlords may be differentiated depending on how much capital or land each possesses but because of their small population size, they will not add much to inequality (Gini within each group is weighed by the group income and population shares).

 

The bottom line is that most of interpersonal inequality will boil down to the gaps in mean incomes between the two (or if landlords are included, three) classes. Studying only that is not different from being concerned with income shares of the three groups, that is, with functional income distribution. Thus the question of income inequality between individuals dissolves into the question of income shares of landlords, capitalists and workers. In such a society, it is  indeed of little practical import to go beyond functional distribution.

 

This picture which is, I think, basically accurate is a bit simplified, especially as far as Marx is concerned. In Ricardo workers are seen as a homogeneous mass facing capitalists such that every increase in the wage rate implies a direct reduction in profit: "a rise of wages, from the circumstance of laborer being more liberally rewarded, or from the difficulty of procuring necessities on which wages are expended, does not…produce a rise in prices but has a great effect in lowering profits" (Principles, Chapter I, Section VII, p. 31). Or even more clearly: "There is no adequate reason for a fall in profit but a rise in wages, and…it may be added the only adequate and permanent cause for the rise of wages is the increasing difficulty of providing food and necessities" (Chapter XXI, p. 197). 

 

Note that the increase in the wage comes either from an improvement in (what we now call) real wage or from greater cost of providing subsistence which, while keeping real wage unchanged, raises the share that belongs to labor, and reduces that of capital. Throughout are not only the interests of workers and capitalists directly opposed but workers are supposed to be paid subsistence, and when, in very unusual circumstances, they are not, the Malthusian checks kick in to drive them  back to subsistence (Chapter V).

 

In Marx, the opposition between workers and capitalists is similar but the distinction between simple and complex labor introduces some variability among workers' wages even if Marx seldom speaks of it. In fact, workers with greater skills will earn more. The rationale is very similar to "human capital" approach. In principle, workers are paid the amount necessary for the reproduction of their class. That could be subsistence only for unskilled workers who are plentiful; for skilled workers the costs of reproduction may be above subsistence because it costs more to produce a skilled than an unskilled worker: "[the difference in wages] can be reduced to the different values of labour-power itself, that is, its varying production costs" (Theories of Surplus Value; also Rosdolsky, pp. 515ff); or "all labor of a higher or more complicated character than average labor is…labor power whose production has cost more labor and time and which therefore has a higher value than unskiled or simple labor" (Capital, vol. I, Chapter III. Section 7). In contemporary terms we could say that the skilled wage must compensate for the foregone earnings during the period of training and for the cost of additional education.

 

Income inequality among workers thus moves us a bit further from a narrow functional distribution of income. If in addition, we allow for the differentiation of capital stock among capitalists which is implicitly present in both Ricardo and Marx, within-capitalist income Gini will be positive too.

 

The situation present in today's capitalism but not common in classical capitalism, namely that (i) a worker may be richer than a capitalist, or (ii) that people could have both labor and property incomes (even if the rich still depend mostly on property incomes), is not envisaged by either Ricardo or Marx. They must have thought both of these possibilities remote and thus not worth complicating the analysis. Possibility (i) existed as some (few?) members of liberal or scientific professions, say doctors or engineers, probably commanded higher incomes than petty capitalists. Possibility (ii) existed only among the self-employed but they could rightly be considered remnants of a past social order and not representative of capitalism. The British social tables, whether in their original form or as they had been reworked by Peter Lindert and Jeffrey Williamson, or more recently by Bob Allen, can be read as the rankings of different non-overlapping classes where the lion's share of inequality is explained by income gaps between these classes. In other words, we do not lose much in our estimate of total inequality if we ignore both the overlap component, and assume all members of a given class to have same incomes.

 

It was thus left to people like Pareto, who were, at the end of the 19th century, witnessing less segregated and less hierarchical societies and were lucky to have access to tax data, to move the study of inequality from functional to interpersonal.

 

 

 

 

This first appeared on Branko's blog and was reposted with permission.

