Aspen Summit on Inequality and Opportunity

The video is here. Pointer from Mark Thoma.

I cannot comment on the video, since I have not watched it yet. I was just amused by the concept of a conference in Aspen on inequality. Heaven forbid that they should hold their discussion in Ferguson, Missouri, or rural Ohio.

I’ve been to Aspen only once, also for a conference. I came away thinking that the best economic opportunity there is for a gigolo. I have never seen such a concentration of wealth, attractive, unattached older women.

Panel on Inequality

With Thomas Piketty, Kevin Murphy, and Stephen Durlauf. View it at Mark Thoma’s blog.

Murphy offers the simplest explanation. Skilled workers become scarce, and less-skilled workers become abundant. The price of skilled labor rises, and those workers respond by working more. The price of less-skilled workers goes down, and they respond by working less. So income inequality shifts for both price and quantity reasons.

Why do skilled workers become scarce and less-skilled workers become abundant? I would say look at the four forces: bifurcated marriage patterns, New Commanding Heights (shift toward education and health care, aided by government subsidies), Moore’s Law, and globalization.

Is Larry Summers Getting Ready to Ditch Secular Stagnation?

He starts with the puzzle that employment and measured productivity growth have both been weak. If we are replacing less-skilled workers with machines and more-skilled workers, then why isn’t labor productivity going up?

This leads Summers to suggest that labor productivity is going up, but this is not being captured in the productivity statistics.

I am struck that there is likely what may well be an increase in unmeasured quality improvement. To take the first example that comes to mind and I’ll do an experiment with this group. I’ve done this experiment with other groups – which would you rather have for you and your family, 1980 healthcare at 1980 prices or 2015 healthcare at 2015 prices? How many people would prefer 1980 healthcare at 1980 prices? How many people would prefer 2015 healthcare at 2015 prices?

There are a fair number of abstainers but your answer was pretty clear. What does that mean? That means that healthcare inflation was negative from 1980. That is very different than the 6% or so that is reflected in the
national income accounts.

Again, thanks to Mark Thoma and Tyler Cowen for pointers.

My thoughts:

1. Since people do not face health care costs directly (with their own money), perhaps this is not a fair question.

2. What about Hansonian medicine?

3. And yet, I agree with Summers on this. I certainly would prefer today’s health care at today’s prices. One of the first points I made in Crisis of Abundance is that we could afford to give everyone in the U.S. the health care of 1970. The main reason we are spending more on health care today is that it is more capital intensive and more specialist intensive. (Incidentally, I predicted when Crisis of Abundance was published in 2006 that its relevance would last a decade. I am now confident that it will be relevant even longer.)

4. Ask Summers’ question about higher education. Would you prefer a 1980 college education at 1980 tuition or 2015 college education at 2015 tuition? Personally, I see no reason to choose the latter.

In some sense, it does not matter whether Summers’ point is valid. Productivity has been been going up quite well in manufacturing and in some other sectors (e.g., Walmart). However, labor is shifting to the New Commanding Heights sectors. Maybe productivity is rising in those sectors and inflation is over-stated, or maybe they suffer from Baumol’s cost disease and there is no overstatement of inflation. Either way, once we ditch the GDP factory and disaggregate the economy, the productivity puzzle goes away.

Summers points out that if you take the view that inflation is lower than what is measured, then real interest rates are higher than typically measured. This is not good for his previous views on secular stagnation, as he points out:

to be fair [it]has an implication for views that I and others have expressed about secular stagnation, at one level you can say, well real interest rates really aren’t that low once you subtract inflation. Once you subtract properly measured inflation, there has been less of a decline in real interest rates than we thought.

And what if we think about a disaggregated economy, with deflation in some sectors and inflation in others? Does it even make sense to talk about “the” real interest rate? Obviously for a business, it is the rate of price change in your sector that matters. For a household, you care about some average rate of price change, but which average? My girls are done with schooling, so do I care about college tuition changes? Does it matter to me whether health care inflation is overstated or not, given that my only option is to purchase health insurance at current prices?

“Secular stagnation” is anachronistic, AS-AD, GDP-factory thinking. We are in a specialized economy. Eventually, otehr economists are going to come around to PSST.

Is Larry Summers Getting Ready to Ditch AS-AD?

Both Tyler Cowen and Mark Thoma point to a discussion by Larry Summers.

I want to argue that the traditional oppositional pairing of supply side secular stagnation and demand side secular stagnation is more of a confusion, than a truth.

His current approach involves thinking about interactions between aggregate supply and aggregate demand. I hope the next stage in his thinking, and that of other macroeconomists, is to ditch AS-AD altogether. Don’t think of the economy as a GDP factory!

Instead, think in terms of a specialized economy. It is affected by secular trends, such as labor force participation increasing for women and decreasing for men from 1970-2000. It is affected by adjustment problems, such as the oil shock of the 1970s or the house-price and mortgage debt crash of 2008.

Can Crowdfunding Work?

Robert Shiller is worried about crowdfunding.

But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions.” It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments.

Pointer from Mark Thoma.

