February 19, 2014
"

Two rich economies, relatively similar in structure, reacted very differently to the global financial shock of late 2008. In America output sank sharply but then rebounded to new highs. Employment, by contrast, fell dramatically and has recovered much more slowly; it has yet to regain the pre-crisis peak. In Britain the trends were reversed; employment is setting new highs while output suffered an L-shaped recovery.

The key difference appears to be rates of inflation. Higher inflation in Britain reduced real wages. That, in turn, allowed firms to meet a given level of demand by using more workers less intensively—at lower productivities. In America, by contrast, lower inflation meant that real wages rose over the course of the recession and recovery. Some research results suggests that firms respond to sticky real wages by wringing more output out of existing workers—raising productivity. Firms meet a given level of demand using fewer workers more intensively, resulting in a jobless recovery.

"

Economist

December 27, 2013
"Here’s an incredible fact: If the typical American family still retained the same share of [national] income that they did in 1970 they would earn about $45,000 more per year. Imagine what our economy would be like if that were the case."

Nick Hanauer

November 26, 2013
"Look at the difference: In 1977 I bought a small house in Portland Oregon for $24,000. At the time I was earning $5 per hour working at a large auto parts store. I owned a 4 year old Chevy Nova that cost $1,500. Now, 36 years later that same job pays $8 an hour, that same house costs $185,000 and a 4 year old Chevy costs $10,000. Wages haven’t kept up with expenses at all. And, I should point out that that $5 an hour job in 1977 was union and included heath benefits."

an anonymous online commenter on the current economy. (via alchemy)

LTMC: When I was working at a gas station, I had an old-timer come in and tell that he used to make $2/hour at a factory job when he was in his late 20’s.  He said he could feed his whole family for the night by buying a 24-cut pizza for $2.  Fast forward to my gas station job, where I was making $8/hour, but a 24-cut pizza in my town costs closer to $20—2.5 times more on a dollar-for-dollar basis.  He said he had no idea how I even survived on what I was making (I was insured through college at the time, but had no savings, and relied on family for large expenses).

This is what people mean when they talk about income inequality.  The reason wages have not kept pace with expenses is because the nation’s previous method of wage redistribution—union representation—has declined substantially.  Wage increases have subsequently been absorbed on an increasingly larger basis by corporate entities and the top 1% of earners.  Strong unions used to serve as a soft redistribution mechanism to help ensure that increases in prosperity were shared equally.  A critical mass of union representation in the labor force has always had derivative wage benefits in the non-union labor market.  That critical mass no longer exists, however.  Consequently, the decline of union labor has led to a concurrent decline in wages relative to expenses, because there’s no longer an institutional mechanism for redistribution of earnings increases in the economy.  The critical mass of union representation is gone, and nothing has taken its place.

(Source: han-nara, via cognitivedissonance)

November 6, 2013
pol102:

From politicalprof:

Many conservatives insist that increasing the money supply (the blue line in the graph above), will inevitably lead to massive increases in inflation (the red line). 
To which all one can say is: anything is possible. But the recent record suggests such fears are overblown …
ht: An Economist’s View

When opinions and data collide, I always go with data.

LTMC: To play devil’s advocate for a moment, some economists would argue that this graph misattributes inflation to the CPI.  Inflation is simply an increase in the money supply.  An increase in prices is rather a symptom of inflation, not inflation per se.  We also don’t see represented here what the effect would have been if the money supply were not increased.  Presumably we would have had a decrease in the price index (or if you prefer, “deflation”), relative to the current baseline.
Plenty of economists would view deflation as a bad thing.  But there are others who would view such deflation as merely the hangover from decades of artificial growth fueled by inflationary monetary policy.  Under this view, deflation would actually be a good thing, because it is the first step on the road to a healthy economy where prices come closer to representing real (rather than artificial) wealth, as opposed to a proxy hybrid of the former and latter.  The business cycle would finally have time to readjust.  Deflation represents that adjustment.
I’m not saying I agree with any of this.  But I do think these ideas need to be addressed to get a complete picture of the economy.  2% price inflation is a great target (and even higher inflation might be better under certain circumstances).  But we ought to reckon with the idea that there may be additional consequences to increasing the money supply over and above increases in the consumer price index—consequences which we can’t see on this graph.  And I say this as a guy who thinks Keynes mostly had the right idea.

pol102:

From politicalprof:

Many conservatives insist that increasing the money supply (the blue line in the graph above), will inevitably lead to massive increases in inflation (the red line). 

To which all one can say is: anything is possible. But the recent record suggests such fears are overblown …

ht: An Economist’s View

When opinions and data collide, I always go with data.