 

Photo by Harrison Haines from Pexels

 

 

References

 

David Ricardo, The Principles of Political Economy and Taxation, Dover Publication, 2004.

Roman Rosdolsky, The Making of Marx's 'Capital', Pluto Press, 1977.  

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Projected State Shortfalls Grow as Economic Forecasts Worsen [feedly]

Projected State Shortfalls Grow as Economic Forecasts Worsen
https://www.cbpp.org/blog/projected-state-shortfalls-grow-as-economic-forecasts-worsen

As economic projections worsen, so do the likely state budget shortfalls from COVID-19's economic fallout. We now project shortfalls of $765 billion over three years, based on the new projections from the Congressional Budget Office (CBO) of yesterday and Goldman Sachs of last week. The new shortfall figure, significantly higher than our estimate based on economic projections of three weeks ago, makes it even more urgent that the President and Congress enact more fiscal relief and maintain it as long as economic conditions warrant.

CBO now projects that unemployment will peak at 15.8 percent in the third quarter of this year (July-September), fall to a still-high 11.5 percent by the last quarter, and remain at an elevated 8.6 percent at the end of 2021. Goldman's new projection estimates that unemployment will peak at an astonishing 25 percent this quarter and still remain at 8.2 percent at the end of 2021. These CBO and Goldman estimates, considerably more pessimistic than their estimates of early April, account for the aid that Washington has already enacted for businesses, individuals, and state and local governments. Goldman's projections also assume that policymakers will provide additional fiscal relief.

Our projection of $765 billion in shortfalls over state fiscal years 2020-22 — much deeper than in the Great Recession of about a decade ago (see chart) — is based on both the historical relationship between unemployment and state revenues and on the average between the latest CBO and Goldman projections. It covers state budget shortfalls only, not the additional shortfalls that local governments, territories, and tribes face.

Federal aid that policymakers provided in earlier COVID-19 packages isn't nearly enough. Only about $65 billion is readily available to narrow state budget shortfalls. Treasury Department guidance now says that states may use some of the aid in the CARES Act of March to cover payroll costs for public safety and public health workers, but it's unclear how much of state shortfalls that might cover; existing aid likely won't cover much more than $100 billion of state shortfalls, leaving nearly $665 billion unaddressed. States hold $75 billion in their rainy day funds, a historically high amount but far too little to meet the unprecedented challenge they face. And, even if states use all of it to cover their shortfalls, that still leaves them about $600 billion short.

States must balance their budgets every year, even in recessions. Without substantial federal help during this crisis, they very likely will deeply cut areas such as education and health care, lay off teachers and other workers in large numbers, and cancel contracts with many businesses. (States and localities furloughed or laid off nearly a million workers in April alone.) That would worsen the recession, delay the recovery, and further harm families and communities. State and local cuts in health care also could shortchange coronavirus response efforts. The large shortfalls could lead states and localities to raise taxes and fees as well.

The coronavirus relief bill that the House passed on May 15, the Heroes Act, includes substantial state and local fiscal relief, both by providing flexible grant aid and by strengthening and extending the temporary increase in the federal share of Medicaid costs in the Families First Act of March — a particularly effective and efficient form of aid that alleviates state budget pressures and protects health coverage. States will need aid of this magnitude to avoid extensive layoffs of teachers, health care workers, and first responders, which would further weaken an already weak economy.

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Who are essential workers?: A comprehensive look at their wages, demographics, and unionization rates [feedly]

Who are essential workers?: A comprehensive look at their wages, demographics, and unionization rates
https://www.epi.org/blog/who-are-essential-workers-a-comprehensive-look-at-their-wages-demographics-and-unionization-rates/

While the coronavirus pandemic has shut down much of the U.S. economy, with over 33 million workers applying for unemployment insurance since March 15, millions of workers are still on the job providing essential services. Nearly every state governor has issued executive orders that outline industries deemed "essential" during the pandemic, which typically include health care, food service, and public transportation, among others. However, despite being categorized as essential, many workers in these industries are not receiving the most basic health and safety measures to combat the spread of the coronavirus. Essential workers are dying as a result. While the Trump administration has failed to provide essential workers basic protections, working people are taking action. Some are walking off the job in protest over unsafe conditions and demanding personal protective equipment (PPE), and unions are fighting to ensure workers are receiving adequate workplace protections.

