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August 27, 2015

Latest Posts from Economist's View

Posted: 26 Aug 2015 12:33 AM PDT
Paul Krugman has advice for the Fed:
It's Getting Tighter: When thinking about the market madness and its possible real effects, here's something you — where by "you" I mean the Fed in particular — really, really need to keep in mind: the markets have already, in effect, tightened monetary conditions quite a lot.
First of all, if break-evens (the difference between interest rates on ordinary bonds and inflation-protected bonds) are any guide, inflation expectations have fallen sharply...
Second, while interest rates on Treasuries are down, rates on private securities viewed as even moderately risky are up quite a lot...
So real borrowing costs are up sharply for many private borrowers. This is a significant headwind for the U.S. economy, which was hardly growing like gangbusters in any case.
A Fed hike now looks like an even worse idea than it did a few days ago.
Posted: 26 Aug 2015 12:24 AM PDT
From Tim Taylor:
John Kenneth Galbraith on Writing, Inspiration, and Simplicity: John Kenneth Galbraith (1908-2006) was trained as an economist, but in books like The Affluent Society (1958) and The New Industrial State (1967), his found his metier as a social critic. In these books and voluminous other writings, Galbraith didn't propose well-articulated economic theories, and carry out systematic empirical tests, but instead offered big-picture perspectives of the economy and society of his time. His policy advice was grindingly predictable: big and bigger doses of progressive liberalism, what he sometimes called "new socialism."
For a sense of how mainstream and Democratic-leaning economists of the time dismissed Galbraith's work, classic example is this scathing-and-smiling review of The New Industrial State by Robert Solow in the Fall 1967 issue of The Public Interest. Galbreath's response appears in the same issue. Connoisseurs of academic blood sports will enjoy the exchange.
Here, I come not to quarrel with Galbraith's economics, but to praise him as one of the finest writers on economics and social science topics it has ever been my pleasure to read. I take as my text his essay on "Writing, Typing, and Economics," which appeared in the March 1978 issue of The Atlantic and which I recently rediscovered. Here are some highlights:
"All writers know that on some golden mornings they are touched by the wand — are on intimate terms with poetry and cosmic truth. I have experienced those moments myself. Their lesson is simple: It's a total illusion. And the danger in the illusion is that you will wait for those moments. Such is the horror of having to face the typewriter that you will spend all your time waiting. I am persuaded that most writers, like most shoemakers, are about as good one day as the next (a point which Trollope made), hangovers apart. The difference is the result of euphoria, alcohol, or imagination. The meaning is that one had better go to his or her typewriter every morning and stay there regardless of the seeming result. It will be much the same. ..."
"My advice to those eager students in California would be, "Do not wait for the golden moment. It may well be worse." I would also warn against the flocking tendency of writers and its use as a cover for idleness. It helps greatly in the avoidance of work to be in the company of others who are also waiting for the golden moment. The best place to write is by yourself, because writing becomes an escape from the terrible boredom of your own personality. It's the reason that for years I've favored Switzerland, where I look at the telephone and yearn to hear it ring. ..."
"There may be inspired writers for whom the first draft is just right. But anyone who is not certifiably a Milton had better assume that the first draft is a very primitive thing. The reason is simple: Writing is difficult work. Ralph Paine, who managed Fortune in my time, used to say that anyone who said writing was easy was either a bad writer or an unregenerate liar. Thinking, as Voltaire avowed, is also a very tedious thing which men—or women—will do anything to avoid. So all first drafts are deeply flawed by the need to combine composition with thought. Each later draft is less demanding in this regard. Hence the writing can be better. There does come a time when revision is for the sake of change—when one has become so bored with the words that anything that is different looks better. But even then it may be better. ..." 
"Next, I would want to tell my students of a point strongly pressed, if my memory serves, by Shaw. He once said that as he grew older, he became less and less interested in theory, more and more interested in information. The temptation in writing is just the reverse. Nothing is so hard to come by as a new and interesting fact. Nothing is so easy on the feet as a generalization. I now pick up magazines and leaf through them looking for articles that are rich with facts; I do not care much what they are. Richly evocative and deeply percipient theory I avoid. It leaves me cold unless I am the author of it. ..." 
"In the case of economics there are no important propositions that cannot be stated in plain language. Qualifications and refinements are numerous and of great technical complexity. These are important for separating the good students from the dolts. But in economics the refinements rarely, if ever, modify the essential and practical point. The writer who seeks to be intelligible needs to be right; he must be challenged if his argument leads to an erroneous conclusion and especially if it leads to the wrong action. But he can safely dismiss the charge that he has made the subject too easy. The truth is not difficult. Complexity and obscurity have professional value—they are the academic equivalents of apprenticeship rules in the building trades. They exclude the outsiders, keep down the competition, preserve the image of a privileged or priestly class. The man who makes things clear is a scab. He is criticized less for his clarity than for his treachery.
"Additionally, and especially in the social sciences, much unclear writing is based on unclear or incomplete thought. It is possible with safety to be technically obscure about something you haven't thought out. It is impossible to be wholly clear on something you do not understand. Clarity thus exposes flaws in the thought. The person who undertakes to make difficult matters clear is infringing on the sovereign right of numerous economists, sociologists, and political scientists to make bad writing the disguise for sloppy, imprecise, or incomplete thought. One can understand the resulting anger." 
Posted: 26 Aug 2015 12:17 AM PDT
Stefania Albanesi, Claudia Olivetti, and Maria Prados at the NY Fed's Liberty Street Economics:
Incentive Pay and Gender Compensation Gaps for Top Executives: The persistence of a gender gap in wages is shaping the debate over women's equality in the workplace and underscores the challenge facing policymakers as they consider their potential role in closing it. While the disparity affects females at all income levels, women in professional and managerial occupations tend to experience greater gender-pay differences than those in working-class jobs. The rise in the use of incentive pay, which has been linked to the growth of income inequality (Lemieux, MacLeod, and Parent), might have contributed to the gender gap in earnings (Albanesi and Olivetti). In this post, which is based on our related New York Fed staff report, we document three new facts about gender differences in the structure of executive compensation.
 Evidence on Gender Differences in Executive Pay
Our research focuses on the top five executives by title in public companies (chair/chief executive officer (CEO), vice chair, president, chief financial officer, and chief operating officer) in Standard and Poor's ExecuComp database between 1992 and 2005. Only 3.2 percent of people in these roles are women.

