Macro Roundup

summery of the Putnam research that came out @ the time. I sent you the paper once before I worked for you. "...Putnam has struggled with how to present his work. He gathered the initial raw data in 2000 and issued a press release the following year outlining the results. He then spent several years testing other possible explanations....The results of his new study come from a survey Putnam directed among residents in 41 US communities, including Boston. Residents were sorted into the four principal categories used by the US Census: black, white, Hispanic, and Asian. They were asked how much they trusted their neighbors and those of each racial category, and questioned about a long list of civic attitudes and practices, including their views on local government, their involvement in community projects, and their friendships. What emerged in more diverse communities was a bleak picture of civic desolation, affecting everything from political engagement to the state of social ties....After releasing the initial results in 2001, Putnam says he spent time "kicking the tires really hard" to be sure the study had it right. Putnam realized, for instance, that more diverse communities tended to be larger, have greater income ranges, higher crime rates, and more mobility among their residents -- all factors that could depress social capital independent of any impact ethnic diversity might have....But even after statistically taking them all into account, the connection remained strong: Higher diversity meant lower social capital.In his findings, Putnam writes that those in more diverse communities tend to"distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television."..." Jonas, Michael, "The downside of diversity,"The Boston Globe, August 2007. Available at:http://www.boston.com/news/globe/ideas/articles/2007/08/05/the_downside_of_diversity/The downside of diversity A Harvard political scientist finds that diversity hurts civic life. What happens when a liberal scholar unearths an inconvenient truth? By Michael Jonas | August 5, 2007 IT HAS BECOME increasingly popular to speak of racial and ethnic diversity as a civic strength. From multicultural festivals to pronouncements from political leaders, the message is the same: our differences make us stronger. But a massive new study, based on detailed interviews of nearly 30,000 people across America, has concluded just the opposite. Harvard political scientist Robert Putnam -- famous for "Bowling Alone," his 2000 book on declining civic engagement -- has found that the greater the diversity in a community, the fewer people vote and the less they volunteer, the less they give to charity and work on community projects. In the most diverse communities, neighbors trust one another about half as much as they do in the most homogenous settings. The study, the largest ever on civic engagement in America, found that virtually all measures of civic health are lower in more diverse settings. "The extent of the effect is shocking," says Scott Page, a University of Michigan political scientist. The study comes at a time when the future of the American melting pot is the focus of intense political debate, from immigration to race-based admissions to schools, and it poses challenges to advocates on all sides of the issues. The study is already being cited by some conservatives as proof of the harm large-scale immigration causes to the nation's social fabric. But with demographic trends already pushing the nation inexorably toward greater diversity, the real question may yet lie ahead: how to handle the unsettling social changes that Putnam's research predicts. "We can't ignore the findings," says Ali Noorani, executive director of the Massachusetts Immigrant and Refugee Advocacy Coalition. "The big question we have to ask ourselves is, what do we do about it; what are the next steps?" The study is part of a fascinating new portrait of diversity emerging from recent scholarship. Diversity, it shows, makes us uncomfortable -- but discomfort, it turns out, isn't always a bad thing. Unease with differences helps explain why teams of engineers from different cultures may be ideally suited to solve a vexing problem. Culture clashes can produce a dynamic give-and-take, generating a solution that may have eluded a group of people with more similar backgrounds and approaches. At the same time, though, Putnam's work adds to a growing body of research indicating that more diverse populations seem to extend themselves less on behalf of collective needs and goals. His findings on the downsides of diversity have also posed a challenge for Putnam, a liberal academic whose own values put him squarely in the pro-diversity camp. Suddenly finding himself the bearer of bad news, Putnam has struggled with how to present his work. He gathered the initial raw data in 2000 and issued a press release the following year outlining the results. He then spent several years testing other possible explanations. When he finally published a detailed scholarly analysis in June in the journal Scandinavian Political Studies, he faced criticism for straying from data into advocacy. His paper argues strongly that the negative effects of diversity can be remedied, and says history suggests that ethnic diversity may eventually fade as a sharp line of social demarcation. "Having aligned himself with the central planners intent on sustaining such social engineering, Putnam concludes the facts with a stern pep talk," wrote conservative commentator Ilana Mercer, in a recent Orange