Monthly Archives: November 2013

Skeptics on Job Polarization

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Lawrence Mishel, Heidi Shierholz, and John Schmitt take on a popular story.

The early version of the “skill-biased technological change” (SBTC) explanation of wage inequality posited a race between technology and education where education levels failed to keep up with technology-driven increases in skill requirements, resulting in relatively higher wages for more educated groups, which in turn fueled wage inequality (Katz and Murphy 1992; Autor, Katz, and Krueger 1998; and Goldin and Katz 2010). However, the scholars associated with this early, and still widely discussed, explanation highlight that it has failed to explain wage trends in the 1990s and 2000s, particularly the stability of the 50/10 wage gap (the wage gap between low- and middle-wage earners) and the deceleration of the growth of the college wage premium since the early 1990s (Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012). This motivated a new technology-based explanation (formally called the “tasks framework”) focused on computerization’s impact on occupational employment trends and the resulting “job polarization”: the claim that occupational employment grew relatively strongly at the top and bottom of the wage scale but eroded in the middle (Autor, Levy, and Murnane 2003; Autor, Katz, and Kearney 2006; Acemoglu and Autor 2012; Autor 2010). We demonstrate that this newer version—the task framework, or job polarization analysis—fails to explain the key wage patterns in the 1990s it intended to explain, and provides no insights into wage patterns in the 2000s. We conclude that there is no currently available technology-based story that can adequately explain the wage trends of the last three decades.

Pointer from Mark Thoma.

Read the whole thing. One of the problems that the authors find with the job polarization story is that a lot of inequality of wages has emerged within occupations rather than between occupations.

Think of the bimodal distribution of starting salaries that has emerged in the market for lawyers. Is that evidence against computer-driven job polarization? Perhaps not. Perhaps with the help of computers paralegals can now do a lot more, driving down the wage of the median lawyer. However, firms that need the most sophisticated legal work will pay up for the top lawyers.

Secstag: All Things to All People?

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Daniel Davies writes,

The US economic policy structure was aware that they were accommodating China and NAFTA, and aware that the tool of demand management was consumer spending. They might or might not have been aware that the consumer spending was financed by borrowing against housing wealth, but if they weren’t, they thundering well should have been. They got a structural increase in personal sector debt because they wanted one and set policy in order to create one. There’s no good calling it a “bubble” or a “puzzle”

Pointer from Tyler Cowen. Read Davies’ entire post.

We have the basic identity

S – I = (T-G) + (X-M)

That is, the excess of domestic savings over investment equals the government surplus plus the trade surplus. This is true whether we are in a recession, a boom, or anywhere in between.

What Davies seems to be saying is that China wanted a lot of (X-M), which gave us a big negative (X-M). Holding (T-G) constant, this gives us a big negative S-I. Since we didn’t do much I, we did a lot of dissaving. And this drop in personal saving is yet another meaning for the very plastic phrase “secular stagnation.”

Oy. Scott Sumner comments,

There can’t be a structural shortage of demand, because demand is a nominal concept.

For decades after The General Theory, there were arguments over what Keynes really meant. Seeing what Larry Summers has unleashed, one can understand how this happens. At a time when economic performance is disappointing and people are groping for explanations, a guy who is known to be a great economist offers an answer that is vague but sounds clever. He then leaves it to other people to come up with a precise version. Unfortunately, the precise versions are problematic, meaning that they are either unsound in terms of theory, inconsistent with evidence, unable to support the explanation and policy implications of the vague version, or all three. We proceed to cycle back-and-forth between the clever-sounding vague version and the precise, problematic versions.

Pro-cyclical Capital Requirements

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Tobias Adrian and Nina Boyarchenko write,

Value-at-Risk constraints were incorporated in the Basel II capital framework, which was adopted by major security broker-dealers in the United States—the investment banks—in 2004. Thus, capital constraints are imposed by regulation. In our staff report, we embed the risk-based capital constraint in a model with three sectors: a production sector (firms), a financial intermediary sector, and a household sector. Intermediaries serve two functions: 1) they create new production capacity through investment in the productive sector, and 2) they provide risk-bearing capacity to the households by accumulating wealth through retained earnings. The tightness of the capital constraint—measured by the maximal allowed ratio between intermediary leverage and one over the VaR on the intermediary’s assets—thus affects household welfare. When this ratio is decreased, the intermediaries are more restricted in their risk-taking and can therefore finance less investment. At the same time, since intermediaries take on less leverage and less risk, the systemic risk of the intermediary sector decreases. Accordingly, there is a trade-off between the amount of risk-taking and the price of credit in the real economy.

Pointer from Mark Thoma.

Using value-at-risk to regulate capital is one of the worst ideas ever. First, it assumes a normal distribution of returns, which is not valid far from the mean. Second, as the authors point out, it tends to be procyclical. Third, it is not a measure of the size of the loss in a bad scenario; instead, it is a measure of the size of the loss in scenario that is just a bit better than a bad scenario.

A better approach would be to spell out a specific scenario–an x percent drop in house prices, or a y percent decrease in bond prices, or something along those lines.

Why Interest on Reserves?