My thoughts:

Amateur investing in start-ups is per se a really bad idea. I did it a few times as an “angel investor” and got screwed. Founders made promises to me about how they would handle finances, and they quickly broke those promises. And once, when the start-up managed to do well, the founder obtained follow-up funding that amounted to legal blackmail against those of us who were early investors, so we got nothing. I came out of that experience convinced that unless you have top-notch lawyers working with you, investing in start-ups is a no-win game. As a small investor, you would need to score a home run just to cover your legal bills.

I see two possibilities for crowdfunding.

1. Suppose that people are only asked to invest in companies where they want to buy the company’s offering. Then, it seems like an interesting way for start-ups to do early market testing.

2. Suppose that the crowdfunding platforms provide some of the legal protection that venture capitalists and other high rollers are able to give themselves against subsequent misbehavior by founders or follow-on financiers.

If one of these, or preferably both, are in place, then I think that crowdfunding could last. Otherwise, I expect it to produce very negative average long-term returns and die a natural death.

Useful Housing Market Charts

From the San Francisco Fed. Pointer from Mark Thoma.

II mostly wanted to keep this link for future reference. It charts some key housing market indicators before and after 2008. One bit of text:

The price-to-rent ratio (red line) reached an all-time high in early 2006, marking the apex of the housing bubble. Currently, the price-to-rent ratio is about 25% below the bubble peak.

My reading of the charts is that after the bubble burst, housing construction really fell off. The result has been an increase in rents, which in turn justifies an increase in house prices. You can argue about how much overbuilding there was prior to 2007 and how much underbuilding there has been since. I doubt that one can give a definitive answer. The problem is that I do not think that anyone can say what the “right” amount of average housing space per person is. And we are in the midst of trend increases in urban and outer suburban population, and I do not know how that affects things.

De-skilling in the Labor Market

Beaudry, Green, and Sand write,

the first object of this paper will be to document that the demand for cognitive tasks has actually been declining since 2000. Such a decline in demand has had, and continues to have, a direct impact on more skilled workers, but we go on to show that it has likely had a substantial impact on less skilled workers as well. In particular, we argue that in response to the demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together. This process had been going on since 2000, but, as argued in earlier papers, the housing boom between 2003 and 2006 masked some of the effects which only become fully apparent after the financial crisis.

Pointer from Mark Thoma (with a couple of clicks in between).

If your main evidence for de-skilling is that people with college education are in jobs that you would not think require college degrees, then there might be another story. That is, credentials do not prove cognitive ability. In fact, we may have observed an increase in the proportion of people attending college who are not really college material and in the number of colleges producing graduates with only high-school level skills. These people would wind up in jobs not requiring great cognitive ability.

Larry Summers Finds an Anomaly

He writes,

We find that in the vast majority of cases output never returns to previous trends. Indeed there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words “super hysteresis” to use Larry Ball’s term is more frequent than “no hysteresis.”

Pointer from Mark Thoma.

In the AS-AD paradigm, AS and AD are independent equations. The long-run aggregate supply curve is what the economy departs from when it goes into recession and what it returns to when there is a recovery. What Summers and co-authors are finding is that the economy is more like Charlie and the MTA. It never returns to the previous long-run aggregate supply curve, and instead the aggregate supply curve appears to shift adversely in response to recessions.

Summers’ explanation for the anomaly might be that when people lose their jobs they lose some of their skills. However, another explanation that fits the data is that people who lose their jobs lose them because their skills were valuable only in patterns of specialization and trade that are no longer sustainable.

Summers points to this paper, where he and Antonio Fatas find a correlation between fiscal consolidations and downward revisions to potential GDP. I worry that both fiscal consolidation (trying to reduce unsustainable budget deficits) and downward revisions to potential GDP would be lagged responses to adverse “supply shocks” (or, in my preferred framework, an unusually large number of specialization and trade patterns becoming unsustainable).

Which Phillips Curve?

Robert Waldmann gives us what I think of as the textbook version.

With high unemployment and low expected inflation, many wage changes will be zero & stuck at the lower bound. higher constant not accelerating inflation relaxes this lower bound (which is that nominal wage changes can’t be negative). This causes higher employment (and lower real wages).

Pointer from Mark Thoma.

A week ago, I pointed out that the Alan Krueger version of the Phillips Curve tells the opposite story: real wages rise with employment.

Of course, as Waldmann points out, there are multiple labor markets. One can conceive of real wages rising on average but falling in other labor markets, with the latter generating the increase in employment.

I continue to say that in economics, we do not produce falsification. Instead, all of our theories must contend with empirical anomalies. We have to use judgment to decide when the anomalies are numerous enough and serious enough to warrant doing without the theory. I have reached that point with Keynesian macro.

However, I do believe that thinking in terms of multiple labor markets is going to put you ahead of the game relative to those who think in terms of homogeneous workers in the national GDP factory.

Intellect and Politics

Chris Dillow writes,

I would rather have second-rate politicians who know they are duffers than ones who believe they are brilliant.

Nice line. Read the whole post. Pointer from Mark Thoma.

In The Secret of Our Success, Joseph Henrich argues that individual humans are not so very intelligent on our own. Instead, it is out collective culturally-acquired knowledge that is impressive. One implication that I draw from this is that we should not be looking for some superior intellect to run our lives. Our lives are better run by drawing on our collective wisdom.