What is essential work?

The coronavirus pandemic has revealed much about the nature of work in the U.S. As state executive orders defined "essential services," attention was focused on the workers performing those services and the conditions under which they work. Using executive orders from California and Maryland as models, we identify below 12 "essential" industries that employ more than 55 million workers, and we detail the demographics, median wages, and union coverage rates for these workers. In doing this, we build on the excellent work by the Center for Economic and Policy Research in their report A Basic Demographic Profile of Workers in Frontline Industries. Key differences are that we use a different data set—the Current Population Survey (CPS) instead of the American Community Survey (ACS), so we could get union breakdowns—and we expand the definition of essential to include occupations found in California and Maryland's executive orders.

As shown in Table 1, a majority of essential workers by these definitions are employed in health care (30%), food and agriculture (20%), and the industrial, commercial, residential facilities and services industry (12%).

Table 1

Table 2 shows the demographics of essential workers by industry, including gender, education level, and race and ethnicity.

• Women make up the majority of essential workers in health care (76%) and government and community-based services (73%).
• Men make up the vast majority of essential workers in the energy sector (96%), water and wastewater management (91%), and critical manufacturing (88%).
• People of color make up the majority of essential workers in food and agriculture (50%) and in industrial, commercial, residential facilities and services (53%).
• Nearly 70% of essential workers do not have a college degree. Three in 10 essential workers have some college (30%) or a high school diploma (29%). One in 10 have less than a high school diploma.

Table 2

Table 3 shows the median wages for nonessential and essential workers by gender, education, and race and ethnicity. Half of the essential industries have a median hourly wage that is less than the nonessential workforce's median hourly wage. Essential workers in the food and agriculture industry have the lowest median hourly wage, at $13.12, while essential workers in the financial industry have the highest, at $29.55.

Table 3

Table 4 shows the union coverage rates of essential and nonessential workers by industry. One in eight (12%) essential workers are covered by a union contract, with the biggest share working in emergency services (51%). Strikingly, some of the most high-risk industries have the lowest unionization rates, such as health care (10%) and food and agriculture (8%).

Table 4

How unions help working people

Prior to the coronavirus pandemic, essential workers provided critical services that often went unnoticed. Now, more than two months into the pandemic, many essential workers are still risking their lives without basic health and safety protections, paid leave, or premium pay. Before the coronavirus pandemic, unions played a critical role in ensuring workers receive fair pay and working conditions. The following are examples of how unions help working people.

• Union workers earn more. On average, a worker covered by a union contract earns 13.2% more in wages than a peer with similar education, occupation, and experience in a nonunionized workplace in the same sector.
• Union workers have greater access to paid sick days. Ninety-one percent of workers covered by a union contract have access to paid sick days, compared with 73% of nonunion workers. Almost all union workers in state and local government (97%) have paid sick days compared with 86% of their nonunion peers. In the private sector, 86% of union workers have paid sick days compared with 72% of their nonunion peers.
• Union workers are more likely to be covered by employer-provided health insurance. Ninety-four percent of workers covered by a union contract have access to employer-sponsored health benefits compared with just 68% of nonunion workers.
• Unions improve the health and safety practices of workplaces.Unions create safer workplaces through their collective bargaining agreements by providing health insurance and requiring safety equipment. Unions also empower and allow workers to freely report unsafe working conditions without retaliation, which can lead to a reduction in work hazards. Furthermore, states with so-called "right-to-work" laws, which weaken unions, are more likely to have workplace injuries. Researchers have found that so-called "right-to-work" legislation has been associated with about a 14% increase in the rate of occupational fatalities.

The Trump administration's failure to provide essential workers basic protections during the coronavirus pandemic sheds light on the importance of unions. The following are examples of how unions are fighting for protections for essential workers.