County Register op-ed titled "Greater diversity equals more misery." Putnam has long staked out ground as both a researcher and a civic player, someone willing to describe social problems and then have a hand in addressing them. He says social science should be "simultaneously rigorous and relevant," meeting high research standards while also "speaking to concerns of our fellow citizens." But on a topic as charged as ethnicity and race, Putnam worries that many people hear only what they want to. "It would be unfortunate if a politically correct progressivism were to deny the reality of the challenge to social solidarity posed by diversity," he writes in the new report. "It would be equally unfortunate if an ahistorical and ethnocentric conservatism were to deny that addressing that challenge is both feasible and desirable."... Putnam is the nation's premier guru of civic engagement. After studying civic life in Italy in the 1970s and 1980s, Putnam turned his attention to the US, publishing an influential journal article on civic engagement in 1995 that he expanded five years later into the best-selling "Bowling Alone." The book sounded a national wake-up call on what Putnam called a sharp drop in civic connections among Americans. It won him audiences with presidents Bill Clinton and George W. Bush, and made him one of the country's best known social scientists. Putnam claims the US has experienced a pronounced decline in "social capital," a term he helped popularize. Social capital refers to the social networks -- whether friendships or religious congregations or neighborhood associations -- that he says are key indicators of civic well-being. When social capital is high, says Putnam, communities are better places to live. Neighborhoods are safer; people are healthier; and more citizens vote. The results of his new study come from a survey Putnam directed among residents in 41 US communities, including Boston. Residents were sorted into the four principal categories used by the US Census: black, white, Hispanic, and Asian. They were asked how much they trusted their neighbors and those of each racial category, and questioned about a long list of civic attitudes and practices, including their views on local government, their involvement in community projects, and their friendships. What emerged in more diverse communities was a bleak picture of civic desolation, affecting everything from political engagement to the state of social ties. Putnam knew he had provocative findings on his hands. He worried about coming under some of the same liberal attacks that greeted Daniel Patrick Moynihan's landmark 1965 report on the social costs associated with the breakdown of the black family. There is always the risk of being pilloried as the bearer of "an inconvenient truth," says Putnam. After releasing the initial results in 2001, Putnam says he spent time "kicking the tires really hard" to be sure the study had it right. Putnam realized, for instance, that more diverse communities tended to be larger, have greater income ranges, higher crime rates, and more mobility among their residents -- all factors that could depress social capital independent of any impact ethnic diversity might have. "People would say, 'I bet you forgot about X,'" Putnam says of the string of suggestions from colleagues. "There were 20 or 30 X's." But even after statistically taking them all into account, the connection remained strong: Higher diversity meant lower social capital. In his findings, Putnam writes that those in more diverse communities tend to "distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television." "People living in ethnically diverse settings appear to 'hunker down' -- that is, to pull in like a turtle," Putnam writes. In documenting that hunkering down, Putnam challenged the two dominant schools of thought on ethnic and racial diversity, the "contact" theory and the "conflict" theory. Under the contact theory, more time spent with those of other backgrounds leads to greater understanding and harmony between groups. Under the conflict theory, that proximity produces tension and discord. Putnam's findings reject both theories. In more diverse communities, he says, there were neither great bonds formed across group lines nor heightened ethnic tensions, but a general civic malaise. And in perhaps the most surprising result of all, levels of trust were not only lower between groups in more diverse settings, but even among members of the same group. "Diversity, at least in the short run," he writes, "seems to bring out the turtle in all of us." The overall findings may be jarring during a time when it's become commonplace to sing the praises of diverse communities, but researchers in the field say they shouldn't be. "It's an important addition to a growing body of evidence on the challenges created by diversity," says Harvard economist Edward Glaeser. In a recent study, Glaeser and colleague Alberto Alesina demonstrated that roughly half the difference in social welfare spending between the US and Europe -- Europe spends far more -- can be attributed to the greater ethnic diversity of the US population. Glaeser says lower national social welfare spending in the US is a "macro" version of the decreased civic engagement Putnam found in more diverse communities within the country. Economists Matthew Kahn of UCLA and Dora Costa of MIT reviewed 15 recent studies in a 2003 paper, all of which linked diversity with lower levels of social capital. Greater ethnic diversity was linked, for example, to