LTMC: To play devil’s advocate for a moment, some economists would argue that this graph misattributes inflation to the CPI.  Inflation is simply an increase in the money supply.  An increase in prices is rather a symptom of inflation, not inflation per se.  We also don’t see represented here what the effect would have been if the money supply were not increased.  Presumably we would have had a decrease in the price index (or if you prefer, “deflation”), relative to the current baseline.

Plenty of economists would view deflation as a bad thing.  But there are others who would view such deflation as merely the hangover from decades of artificial growth fueled by inflationary monetary policy.  Under this view, deflation would actually be a good thing, because it is the first step on the road to a healthy economy where prices come closer to representing real (rather than artificial) wealth, as opposed to a proxy hybrid of the former and latter.  The business cycle would finally have time to readjust.  Deflation represents that adjustment.

I’m not saying I agree with any of this.  But I do think these ideas need to be addressed to get a complete picture of the economy.  2% price inflation is a great target (and even higher inflation might be better under certain circumstances).  But we ought to reckon with the idea that there may be additional consequences to increasing the money supply over and above increases in the consumer price index—consequences which we can’t see on this graph.  And I say this as a guy who thinks Keynes mostly had the right idea.

April 23, 2013
An Economy Of Error?

Lynn Stuart Parramore discusses the work of an economics grad student who recently blew the lid off Reinhart and Rogoff’s infamous study concluding that a 90% or higher GDP-to-debt ratio results in dramatic reductions in economic growth:

Since 2010, the names of Carmen Reinhart and Kenneth Rogoff have become famous in political and economic circles. These two Harvard economists wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify harmful austerity policies. The authors purported to show that once a country’s gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad.

Parramore notes that austerity advocates have used the Reinhart-Rogoff study to justify the implementation of austerity measures in multiple countries.  There is one tiny problem, however: the Reinhart-Rogoff data spreadsheet contains a massive error:

Enter Thomas Herndon, Michael Ash and Robert Pollin of University of Massachusetts, Amherst, the heroes of this story. Herndon, a 28-year-old graduate student, tried to replicate the Reinhart-Rogoff results as part of a class excercise and couldn’t do it. He asked R&R to send their data spreadsheet, which had never been made public. This allowed him to see how the data was put together, and Herndon could not believe what he found. Looking at the data with his professors, Ash and Pollin, he found a whole host of problems, including selective exclusion of years of high debt and average growth, a problematic method of weighing countries, and this jaw-dropper: a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries.

What’s the end result?

In their newly released paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” Herndon, Ash and Pollin show that “when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to R&R, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”

I imagine that Reinhart and Rogoff are gearing up for a response.  Meanwhile, Parramore also links us to Daniel Schuchman at Forbes, who appears to have quickly respun this fairly devastating academic take-down as simply a sign that “academic economics, like many social sciences, is grounded in hubris and pseudo-precision.”  

Perhaps so.  But but I don’t think this requires throwing the baby out with the bathwater.  Indeed, we needn’t draw any conclusion from this episode other than the narrow one it stands for: there’s nothing automatically devastating about the 90% GDP-to-debt ratio.  It would be a mistake to conclude that this justifies terminal apathy about the size of the public debt, just the same as it would be to conclude that discrediting the Reinhart-Rogoff study leaves austerity policies with no other legs to stand on.  Nonetheless, it seems proponents of the latter will have to rely on other metrics going forward, as the methodology of the Reinhart-Rogoff study appears to be terminally flawed.

May 29, 2012
What Recession?

Cord Jefferson discusses an alarming upward trend in people robbing banks in order to keep their heads above water:

In Mississippi this week, a man walked into a bank and handed a teller a note demanding money, according to broadcast news reporter Brittany Weiss. The man got away with a paltry $1,600 before proceeding to run errands around town to pay his bills and write checks to people to whom he owed money. He was hanging out with his mom when police finally found him. Three weeks before the Mississippi fiasco, a woman named Gwendolyn Cunningham robbed a bank in Fresno and fled in her car. Minutes later, police spotted Cunningham’s car in front of downtown Fresno’s Pacific Gas and Electric Building. Inside, she was trying to pay her gas bill.

More examples:

The list goes on: In October 2011, a Phoenix-area man stole $2,300 to pay bills and make his alimony payments. In early 2010, an elderly man on Social Security started robbing banks in an effort to avoid foreclosure on the house he and his wife had lived in for two decades. In January 2011, a 46-year-old Ohio woman robbed a bank to pay past-due bills. And in February of this year, a  Pennsylvania woman with no teeth confessed to robbing a bank to pay for dentures. “I’m very sorry for what I did and I know God is going to punish me for it,” she said at her arraignment. Yet perhaps none of this compares to the man who, in June 2011, robbed a bank of $1 just so he could be taken to prison and get medical care he couldn’t afford.

