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September 29, 2011

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Interview with Daron Acemoglu

Posted: 29 Sep 2011 12:24 AM PDT

This is part of a much, much longer interview of Daron Acemoglu:

Interview with Daron Acemoglu, by Douglas Clement, The Region, FRB Minneapolis: ... Job Markets Region: You've done a great deal of research on labor market imperfections, looking at search frictions and asymmetric information, as well as important work on directed job search, matching efficiency and the impact of unemployment insurance. What's your sense of the impact those factors are having on the current U.S. job market?
Acemoglu: I pondered exactly that question over the last few years. Who hasn't, I suppose? [Laughs.] And I guess I have a two-layered answer. I tend to think that there are serious structural problems with the U.S. labor market that will keep the economy down more and more over the next decade. They're related to the fact that our workforce, especially the male half, hasn't really made an adjustment to the new technologies and types of skills that are required.
Labor market imperfections play a role in that, in the sense that I think most people are not sufficiently informed about the sort of skills that they will require. ... U.S. workers who don't have college degrees are not going to be able to get good-paying manufacturing jobs. ...
Region: Some contend that labor market factors like these have raised the structural rate of unemployment.
Acemoglu: Right, yes. I was just getting to that idea in fact. I would probably agree with the statement that these factors have raised the structural rate. But I don't agree—and I think it's hard to agree—with the statement that what we are seeing right now in the U.S. labor market is just structural unemployment. It seems quite clear that the sudden increase in and the composition of joblessness points out that this unemployment experience is really related to the downturn in economic activity. I think it also highlights that at some level, despite decades of very productive work, we economists haven't really made as much progress in understanding cyclical unemployment as we thought.
At some level, this wasn't so much of an embarrassment for us because the United States previously had relatively low unemployment, so most labor economists in the United States didn't really worry about unemployment, and most macroeconomists worried much more about employment than unemployment. Even when search models have been successful in thinking about some conceptual issues, I don't think they have been really that useful for thinking about why is it that we have these long periods of unemployment?
I think we probably need sort of a paradigm shift there, to combine some of the elements of the search model, perhaps, with some other ingredients in order to understand these things. ...
"Top Inequality" & Political Processes
Region: Earlier this year, at the American Economic Association meeting, you said that top inequality (the top 99th percentile) and the financial crisis itself might be due to "the peculiar political processes that have been under way in the United States over the last 25 years."
Can you elaborate on what you meant?
Acemoglu: Yes, sure. I think it's useful to put that into perspective, because that was commenting on a well-known thesis, that's become even better known over the last year or so, proposed by Raghu Rajan at the University of Chicago. And Raghu is a leading financial economist and has written many insightful pieces, including a wonderful book called Fault Lines. ...
I sympathize with 80 percent of the book greatly. But the 20 percent that has perhaps received the most attention, including by Raghu himself, I think, in his presentations, is about this new thesis ... that the root of the crisis was a regulatory response to the rising inequality experienced in the United States. I think this 20 percent is less compelling.
And the story goes like this: Inequality has been rising in the United States, and I think by that he was referring not to the top 1 percent inequality, but inequality between the bottom quarter and top quarter, or middle and the top quarter. It's been rising for exogenous reasons, for reasons unrelated to finance or to banking regulations and so on. This rise in inequality generated demand for appeasing the bottom of the distribution, and the political process responded by giving them cake instead of bread, so to speak—by giving them housing. And it did so by encouraging the GSEs [government-sponsored enterprises such as Fannie Mae and Freddie Mac] to give lower-income people unsustainably cheap credit or subprime lending and mortgages.
Region: Creating the "ownership society."
Acemoglu: Exactly: the "ownership society." And the house of cards that was created came tumbling down. That would be my summary of the 20 percent of Raghu's book that he emphasizes a lot and is the part that I disagree with.
So when I made that comment about top inequality and the crisis being due to the political process, it followed other remarks I made to explain why, in my opinion, this thesis doesn't hold water.
Why not? First, I think evidence that the demand for redistribution from the bottom was strongest in the 2000s is nonexistent. If anything, it was stronger in the 1980s, which was a time when the bottom of the income distribution was falling and, in fact, there was a stronger labor movement to demand such changes. If you look at the 2000s, the bottom of the income distribution is doing well, actually, for the reasons that we just talked about. In fact, the middle is not doing all that badly either in the 2000s, relative to what was going on before. So the 2000s seem to be a particularly peculiar time for people to make those demands.
Second, I actually see no evidence, qualitative or quantitative, that even if people at the bottom did make such demands, the political system would respond to it. Over time, the U.S. political system seems to have become much less responsive to what's being demanded by the bottom.
And third, I didn't see any evidence that GSEs really played such an important role in this whole thing. They were relatively late arrivals into the subprime scene, which the private sector had fought very hard to carve out away from the GSEs and had successfully done so. Then the GSEs came in because they thought this was a profitable opportunity.
Region: So the demand timing was wrong, the political response wasn't really there and the institutional details weren't quite right either.
Acemoglu: Yes, the details of the institutional process just don't seem to work out. Now, for all of this, we don't have conclusive evidence, but existing evidence doesn't seem to support the thesis.
And at the end, I said that if there was going to be any link between inequality and the financial crisis, I would have put it another way, which is that the financial crisis and the inequality of the top 1 percent, which has a heavy overrepresentation from the financial sector, has been an outcome of the political processes that have removed all of the regulations in finance, and so created the platform for 40 percent of U.S. corporate profits to be in the financial sector—which is just an amazing number. That is where financial sector profits stood at the time.
Region: Really, 40 percent? Wow.
Acemoglu: Exactly, wow. ... They were amazingly overrepresented in the top 0.1 percent of the income distribution. And the thing is that this was underpinned by a political process, in the sense that it was an outcome of this lack of regulation and the way that we have allowed the laws to be changed for things such as subprime, and the relationship between investment banking and regular banking. And those things also played a major role, obviously, in the run-up to the financial crisis.
So it could well be that a political process that responded not to the bottom of the income distribution, but to the lobbying, financial and expertise power of the very top of the income distribution might have been responsible for these two processes. ...

links for 2011-09-29

Posted: 28 Sep 2011 10:08 PM PDT

Ben Bernanke and the Washington Consensus

Posted: 28 Sep 2011 06:30 PM PDT

A few quick and somewhat scattered comments on Bernanke's speech today:

Ben Bernanke and the Washington Consensus

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