lower school funding, census response rates, and trust in others. Kahn and Costa's own research documented higher desertion rates in the Civil War among Union Army soldiers serving in companies whose soldiers varied more by age, occupation, and birthplace. Birds of different feathers may sometimes flock together, but they are also less likely to look out for one another. "Everyone is a little self-conscious that this is not politically correct stuff," says Kahn.... So how to explain New York, London, Rio de Janiero, Los Angeles -- the great melting-pot cities that drive the world's creative and financial economies? The image of civic lassitude dragging down more diverse communities is at odds with the vigor often associated with urban centers, where ethnic diversity is greatest. It turns out there is a flip side to the discomfort diversity can cause. If ethnic diversity, at least in the short run, is a liability for social connectedness, a parallel line of emerging research suggests it can be a big asset when it comes to driving productivity and innovation. In high-skill workplace settings, says Scott Page, the University of Michigan political scientist, the different ways of thinking among people from different cultures can be a boon. "Because they see the world and think about the world differently than you, that's challenging," says Page, author of "The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies." "But by hanging out with people different than you, you're likely to get more insights. Diverse teams tend to be more productive." In other words, those in more diverse communities may do more bowling alone, but the creative tensions unleashed by those differences in the workplace may vault those same places to the cutting edge of the economy and of creative culture. Page calls it the "diversity paradox." He thinks the contrasting positive and negative effects of diversity can coexist in communities, but "there's got to be a limit." If civic engagement falls off too far, he says, it's easy to imagine the positive effects of diversity beginning to wane as well. "That's what's unsettling about his findings," Page says of Putnam's new work. Meanwhile, by drawing a portrait of civic engagement in which more homogeneous communities seem much healthier, some of Putnam's worst fears about how his results could be used have been realized. A stream of conservative commentary has begun -- from places like the Manhattan Institute and "The American Conservative" -- highlighting the harm the study suggests will come from large-scale immigration. But Putnam says he's also received hundreds of complimentary emails laced with bigoted language. "It certainly is not pleasant when David Duke's website hails me as the guy who found out racism is good," he says. In the final quarter of his paper, Putnam puts the diversity challenge in a broader context by describing how social identity can change over time. Experience shows that social divisions can eventually give way to "more encompassing identities" that create a "new, more capacious sense of 'we,'" he writes. Growing up in the 1950s in a small Midwestern town, Putnam knew the religion of virtually every member of his high school graduating class because, he says, such information was crucial to the question of "who was a possible mate or date." The importance of marrying within one's faith, he says, has largely faded since then, at least among many mainline Protestants, Catholics, and Jews. While acknowledging that racial and ethnic divisions may prove more stubborn, Putnam argues that such examples bode well for the long-term prospects for social capital in a multiethnic America. In his paper, Putnam cites the work done by Page and others, and uses it to help frame his conclusion that increasing diversity in America is not only inevitable, but ultimately valuable and enriching. As for smoothing over the divisions that hinder civic engagement, Putnam argues that Americans can help that process along through targeted efforts. He suggests expanding support for English-language instruction and investing in community centers and other places that allow for "meaningful interaction across ethnic lines." Some critics have found his prescriptions underwhelming. And in offering ideas for mitigating his findings, Putnam has drawn scorn for stepping out of the role of dispassionate researcher. "You're just supposed to tell your peers what you found," says John Leo, senior fellow at the Manhattan Institute, a conservative think tank. "I don't expect academics to fret about these matters." But fretting about the state of American civic health is exactly what Putnam has spent more than a decade doing. While continuing to research questions involving social capital, he has directed the Saguaro Seminar, a project he started at Harvard's Kennedy School of Government that promotes efforts throughout the country to increase civic connections in communities. "Social scientists are both scientists and citizens," says Alan Wolfe, director of the Boisi Center for Religion and American Public Life at Boston College, who sees nothing wrong in Putnam's efforts to affect some of the phenomena he studies. Wolfe says what is unusual is that Putnam has published findings as a social scientist that are not the ones he would have wished for as a civic leader. There are plenty of social scientists, says Wolfe, who never produce research results at odds with their own worldview. "The problem too often," says Wolfe, "is people are never uncomfortable about their findings."