It’s an old trope that wealth and poverty breed immorality in equal measure.  The only difference is, in the latter case, they’re doing it to survive.  In the former case, they do it because they can.

h/t Sullivan

May 19, 2012
Oh?  Do tell.

Oh?  Do tell.

May 3, 2012
"

The life of a 19th-century steel worker was grueling. Twelve-hour shifts, seven days a week. Carnegie gave his workers a single holiday-the Fourth of July; for the rest of the year they worked like draft animals. “Hard! I guess it’s hard,” said a laborer at the Homestead mill. “I lost forty pounds the first three months I came into this business. It sweats the life out of a man. I often drink two buckets of water during twelve hours; the sweat drips through my sleeves, and runs down my legs and fills my shoes.”

For many the work went without a break; others managed to find a few minutes here and there. “We stop only the time it takes to oil the engine,” a stop of three to five minutes, said William McQuade, a plate-mill worker in 1893. “While they are oiling they eat, at least some of the boys, some of them; a great many of them in the mill do not carry anything to eat at all, because they haven’t got time to eat.

The demanding conditions sapped the life from workers. “You don’t notice any old men here,” said a Homestead laborer in 1894. “The long hours, the strain, and the sudden changes of temperature use a man up.” Sociologist John A. Fitch called it “old age at forty.”

For his trouble, the average worker in 1890 received about 10 dollars a week, just above the poverty line of 500 dollars a year. It took the wages of nearly 4,000 steelworkers to match the earnings of Andrew Carnegie.

"

PBS American Experience: The Lot Of A Steel Worker

To put this in perspective: a minimum wage worker in 2012 who worked 12 hour days, 7 days a week, would receive 40 hours straight pay, and 44 hours overtime.  that’s 768.50/week, at 52 weeks/year, meaning he or she would be earning just under $40,000/year.

When folks complain that government has too much of a role in the economy, I take them at their word that many of the harms they associate with said involvement are real.  But in terms of increasing the welfare of the poor, history seems to tell a cautionary tale about removing all economic intervention completely from the picture.  Uncle Sam was not telling Andrew Carnegie what he had to pay his workers in 1890, or whether he a had a legal duty to let them unionize.  Yet if you compare Carnegie’s steel workers to a person making minimum wage flipping burgers at McDonalds, it’s pretty clear who’s in better shape.  And it’s not the guy working 12-hour days for America’s most famous steel Magnate under comparatively laissez-faire industrial policies.

With all this being said, there’s no question that potential problems can crop up with minimum wage laws.  As fellow Tumblogger Jakke said back in October:  

Minimum wage is NOT about forcing employers to pay more than worker productivity. This would just result in mass layoffs for people in low-productivity jobs, and banning layoffs would drive those employers out of business. For raising wage levels above marginal productivity, this isn’t the right approach. You’ll most likely need to look at government subsidies instead.

Personally, I’m on record for repealing the minimum wage and replacing it with a Basic Income Guarantee (also known as a “Guaranteed Minimum Income” or “Negative Income Tax”).  However, the analysis doesn’t end there.  Any number of circumstances will change the empirical impact of a minimum wage law.  For example, there is evidence that minimum wages have helped drive industrialization in developing countries.  So it is difficult to make sweeping declarations about when or under what circumstances a minimum wage becomes detrimental.  The devil, as they say, is in the details.

Yet what seems clear is that not a single modern thriving 1st-world economy has failed to introduce some sort of regulated wage floor, or alternatively, an organized system of collective bargaining, like that which exists in many European countries.  Indeed, institutional trade unionism has helped countries like Germany increase the wages of unskilled workers without stymieing economic growth.  Many countries have gotten by just fine without minimum wage laws by making Unions an indispensable player in labor relations.  I see no issue with this approach, but I don’t see it taking hold in America anytime soon.

As in all things, there is a line to be crossed when regulating economic activity.  many of the choices we face in economic policy are not simply a matter of “best” or “worst,” but rather, take the form of trade-offs.  The challenge of policy is to discover a way in which to make that trade-off inherent in any regulatory proscription worth the effort.  I know there are people who think that any attempt to do so is a waste of time.  But Carnegie’s beleaguered steel workers prevent me from seeing the wisdom of that proposition.

April 27, 2012
Socialism!
via Krugman

Socialism!

via Krugman

March 16, 2012
All this highfalutin economics talk is getting me all hot and bothered.

All this highfalutin economics talk is getting me all hot and bothered.

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