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September 26, 2015

Latest Posts from Economist's View

Posted: 19 Sep 2015 12:23 AM PDT
Some preliminary results from a working paper by Alisdair Mckay and Ricardo Reis:
Optimal Automatic Stabilizers, by Alisdair McKay and Ricardo Reis: 1 Introduction How generous should the unemployment insurance system be? How progressive should the tax system be? These questions have been studied extensively and there are well-known trade-offs between social insurance and incentives. Typically these issues are explored in the context of a stationary economy. These policies, however, also serve as automatic stabilizers that alter the dynamics of the business cycle. The purpose of this paper is to ask how and when aggregate stabilization objectives call for, say, more generous unemployment benefits or a more progressive tax system than would be desirable in a stationary economy. ...
We consider two classic automatic stabilizers: unemployment benefits and progressive taxation. Both of these policies have roles in redistributing income and in providing social insurance. Redistribution affects aggregate demand in our model because households differ in their marginal propensities to consume. Social insurance affects aggregate demand through precautionary savings decisions because markets are incomplete. In addition to unemployment insurance and progressive taxation, we also consider a fiscal rule that makes government spending respond automatically to the state of the economy.
Our focus is on the manner in which the optimal fiscal structure of the economy is altered by aggregate stabilization concerns. Increasing the scope of the automatic stabilizers can lead to welfare gains if they raise equilibrium output when it would otherwise be inefficiently low and vice versa. Therefore, it is not stabilization per se that is the objective but rather eliminating inefficient fluctuations. An important aspect of the model specification is therefore the extent of inefficient business cycle fluctuations. Our model generates inefficient fluctuations because prices are sticky and monetary policy cannot fully eliminate the distortions. We show that in a reasonable calibration, more generous unemployment benefits and more progressive taxation are helpful in reducing these inefficiencies. Simply put, if unemployment is high when there is a negative output gap, a larger unemployment benefit will stimulate aggregate demand when it is inefficiently low thereby raising welfare. Similarly, if idiosyncratic risk is high when there is a negative output gap,1 providing social insurance through more progressive taxation will also increase welfare....
Posted: 19 Sep 2015 12:06 AM PDT
Posted: 18 Sep 2015 12:32 PM PDT
More on income stagnation and inequality:
The typical male U.S. worker earned less in 2014 than in 1973: The median male worker who was employed year-round and full time earned less in 2014 than a similarly situated worker earned four decades ago. And those are the ones who had jobs. ...
What about women? Well, they haven't closed the pay gap with men, but the inflation-adjusted earnings of the median female worker increased more than 30% between 1973 and 2014... But back to men. Why are wages for the typical male worker stagnating? ... I contacted Larry Katz, the Harvard University labor economist. He identified three factors to explain the stagnation of men's wages:
1. Although this is not the major factor, workers have been getting more of their compensation in benefits as opposed to the cash wages that the Census tallies. ...
2. Labor's share of national income has been declining since 2000 and capital's share has been rising. Labor's compensation (wages and benefits) has not been keeping pace with productivity growth. ...EPI's Josh Bivens and Larry Mishel argue, " This decoupling coincided with the passage of many policies that explicitly aimed to erode the bargaining power of low- and moderate-wage workers in the labor market."
3. The "most important factor," Mr. Katz says, is the rise in wage inequality, the gap between the earnings of the best-paid workers and the ones at the middle and the bottom that has been widening steadily since about 1980. Economists differ over how much of this is the result of globalization, technological change, changing social mores, and government policies, but there is no longer much dispute about the fact that inequality is increasing.
... It's not hard to understand why so many voters ... are drawn to candidates who acknowledge this reality, lambast incumbents for not doing more to address it, and style themselves as outsiders with fresh approaches to one of the nation's most alarming economic problems.
To me, it's interesting how much the explanation for inequality has shifted away from the "skill-biased technical change" and technological based arguments and towards "changing social mores, and government policies." Even so, I think these types of arguments -- those that explain the decline in bargaining power in wage negotiations -- have more explanatory power than many people acknowledge. But even if we acknowledge that we aren't sure about the degree to which inequality can be explained by market-based versus institutional structure arguments, what seems clear to me is that the market won't solve this problem by itself. There do not appear to be forces within capitalism that necessarily push us toward an equal distribution of income. Thus, there is no assurance that heeding calls for government to get out of the way would help to reduce inequality, and it could make it worse. To me, policies that increase the ability of workers to bargain for a fair share of what they produce holds the most promise for solving the inequality problem (in a way that avoids direct redistribution). How to actually accomplish this is a difficult problem, unions have less power in a world where the threat of moving production to another country is very real (or a region within the US where the laws are more favorable), but at the very least we ought to ensure that new legislation does not make the highly unequal wage bargaining problem any worse (see Scott Walker).
Posted: 18 Sep 2015 10:50 AM PDT
Dani Rodrik:
Trade within versus between nations: ...economics does not offer unconditional policy prescriptions. Every graduate student learns that depending on the background specifications, any policy x  can be good or bad. A minimum wage can lower or raise employment (depending on whether employers have monopsony power); a natural resource discovery can raise or lower growth (depending on the likelihood of the Dutch disease); fiscal consolidation can expand or contract output (depending on the respective strengths of expectational versus Keynesian effects). And yes, the dictum that free trade benefits a nation depends on a long list of qualifying conditions.
So the proper response to the question "is free trade good?" is, as always, "it depends." When an economist says "I support free trade" s/he must mean that s/he judges the circumstances under which free trade would not be desirable to be very rare or unlikely to obtain in the context at hand.
Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous in the real world, particularly in the developing world on which I spend most of my time. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up, even when they mean well. But it does mean that a knee-jerk free trader response is faith-based rather than science-based. ...
[He goes on to answer a question about differential support for trade within nations versus trade between nations.]
Posted: 18 Sep 2015 10:01 AM PDT
I often forget to post the link to my MoneyWatch pieces:
Republicans and Climate Change: What should we do about climate change? When Jake Tapper asked that question at the Republican debate Wednesday night, the candidates were united in their view that the economic costs of fighting climate change are much larger than the potential benefits.
Florida Senator Marco Rubio, for example, said "Every proposal they (Democrats) put forward will make it harder to do business in America. Harder to create jobs in America." New Jersey Governor Chris Christie had similar sentiments. "We shouldn't be destroying our economy in order to chase some wild left-wing idea that somehow us by ourselves is going to fix the climate," he said. And Wisconsin Governor Scott Walker responded with: "We're going to put people -- manufacturing jobs -- this administration is going to put them at risk."
The skepticism among those on the political right about the benefits of addressing climate change could be at least partly based on the apparent pause in global warming from 1998-2013. But according to work from a group of researchers at Stanford University, that "hiatus" is a statistical artifact. The climb in temperatures hasn't paused at all.
Given that, and the voluminous scientific evidence indicating that global warming is a substantial threat, it's important to understand the extent to which climate change will affect the economy. Will the loss to GDP be large (so that the benefits of abatement are also large)? Will the impacts be equally distributed across geographic regions? Is it possible that some regions will actually benefit from global warming? ...

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