• The United Food and Commercial Workers (UFCW) has won premium pay, paid sick leave, and PPE for thousands of workers during the coronavirus pandemic.
• The AFL-CIO has called on the Department of Labor to enact and enforce policies that would protect essential workers from COVID-19.
• The American Postal Workers Union (APWU) has secured additional paid sick leave, extended paid leave for dependent care, and expanded teleworking policies for postal workers.
• The Transport Workers Union of America (TWU) and the Amalgamated Transit Union (ATU) are working together to put pressure on transit agencies to secure safety protections for over 300,000 transit workers across America.

The coronavirus pandemic has revealed the lack of power far too many U.S. workers experience in the workplace. There are roughly 55 million workers in industries deemed "essential" at this time. Many of these workers are required to work without protective equipment. They have no effective right to refuse dangerous assignments and are not even being granted premium pay, despite working in difficult and dangerous conditions. Policymakers must address the needs of working people in relief and recovery legislation, and that should include ensuring workers have a meaningful right to a union.

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Congress Should Bolster ACA Marketplace Coverage Amid COVID-19 [feedly]

Congress Should Bolster ACA Marketplace Coverage Amid COVID-19
https://www.cbpp.org/research/health/congress-should-bolster-aca-marketplace-coverage-amid-covid-19

Congress should take steps to help as many people as possible access marketplace plans at this critical time.

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Radical far-right CFPB taskforce threatens consumer protection [feedly]

Radical far-right CFPB taskforce threatens consumer protection
https://www.epi.org/blog/radical-far-right-cfpb-taskforce-threatens-consumer-protection/

This blog post is cross-posted in the American Constitution Society's Expert Forum Blog. 

As unemployment approaches levels last seen during the Great Depression, and requests for mortgage forbearance increase every week, the Consumer Financial Protection Bureau (CFPB) has proceeded doggedly ahead in undermining consumer protection. The CFPB has suspended enforcement of most of the rules requiring mortgage servicers to help homeowners who have fallen behind in their payments; eased disclosure requirements for remittance transfer providers; and reduced collection and reporting of critical fair lending data. Apparently unsatisfied with rolling back regulatory requirements in the middle of a pandemic-driven economic crisis, the CFPB is also paying hundreds of thousands of dollars to a small "taskforce" of conservative academics and industry lawyers whose charter is to reconsider every aspect of consumer protection.

Although Congress specifically mandated that the CFPB's advisory committees follow federal sunshine laws, the CFPB has allowed the taskforce to meet without notice behind closed doors. The first public glimpse of its plans was a sweeping request for information issued in late March. While the rest of the country was struggling to address the spiraling economic threats posed by COVID-19, the taskforce asked questions about weakening fair lending laws and deregulating consumer finance markets.

Following the CFPB's expected repeal of consumer protections on payday loans and encouragement to banks to make their own high-priced, short-term loans, the taskforce asked about "impediments" to expanding such lending. It questioned whether consumer benefits like privacy and accuracy in credit reporting are worth the cost to industry and suggests that enforcement penalties discourage competition. In the midst of the pandemic, the CFPB taskforce is giving the public a mere two months to comment on fundamental questions like "the optimal mix of regulation, enforcement, supervision, and consumer financial education," how best to measure whether or not consumer protection is effective, and which markets should and should not be regulated.

The taskforce explicitly centers "informed choice" and "competition" as the preferred means of providing consumer protection, with enforcement only as a backstop. Left unchallenged, this framework threatens a dangerous future. Lenders, not consumers, choose debt collectors and loan servicers, and decades of competition in those markets has not reduced the volume of consumer complaints about harassing and abusive behavior. Even in markets where consumers can, in theory, choose the product and provider, abusive lenders often make that choice for them. The vast majority of homeowners don't comparison shop for a mortgage, the largest portion of many family budgets, and in the last great economic crisis, millions of homeowners lost their homes because of loans they couldn't afford with terms they couldn't understand.