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Scott Sumner writes,

Back in late 2008 a few money market funds got into trouble and were in danger of “breaking the buck.” That’s due to their policy of pricing each share at $1. The solution is to allow the price to fluctuate. The Fed should have given the industry 6 months to prepare for negative interest rates. Instead they bailed them out and propped up interest rates at 25 basis points, in order to insure they would never break the buck.

If not for the money market industry the Fed could have already cut the fed funds target to around negative 0.25%, and the same for the interest rate on reserves. In that case (and assuming the IOR also applied to vault cash) it’s likely that most of the ERs would exit the banking system and end up in safety deposit boxes. But three trillion dollars is a lot of Benjamins, and despite the cash hoards you observe in places like Japan, a more likely outcome would have been hyperinflation. Obviously that would not be allowed, so what this thought experiment really shows is that with that sort of negative IOR the Fed could have gotten the stimulus it wanted with much less QE.

The decision to pay interest on reserves is one of the great mysteries of the 2008 response to the financial crisis. In terms of monetary policy, it is clearly contractionary, and a financial crisis seems like an odd time to engage in a contractionary policy.

The Fed acts in mysterious ways. At the time, the Fed said,

Paying interest on excess balances will permit the Federal Reserve to provide sufficient liquidity to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.

Which to me says exactly nothing. It could be that the only way to find out the basis of the Fed decision is with an audit.

Doc Shock

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The Washington Post reports,

The Obama administration made it a priority to keep down the cost of insurance on the exchanges, the online marketplaces that are central to the Affordable Care Act. But one way that insurers have been able to offer lower rates is by creating networks that are far smaller than what most Americans are accustomed to.

In our discussion of Obamacare implementation the earlier this week, Megan McArdle warned of this. She called it “doc shock,” as people find that the most reputable health care providers are not in their plans. She said that the out-of-network co-payments are often 100 percent, meaning that the insurance company pays zero and the consumer has to pay everything. This will probably not go over well.

The Year in Books

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Note that on December 5, I will be talking at Cato about one book that came out this year, George Gilder’s Knowledge and Power. In it, he gives credit to the widely-unread Unchecked and Unbalanced. Another author who credits me is Kevin Williamson in The End is Near.

This was also the year in which I e-published The Three Languages of Politics and also had a chapter in the Routledge Handbook of major events in economic history.

This year, there were three books that were widely heralded that I thought were more “eh:” Michael Huemer on political authority; Martin Hellwig and Anat Admati on banks; and Jeremy Adelman’s Hirschman bio (an admirable book, but I cannot count it as a must-read).

Books that I thought deserved more acclaim than they got include:

Lant Pritchett on education
Zvi Eckstein on The Chosen Few
Ara Norenzayan on Big Gods
Mark Weiner on Rule of the Clan
Edmund Phelps on flourishing
Hasan Comert on monetary impotence
Nick Schulz on marriage

Olivier Blanchard on the Macroeconomic Consensus

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He writes,

Turning to liquidity provision: in advanced countries (but, again, the lesson is more general), we have learned that runs are relevant not only for banks, but also for other financial institutions, and for governments. In an environment of high public debt, rollover risks cannot be excluded. An implication, and one of the themes emphasized by Paul Krugman, is that it is essential to have a lender of last resort, ready to lend not only to financial institutions but also to governments. The evidence on periphery sovereign bonds in the Euro area, pre and post the European Central Bank’s announcement of outright monetary transactions, is quite convincing on this point.

I cannot say that I agree. In fact, I cannot say that I agree with a single point that he makes in the essay. But he represents the consensus.

Scott re-interprets Larry

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Scott Sumner writes,

Summers claims that some sort of exogenous shock has reduced the long run real interest rate on safe assets.

That is not what I heard. Go back and listen to Larry’s response to Jeff’s question. Larry is talking about a savings glut and a decline in the cost of physical capital.

Think of an economy with three assets: money, risk-free Treasuries, and physical capital. What I heard Larry saying was that because of the savings glut and the low price of computers, the full-employment real return on physical capital is negative. That is a silly idea and a false idea, but that is what I heard Larry say. Ben Bernanke heard the same thing.

What Scott heard Larry say was that the demand for risk-free Treasuries is high, but the demand for physical capital is not so high, so that there is still a sizable risk premium on risky assets. My comments:

1. That may be a good story for, say, the fourth quarter of 2008. Larry claims to be talking about a decades-long phenomenon, pre-dating the crisis and continuing into the indefinite future.

2. The policy implications of that story are somewhat different than the policy implications of “secular stagnation.” If there is too much savings, then Larry wants to argue that the government needs to use up the savings. If what is holding back investment is high risk premiums, then more government spending is not such an obvious remedy.

Jeff Sachs vs. Summers/Krugman

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He writes,

Keynesians like to say that there is a savings glut (an excess of saving over investment). They try to remedy it by spurring consumption. This is a mistake. There is an investment shortfall, because the financial, regulatory, and policy barriers to high-return investments have not been addressed. America urgently needs investments in modernized infrastructure, advanced science and technology, and job skills appropriate for the 21st century. We are sitting on top of an information revolution and nanotechnology revolution that could positively reshape healthcare, education, transportation, low-carbon energy systems, green buildings, water conservation, and environmental safety.

Pointer from Mark Thoma. Sachs and I would probably disagree about the proportion of the solution that consists of government leading vs. getting out of the way. However, his diagnosis seems to me to make some sense, unlike the savings glut story.