Hall on secular stagnation Hall, Robert, "Secular Stagnation in the US,"Center for Economic and Policy Research, April 22, 2015. Available at:http://www.voxeu.org/article/secular-stagnation-us"...Despite the resumption of normal conditions in the US labour market and the consensus that slack is gone, the US economy is stagnated in the sense that the standard of living stopped growing around 2000. Family purchasing power today is just the same as in that year.......Four factors account for the stagnation of purchasing power in the US economy: 1) declining labour share; 2) depleted capital; 3) reduced productivity growth; and 4) declining labour-force participation.....Most importantly, there is no sign suggesting a departure from the decline in labour-force participation shown in Figure 6. Some commentators have declared a turnaround in participation based on recent monthly data, but Figure 9 suggests this is wishful thinking.Participation has declined along a straight line during the period of improving conditions in the labour market, suggesting a complete disconnect between participation and the state of the labour market.....Thus a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years...." Secular Stagnation in the USEuropean versus US secular stagnation: Demand versus supply factorsCauses of US secular supply stagnation

• Labour’s declining share of income.
  • Slow overall productivity growth.
    • Depleted capital per household.
      • Low labour-force participation.Why hours worked declined
        • Figure 6 shows an index of participants per household.
          • Figure 7 shows an index of the fraction of participants who were actually working - the remainder were unemployed and actively looking for work.
            • Figure 8 tracks hours of work per week for the average household.Work versus other time uses
              • For men, the biggest change by far is the decline of 2.5 hours per week at work, a big drop relative to a normal 40- hour work week.
                • The decline for women is much smaller, at 0.8 hours per week.Is there hope for a return to normal growth of household purchasing power?ReferencesFootnotes

3 See Foote and Ryan (2015).

2 See Fernald (2014) for a discussion of the evidence.

1Complete backup for all of the calculations is available from my website, stanford.edu/∼rehall

Lawrence H. Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”Business EconomicsVol. 49, No. 2 National Association for Business Economics

Fernald, John (2014). “Productivity and Potential Output Before, During, and After the Great Recession”, NBER Macro Annual, 2014, forthcoming.

I reiterate that these conclusions apply to the United States. In continental Europe, the case is strong that demand has far from recovered. In Japan, unemployment is at low levels but the performance of the economy is substandard.

One possibility for growth in purchasing power is that unemployment may dip below 5.5% -- the level that some believe defines full employment. The unemployment rate reached 3.8% in 2000 and 4.4% in 2007, in both cases at the ends of long expansions, without triggering inflation much above the Fed’s target of around 2%.

Figure 9.

Most importantly, there is no sign suggesting a departure from the decline in labour-force participation shown in Figure 6. Some commentators have declared a turnaround in participation based on recent monthly data, but Figure 9 suggests this is wishful thinking. Participation has declined along a straight line during the period of improving conditions in the labour market, suggesting a complete disconnect between participation and the state of the labour market.

Capital seems likely to continue to return to its historical growth path, as Figure 4 suggests. For the three other major categories, forecasting is a challenge. There has been no sign of a reversal of the decline in labour’s share of total income and no body of research that supports the idea that it will. Productivity growth is definitely under way, at rates similar to those in the 1970s and 1980s, but well below the rates of the 1950s, 1960s, and 1990s. In particular, there is no sign that a burst of productivity growth will make up for the complete stall in productivity growth around the crisis, as Figure 3 shows.

For both sexes, the big increases were in personal care (including sleep) and leisure (mainly video-related activities). Essentially no change occurred in time spent in education. Women cut time spent on housework.

A small part of the decline is attributable to higher unemployment—the unemployment rate was 6.0% in 2003 and 7.4% in 2013.

Table 1.

Some indication about the changing balance between work and other uses of time comes from the American Time Use Survey, which began in 2003. Table 1 shows the change in weekly hours between 2003 and 2013 in a variety of activities.

Figure 8.

It was quite constant over most of the period, but fell sharply during the Great Recession and recovered only about half of the decline since. It is too early to judge whether hours per worker will return soon to its earlier level or remain as an element of the stagnation of earnings.

Figure 7.

This factor was flat on average, falling in recessions and rising in the ensuing recoveries. It has risen recently, as unemployment has fallen to the upper-five-percent range. It is not an important element of the stagnation of earnings as of today.

Economists have been working hard on trying to understand the surprising decline in participation, which exceeds forecasts that were made in earlier years. Most research agrees that the slack labour market had a relatively small discouraging effect. Another suspect that has been found to have at most a small role is changes in the composition of the working-age population - the negative effect of aging of the population on participation just offsets the positive effect of higher educational attainment. A large increase in the fraction of households subject to taxes imposed on families benefiting from food stamps, disability, and other safety-net programs may be a factor.

As the chart illustrates, participation rose during the 1990s, especially in the second half of the decade, but has fallen since. The Great Recession depressed participation only slightly and does not appear to have been an important determinant of the overall decline in involvement in the labour market. Of course, the recession was a time when fewer participants were actually working and more were looking for work.

Figure 6.

Because declining hours account for the biggest part of the stagnation of earnings, I will dig deeper, by breaking them down into three components: Labour-market participants per household; fraction of participants working; and hours per worker.

Figure 5.

Figure 5 displays the average household’s involvement in the workplace as measured by an index of annual hours of work of household members. Hours per household grew rapidly until 2000, fell as usual during the recession of 2001, flattened but did not grow during the boom of 2002 through 2007, unlike previous booms, collapsed in the Great Recession, and have risen during the recovery that is still underway. The decline in hours since 2000 is the single biggest factor in the decline in household earnings.3 Recent growth in hours per household offers some hope for the return of earnings growth in coming years.