Informed choice is a fantasy in most modern consumer credit markets, with pricing driven by obscure algorithms and marketers focused on exploiting consumer weaknesses. Competition in many consumer financial markets may benefit corporations and investors but not the ordinary people who foot the bill and lose their homes.

The taskforce cites the National Commission on Consumer Finance as its inspiration. But unlike the five-member, ideologically homogeneous taskforce, accountable only to the director of the CFPB, the National Commission on Consumer Finance was specifically authorized and funded by Congress; its work was bipartisan; a majority of its 12 members, supported by dozens of staff and student researchers, were members of Congress accountable to the public; its work spanned four years and drew on multiple public hearings with hours of testimony from leading consumer advocates as well as individual consumers and lenders. Whereas the National Commission concerned itself with "market excesses," the taskforce asks only about "informed choice." Whereas the National Commission recognized that consumers can be burdened with excessive debt, the taskforce's only reference to burden is that of the cost of compliance with consumer protections.

We have only until June 1 to submit comments on this information request. This may be our only chance to weigh in before the taskforce issues its report. If we think—as Congress did in 2010 when it created the CFPB, mandated consumer protections, and set the parameters for measuring the effectiveness of consumer protections—that consumer protection requires more than informed choice and competition; that enforcement and supervision and regulation are critical pieces of ensuring effective consumer protection; and that education alone is not and never can be enough, then we must comment.

In the wake of the 2007-2008 foreclosure crisis and the Great Recession, Congress recognized the central role that vigilant, focused consumer protection plays in ensuring economic stability. It created the CFPB so that never again would haphazard consumer protection derail economic prosperity. That focus and those consumer protections are threatened now.

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Summers: Given what we’re losing in GDP, we should be spending far more to develop tests [feedly]

Given what we're losing in GDP, we should be spending far more to develop tests
http://larrysummers.com/2020/05/05/given-what-were-losing-in-gdp-we-should-be-spending-far-more-to-develop-tests/

Larry Summers Blog

When it comes to crafting foreign policy, designing anti-poverty programs or implementing measures to combat climate change, economists have an understandable tendency to feel as though the economic aspects of the debate receive short shrift. The opposite is true when it comes to the pandemic. If anything, the United States is in danger of overemphasizing the impact of the crisis on the economy — and massively underinvesting in the health measures that are ultimately most important.

We are embarked on a policy path of opening things up without major complementary measures, an approach based more on wishful thinking than on logic or evidence. In guidance issued last month, the Trump administration stated this relaxation should only begin when the number of new cases daily had declined for 14 days. This criterion has not been met for the country as a whole or in many states, yet reopening has begun.

A simple calculation illustrates why this path is so dangerous. The most important parameter for understanding an epidemic is what epidemiologists label R0 (R-nought) — the number of people infected by a single individual with the virus. If R0 is greater than 1, an epidemic explodes; if it is less than 1, it diminishes and eventually ceases to be a problem. Experts estimate that before lockdown R0 was about 2.5, which is why lockdown was necessary. They now estimate, in part because case counts have been stable, that R0 is a bit below 1 — perhaps 0.9 or, on an optimistic view, 0.8.

Basic but grim arithmetic implies that if we move from lockdown even 20 percent of the way back to normal life, the epidemic will again be potentially explosive. (For example, if we are currently at an R0 of 0.9, and assuming that the R0 without any distancing is 2.5, then returning to 20 percent of normal would take the R0 to 1.22, clearly in the danger zone.) This is very worrying as the president and many other political leaders seem to be encouraging substantial reversals in lockdown policies.

It's conceivable this will work out, at least in the short run. For a few months, summer heat and humidity may reduce transmissibility. The virus may mutate in benign ways. The population that has not yet been infected may be less susceptible on average to the virus and less contagious when they catch it.

But don't count on it; hope is not a strategy. These factors have been operating in recent weeks, and yet R0 has remained stubbornly close to 1. That suggests it is unlikely that any of these factors are significant enough to change the basic conclusion: Substantial opening up without new measures to reduce transmission is likely to unleash major new waves of disease, sooner or later.