Fact 1: Female executives receive a lower share of incentive pay in total compensation than males. This difference accounts for 93 percent of the unconditional gender gap in total pay. ...
Fact 2: Compensation of female executives is less sensitive to firm performance than males'. For example, a $1 million increase in firm value generates a $17,150 increase in firm-specific wealth for male executives but only a $1,670 increase for females. For each 1 percent increase in firm market value, compensation rises by $60,000 for men and only $10,000 for women. ...
Fact 3: Compensation of female executives is more exposed to declines in firm value and less exposed to increases in firm value than males'. We find that a 1 percent rise in firm value is associated with a 13 percent rise in firm-specific wealth for female executives and a 44 percent rise for male executives. Conversely, a 1 percent decline in firm value is associated with a 63 percent decline in firm-specific wealth for female executives and a 33 percent decline for males. ...
Are these gender differences in compensation efficient?
Surveys of professionals and executives, time-use studies, and experimental and psychological studies suggest that:
  • Exclusion from informal networks, gender stereotyping, and lack of role models are perceived as substantial barriers to career advancements for female executives.
  • Married female professionals bear a disproportionately large share of childcare responsibilities relative to married men in similar circumstances.
  • Women display lower propensity to enter into competitive environments.
  • Women display lower propensity to initiate negotiations.
  • Women exhibit higher risk aversion.
Based on the efficient paradigm of the pay-setting process, these gender differences in barriers to career advancement and preferences are consistent with Facts 1 and 2, but they would imply lower performance for firms headed by females, an outcome for which we find no evidence in our data. Moreover, this framework cannot explain Fact 3.
We find instead that the gender differences in pay and pay-performance sensitivity are consistent with the "skimming" or "managerial power" view of executive compensation. According to this theory, board members are captive to executives, who use that position to influence their compensation packages in a way that increases their average pay and undermines incentives. In this scenario, the goal of the executive is to prevent pay from falling when firm performance deteriorates and to boost pay when the company is doing well. However, as we document in our paper, top female executives are less entrenched than their male counterparts, since they are usually younger, with fewer years of tenure and weaker networks. Thus, they are more limited than male executives in their ability to control their own compensation.
Our analysis suggests that performance pay schemes should be held to closer scrutiny. Increasing transparency about an executive's compensation, both in absolute terms and relative to counterparts', might mitigate gender-pay inequality for top executives. A recent Securities and Exchange Commission ruling that says that companies have to disclose whether executive pay is in line with the company's financial performance seems to be a good step in this direction.
Our findings also raise concern about the standing of all professional women as incentive pay schemes proliferate outside the executive ranks. The failure of the efficient contracting paradigm to explain the gender differences in the structure of executive compensation points to possible distortions in the link between pay and performance. To the extent that performance pay amplifies earnings differentials resulting from actual or perceived differences in attributes between workers,  it can exacerbate inequality and can severely distort the allocation of resources, if designed incorrectly.
Posted: 26 Aug 2015 12:06 AM PDT
Posted: 25 Aug 2015 08:34 AM PDT
I have a new column:
The Politics of Income Inequality: f the policies favored by some Republicans seeking the nomination for president turned into reality, we'd roll back or eliminate our social insurance programs, cut taxes on the wealthy, cut spending even more to slash the deficit, and turn health care over to the private sector. 
The "you're on your own no matter what bad luck comes your way" society is a desirable outcome according to this view because it creates the correct incentives for people to be gainfully employed and take care of themselves. Never mind that history shows many people won't prepare for retirement, purchase health care, set aside funds in case of job loss, and so on unless they are forced to do so by government programs, and will thus then end up being an even bigger burden to the rest of society, Those who support these policies appear to believe that this time will somehow be different. 
What do these issues have in common? ...

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