NOVEMBER 6 2015

Larry Summers blog: Advanced economies are so sick we need a new way to think about them. Blanchard Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. 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.” Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent this is true of the DSGE (dynamic stochastic general equilibrium) models that are the workhorse of central bank staffs and much practically oriented academic work.

Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff , Lawrence H. Summers, MIT Press: Progress and Confusion. The State of Macroeconomic Policy. What will economic policy look like once the global financial crisis is finally over? Will it resume the pre-crisis consensus, or will it be forced to contend with a post-crisis “new normal”? Have we made progress in addressing these issues, or does confusion remain? In April of 2015, the International Monetary Fund gathered leading economists, both academics and policymakers, to address the shape of future macroeconomic policy. This book is the result, with prominent figures—including Ben Bernanke, Lawrence Summers, and Paul Volcker—offering essays that address topics that range from the measurement of systemic risk to foreign exchange intervention. The chapters address whether we have entered a “new normal” of low growth, negative real rates, and deflationary pressures, with contributors taking opposing views; whether new financial regulation has stemmed systemic risk; the effectiveness of macro prudential tools; monetary policy, the choice of inflation targets, and the responsibilities of central banks; fiscal policy, stimulus, and debt stabilization; the volatility of capital flows; and the international monetary and financial system, including the role of international policy coordination. In light of these discussions, is there progress or confusion regarding the future of macroeconomic policy? In the final chapter, volume editor Olivier Blanchard answers: both. Many lessons have been learned; but, as the chapters of the book reveal, there is no clear agreement on several key issues.

Martin Wolf, FT: America’s labour market is not working. In 2014, 12 per cent — close to one in eight — of US men between the ages of 25 and 54 were neither in work nor looking for it. This was very close to the Italian ratio and far higher than in other members of the group of seven leading high-income countries: in the UK, it was 8 per cent; in Germany and France 7 per cent; and in Japan a mere 4 per cent. In the same year, the proportion of US prime-age women neither in work nor looking for it was 26 per cent, much the same as in Japan and less only than Italy’s. US labour market performance was strikingly poor for the men and women whose responsibilities should make earning a good income vital. So what is going on.

Kai Rehwald, Michael Rosholm, Michael Svarer, IZA: Are Public or Private Providers of Employment Services More Effective? Evidence from a Randomized Experiment. This paper compares the effectiveness of public and private providers of employment services. Reporting from a randomized field experiment conducted in Denmark we assess empirically the case for contracting out employment services for a well-defined group of highly educated job-seekers (unemployed holding a university degree). Our findings suggest, first, that private providers deliver more intense, employment-oriented, and earlier services. Second, public and private provision of employment services are equally effective regarding subsequent labour market outcomes. And third, the two competing service delivery systems appear to be equally costly from a public spending perspective.

Tim Harford, The Undercover Economist: The real benefits of migration. Among policy wonks and fact-checkers, one statement in the speech found the spotlight: “The evidence . . . shows that while there are benefits of selective and controlled immigration, at best the net economic and fiscal effect of high immigration is close to zero.” (Translation: immigration costs us nothing but we want to reduce it anyway.) Is May’s summary of the evidence correct? Probably not, although there is room for reasonable people to disagree…But there was a far bigger lacuna in May’s speech, and most commentators have missed it: the fact that these supposed costs or benefits always omit one crucial group. That group is the migrants themselves. They prosper hugely from being allowed to migrate yet that prosperity hardly ever figures in debates about immigration.

Neeraj Kaushal, Yao Lu, Nicole Denier, Julia Shu-Huah Wang, Stephen J. Trejo, NBER:  Immigrant Employment and Earnings Growth in Canada and the U.S.: Evidence from Longitudinal Data. We study the short-term trajectories of employment, hours worked, and real wages of immigrants in Canada and the U.S. using nationally representative longitudinal datasets covering 1996-2008.  Models with person fixed effects show that on average immigrant men in Canada do not experience any relative growth in these three outcomes compared to men born in Canada. Immigrant men in the U.S., on the other hand, experience positive annual growth in all three domains relative to U.S. born men. This difference is largely on account of low-educated immigrant men, who experience faster or longer periods of relative growth in employment and wages in the U.S. than in Canada.  We further compare longitudinal and cross-sectional trajectories and find that the latter over-estimate wage growth of earlier arrivals, presumably reflecting selective return migration.

Nabanita Datta Gupta, Mona Larsen, Lars Stage Thomsen, IZA Journal of Labor Policy: Do wage subsidies for disabled workers reduce their non-employment? - evidence from the Danish Flexjob scheme. We evaluate the potential of wage subsidy programs for reducing non-employment of the disabled by exploiting a reform of the Danish Flexjob scheme targeted towards employing the long-term (partially) disabled. Firms received a salary reimbursement for all employees granted a Flexjob. We examine whether a change from full to partial reimbursement to governmental units affected the share of Flexjobs allocated to retained (insiders) versus non-employed hirees (outsiders). After the reform, the composition of hires changed substantially in favor of insiders, both in absolute and relative terms. A reduction in subsidies thus leads to a decrease in the hiring of the non-employed disabled.

Yves Smith, Naked Capitalism: Stunning Rise in Death Rate, Pain Levels for Middle-Aged, Less Educated Whites. One of the long standing patterns in economies showing economic growth is longer life spans, and falls are see the result of severe distress and dislocation, as took place in the period right after the fall of the Soviet Union, when the expectancies of adult men fell by over seven years. The US has just become the first country to approach this appalling record. A stark warning about the level of distress in America comes from an important study by Angus Deaton, the 2015 Nobel prize winner in economics, and his wife Anne Case. We’ve embedded their short and readable article at the end of this post. The authors found that from 1999 to 2013, the death rate among non-Hispanic whites aged 45 to 54 with a high school education or less rose, while it fell in other age and ethnic groups. This is an HIV-level silent epidemic: AIDS killed an estimated 650,000 from the mid-1980s to present, while an estimated close to half-million died in half that time period who would have lived had their mortality rates fallen in line with the rest of the population. It is hard to overstate the significance of these findings.

Mark Thoma, The Fiscal Times: Are Economists Driven by Ideology or Evidence? The problem is that, in economics, the evidence rarely delivers clear answers. That leads to ongoing disputes among economists, and since ideology influences the questions researchers ask, these disputes are often viewed along ideological lines.Again, so long as, in the end, economists follow the evidence once it accumulates on one side or the other, I don’t see this as a problem. But, despite the confidence in the academic community expressed above, there have been some worrisome trends in recent years. Too many economists have been unwilling to change their views on issues such as whether quantitative easing in a deep recession will cause runaway inflation and interest rate spikes despite clear evidence those views are wrong. That must change. Our reputation with the public is bad enough as it is, and our best hope of changing that is to be honest about the evidence, and follow it wherever it might take us.