Some might believe this is a price worth paying for the economic benefits the country would reap. After all, on a rough estimate covid-19 is reducing the gross domestic product by 20 percent — $80 billion dollars a week. The problem is that the main constraint on economic activity is not mandatory lockdowns. Rather, whatever is technically permitted, people will be reluctant to resume normal behavior for fear of being infected. The likely result: a resurgent pandemic, dramatically lowered economic activity, or both simultaneously.

Moreover, this economic slowdown is a price we do not have to pay. We could substantially reduce transmission, save lives and permit the safe acceleration of reopening — if we are willing to commit the necessary resources. These would be small compared to the economic damage the virus is wreaking and the amounts we are paying to try to compensate for the losses.

The most promising strategy is establishing a system of pervasive targeted testing. If we were able to identify individuals who have potentially been infected, then quarantine those who test positive, we could substantially reduce the transmission rate. Suppose this required testing every American every week and that each test cost $20. (Both are pessimistic assumptions.) The $6.6 billion price tag would be less than one-tenth of the weekly cost of the Cares Act.

Similarly, investments in contact tracers for those who identified with covid-19 would have an extraordinarily high return. Suppose the total cost of a contact tracer is $400 daily, and that 300,000 tracers are needed to follow up on all newly discovered positive cases. The cost would only be $600 million a week, less than 1 percent of the cost of the Cares Act.

The same kinds of calculations make the case for much more spending on masks, on potential therapies and on pursuing production of plausible but still unproven vaccine candidates.

Amounts of money that are small compared to the economic losses we are suffering are immense relative to battling the virus. They should be the first priority going forward.

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Tim Taylor: Interview with Emi Nakamura: Price Dynamics, Monetary and Fiscal, and COVID-19 Adjustments [feedly]

Interview with Emi Nakamura: Price Dynamics, Monetary and Fiscal, and COVID-19 Adjustments
https://conversableeconomist.blogspot.com/2020/05/interview-with-emi-nakamura-price.html

Douglas Clement at the Minneapolis Federal Reserve offers one of his characteristically excellent interviews, this one with Emi Nakamura, titled "On price dynamics, monetary policy, and this `scary moment in history'" (May 6, 2020, Federal Reserve Bank of Minneapolis). Here are a few of Nakamura's comments that caught my eye, but there's much more in the full interview.

On the current macroeconomic situation

It's a scary moment in history. I thought the Great Recession that started in 2007 was going to be the big macroeconomic event of my lifetime, but here we are again, little more than a decade later. ... More than other recessions, this particular episode feels like it fits into the classic macroeconomic framework of dividing things into "shocks" and "propagation"—mainly because in this case, it's blindingly clear what the shock is and that it is completely unrelated to other forces in the economy. In the financial crisis, there was much more of a question as to whether things were building up in the previous decade—such as debt and a housing bubble—that eventually came to a head in the crisis. But here that's clearly not the case.

Price rigidity at times of macroeconomic adjustment

You might think that it's very easy to go out there and figure out how much rigidity there is in prices. But the reality was that at least until 20 years ago, it was pretty hard to get broad-based price data. In principle, you could go into any store and see what the prices were, but the data just weren't available to researchers tabulated in a systematic way. ...

Once macroeconomists started looking at data for this broad cross section of goods, it was obvious that pricing behavior was a lot more complicated in the real world than had been assumed. If you look at, say, soft drink prices, they change all the time. But the question macroeconomists want to answer is more nuanced. We know that Coke and Pepsi go on sale a lot. But is that really a response to macroeconomic phenomena, or is that something that is, in some sense, on autopilot or preprogrammed? Another question is: When you see a price change, is it a response, in some sense, to macroeconomic conditions? We found that, often, the price is simply going back to exactly the same price as before the sale. That suggests that the responsiveness to macroeconomic conditions associated with these sales was fairly limited. ... 