Figure 4 shows the third factor - the amount of capital available to equip the average worker. With more plant, equipment, and software, workers earn more. Capital per household rose rapidly during the 1990s, but more slowly after 2000. Capital per household actually fell during the Great Recession, and its more recent growth has not come close to placing capital per household where it would have been if the trend of the 1990s had continued.

Figure 4.

Figure 3.

Figure 3 shows that productivity grew rapidly from 1989 to 2007. The Great Recession caused a dip in productivity, as did past recessions (due mainly to idle facilities). Though productivity grew at normal rates during the recovery, it did not make up for the shock of the crisis, so the average growth since 2006 has been below par.2 Household earnings suffered proportionately. See Fernald (2014) for further discussion of productivity.

Figure 2.

Figure 2 shows an index of labour’s share (including fringe benefits) of total US income. It tends to be level in recessions, fall during the first half of ensuing expansions, then rise back to a high level at the next recession. But superimposed on that pattern is a general decline that cumulates to about 10% over the period. Like the general declining trend in earnings, the decline in the share seems to have started around 2000. Economists have pursued multiple explanations of the decline, but no consensus has formed.

Four factors account for the stagnation of purchasing power in the US economy: 1) declining labour share; 2) depleted capital; 3) reduced productivity growth; and 4) declining labour-force participation. I will discuss indexes that capture each of these factors in turn using indices that all start at unity in 1989. An index of total purchasing power from earnings is the result of multiplying the four indexes together.

Two episodes of low purchasing-power growth despite a growing economy appear in the figure. From 2002 through 2007 (recovery from the 2001 recession), and 2010 to 2013 (the recovery from the 2008-09 Great Recession). The unemployment rate reached 4.8% in 2007 - well below the long-run average rate of 5.8% and is right at that long-run rate today. The evidence is strong that inadequate demand is not behind the general stagnation of purchasing power, though it was a factor in the period immediately following the Crisis. As of 2014, the US has had a decade and a half of a new kind of secular stagnation, one associated with declining supply.

Figure 1.

Despite the resumption of normal conditions in the US labour market and the consensus that slack is gone, the US economy is stagnated in the sense that the standard of living stopped growing around 2000. Family purchasing power today is just the same as in that year. Figure 1 shows that it grew briskly during the 1990s, slowed markedly prior to the crisis, dropped below its 2000 level as a result of the crisis, and grew slowly in recent years.

Thus a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.

Extreme slack persists in continental Europe and Japan, but in the US, several labour-market indicators, such as low short-term unemployment and high levels of unfilled job openings, indicate the end of the period of slack that followed the crisis, while others, such as long-term unemployment and involuntary part-time work, still show slack but are declining and will probably reach normal levels in the coming year.1 Forecasters believe that the Fed will unpin the short-term interest rate in the middle of 2015 or a bit later in the year. Markets for forward rates agree.

One important factor in stagnations is the inability or reluctance of the central bank to lower interest rates as low as would seem to be appropriate, given the ability of low rates to stimulate output and employment. The Federal Reserve and the Bank of Japan have kept rates slightly positive since the crisis, while the ECB did the same until recently, when it pushed the rate just slightly negative. All three economies had combinations of high unemployment and substandard inflation that unambiguously called for lower rates, according to standard principles of modern monetary economics.

The disappointing post-crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. Under stagnation, real incomes fail to grow or even shrink, and the economy’s output falls farther and farther below its earlier upward trend. Rising unemployment may also occur. Summers (2014) ignited interest in the possibility of secular stagnation.

The disappointing post-Crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. This column argues that a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.

Robert E. Hall22 April 2015

"...Finally Paul Samuelson ended the conversation by remarking in words I have never forgotten—“Larry, I recently wrote a eulogy for Art Okun. In it, I observed that I had never heard him say a stupid thing. Well Larry, it looks now like I will not be able to say that about you.” I learned something from Paul’s putdown and even more from Art’s example. The stakes in economic policy making are enormous. Economics is not physics—economic theories do not just describe the world—they can change it. Rigorous modeling, effective polemic, or elegant mathematics can be very dangerous when they are not informed by wisdom and good sense and a willingness to learn from experience...."Summers, Larry, "40 Years Later—The Relevance of Okun’s “Equality and Efficiency: The Big Tradeoff,” Brookings, May 4, 2015. Available at:http://www.brookings.edu/~/media/research/files/speeches/2015/05/050415-summers-okun-speech.pdf