One of the things that's been very striking to me in the recent period of the COVID-19 crisis is that even with incredible runs on grocery products, when I order my online groceries, there are still things on sale. Even with a shock as big as the COVID shock, my guess is that these things take time to adjust. ... he COVID-19 crisis can be viewed as a prime example of the kind of negative productivity shock that neoclassical economists have traditionally focused on. But an economy with price rigidity responds much less efficiently to that kind of an adverse shock than if prices and wages were continuously adjusting in an optimal way.

What's does the market learn from Fed announcements of changes in monetary policy? 

The basic challenge in estimating the effects of monetary policy is that most monetary policy announcements happen for a reason. For example, the Fed has just lowered interest rates by a historic amount. Obviously, this was not a random event. It happened because of this massively negative economic news. When you're trying to estimate the consequences of a monetary policy shock, the big challenge is that you don't really have randomized experiments, so establishing causality is difficult.

Looking at interest rate movements at the exact time of monetary policy announcements is a way of estimating the pure effect of the monetary policy action. ...  Intuitively, we're trying to get as close as possible to a randomized experiment. Before the monetary policy announcement, people already know if, say, negative news has come out about the economy.The only new thing that they're learning in these 30 minutes of the [time window around the monetary policy] announcement is how the Fed actually chooses to respond. Perhaps the Fed interprets the data a little bit more optimistically or pessimistically than the private sector. Perhaps their outlook is a little more hawkish on inflation. Those are the things that market participants are learning about at the time of the announcement. The idea is to isolate the effects of the monetary policy announcement from the effects of all the macroeconomic news that preceded it. Of course, you have to have very high-frequency data to do this, and most of this comes from financial markets. ...

The results completely surprised us. The conventional view of monetary policy is that if the Fed unexpectedly lowers interest rates, this will increase expected inflation. But we found that this response was extremely muted, particularly in the short run. The financial markets seemed to believe in a hyper hyper-Keynesian view of the economy. Even in response to a significant expansionary monetary shock, there was very little response priced into bond markets of a change in expected inflation. ... 

But, then, we were presenting the paper in England, and I recall that Marco Bassetto asked us to run one more regression looking at how forecasts by professional forecasters of GDP growth responded to monetary shocks. The conventional view would be that an expansionary monetary policy shock would yield forecasts of higher growth. When we ran the regression, the results actually went in the opposite direction from what we were expecting! An expansionary monetary shock was actually associated with a decrease in growth expectations, not the reverse! ... When Jay Powell or Janet Yellen or Ben Bernanke says, for example, "The economy is really in a crisis. We think we need to lower interest rates" ... perhaps the private sector thinks they can learn something about the fundamentals of the economy from the Fed's announcements. This can explain why a big, unexpected reduction in interest rates could actually have a negative, as opposed to a positive, effect on those expectations.

The Plucking Model of Unemployment

A feature emphasized by Milton Friedman is that the unemployment rate doesn't really look like a series that fluctuates symmetrically around an equilibrium "natural rate" of unemployment. It looks more like the "natural rate" is a lower bound on unemployment and that unemployment periodically gets "plucked" upward from this level by adverse shocks. Certainly, the current recession feels like an example of this phenomenon.

Another thing we emphasize is that if you look at the unemployment series, it appears incredibly smooth and persistent. When unemployment starts to rise, on average, it takes a long time to get back to where it was before. This is something that isn't well explained by the current generation of macroeconomic models of unemployment, but it's clearly front and center in terms of many economists' thinking about the policy responses [to COVID-19]. A lot of the policy discussions have to do with trying to preserve links between workers and firms, and my sense is the goal here is to avoid the kind of persistent changes in unemployment that we've seen in other recessions.

For more on Nakamura and her work, the Journal of Economic Perspectives has a couple of articles to offer.

• Janice Eberly and Michael Woodford  provide an overview of some of her prominent research in "Emi Nakamura: 2019 John Bates Clark Medalist," in the Winter 2020 issue of JEP
• Nakamura and Jón Steinsson give a sense of how they perceive "Identification in Macroeconomics" and how this is on display in some of their joint work in the Summer 2018 issue of JEP

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