Macro Roundup

"...“We didn’t really find large differences in student achievement gains across different textbooks,” said the University of Maryland’s David Blazar, one of the study’s authors. It’s a surprising conclusion for the six-state analysis, which was funded in part by the Bill and Melinda Gates Foundation and released Monday. And though it is just one study — which clashes with prior research — the results raise questions about the likelihood that the Gates Foundation’s curriculum-focused approach will boost student learning in the way its leaders hope. “This study throws some cold water on the idea that just swapping out textbooks would make a big difference,” said Morgan Polikoff, a University of Southern California professor and another of the study’s researchers...."
Matt Barnum, "The Gates Foundation is hoping better curriculum will boost student learning. A study says, not so fast,"Chalkbeat, March 11, 2019, https://chalkbeat.org/posts/us/2019/03/11/gates-foundation-curriculum-textbooks-study/

"....Of the three changes that we consider, that is wages, out-of-pocket medical expenses during retirement, and life expectancy, we find that the observed changes in the wage schedule had by far the largest e ect on the labor supply of men and women born in the 1960s cohort. Specifically, it depressed the labor supply of men and increased that of women, especially in married couples. The decrease in life expectancy mainly reduced retirement savings, while the expected increase in out-of-pocket medical expenses increased them. On net, these two changes taken together had overall modest effects on all of the outcomes that we consider, including savings. We also find that the combined effect of the changes have large welfare costs. In fact, the one-time asset compensation required to make 25-year-old households indifferent between the 1940s and 1960s health and survival dynamics, medical expenses, and wages are $126,000 for single men, $44,000 for single women, and $132,000 for couples. The corresponding numbers expressed as a fraction of their average discounted present value of earnings are, 12.5%, 7.2%, and 8.0%, respectively. Lower wages explain 47-58% of these losses, shorter life expectancies explain 26-34%, and higher medical expenses account for the rest. Other interesting changes took place for the same cohorts, including in the number of children, marriage and divorce patterns, assortative mating, child care costs, initial conditions at age 25, and time spent in home production and raising children. Our paper suggests that studying the opportunities and outcomes of people in different cohorts and across different groups is a topic worthy of investigation, including from a macroeconomic standpoint.... Our results thus indicate that the group of white, non-college educated people born in the 1960s cohort, which comprises about 60% of the population of the same age, experienced large negative changes in wages, large increases in medical expenses, and large decreases in life expectancy and would have been much better oif they had faced the corresponding lifetime opportunities of the 1940s birth cohort.....
Margherita Borella, Mariacristina De Nardi, and Fang Yang, "The lost ones: the opportunities and outcomes of non-college educated Americans born in the 1960s," National Bureau of Economic Research, March 11, 2019, http://users.nber.org/~denardim/research/Couples_Macro_Annual_26.pdf

"...No longer. Last yearChina’s current-account surplus was just 0.4% of GDP. Analysts at Morgan Stanley predict that China could be in deficit in 2019—which would be the first annual gap since 1993—and for years to come. Others, such as the International Monetary Fund, forecast that China will maintain a surplus, though only by the slimmest of margins...."

Economist Staff, "China’s current-account surplus has vanished,"The Economist, March 14, 2019, https://www.economist.com/leaders/2019/03/16/china-may-soon-run-its-first-annual-current-account-deficit-in-decades

would add to this "beggar thy neighbor" isn't the only implied win set, could get same effect by fiscal expansion in the chronic surplus countries, Germany and South Korea come to mind.

"...If demand is chronically too low, it is not just fiscal policy that can address this; so can a mercantilist trade policy aimed at boosting net exports. Secular stagnation quickly becomes a justification for the Trumpian fetish of seeing exporting as strength and importing as weakness, and all the bad policies such a view brings with it. It is true that at a global level, net exports must be zero and cannot add or subtract from demand — so only other demand-boosting policies work in the aggregate. But in our imperfect world with national policymaking, and (supposedly) “bounded” monetary policy, this may just reinforce zero-sum-game thinking, in which it is all about who wins the competition for national export surpluses...."

Martin Sandbu, "How secular is secular stagnation?"Financial Times, March 14, 2019, https://www.ft.com/content/7f6b72f8-456f-11e9-b168-96a37d002cd3

How secular is secular stagnation?

There was, as usual, a rich trove of economic research in the Brookings Papers on Economic Activity presented last week. In particular, Lawrence Summers further developed his thesis that rich economies are in the grip of “secular stagnation”. In an article, Summers and Lukasz Rachel develop new estimates of the “natural” rate of interest — the interest rate that brings desired savings and desired investment in the economy into balance — and find that it has fallen by about 3 percentage points over the last generation. More astonishing, they point out that several public policy decisions (such as higher government debt) has counteracted this fall, and that without them, the “private” real natural rate of interest would have fallen by as much as 7 percentage points.

This is enormous. It is also, in all likelihood, more or less right; the factors the authors attribute it to are plausible. (Emmanuel Farhi and François Gourio establish similar magnitudes in a paper asking why the marginal product of capital has not been driven down along with cheaper borrowing costs.)

The most consequential question, however, is what it means for policy. Summers’s secular stagnation analysis is that equilibrium rates have come so far down that it is impossible for central bank or market interest rates to make demand match the level of potential supply, leaving the economy indefinitely underemployed. To get out of stagnation, other sources of demand have to be increased, where Summers often points to fiscal policy. Rachel has written in a tweet the interesting observation that if the asset-wealthy are less likely to spend out of income than the asset-poor, then a net wealth tax of the kind I have analysed here could be implemented so as to lift aggregate demand.

But I worry about the usefulness of secular stagnation theory, for three reasons.

First, it may lead to policy cures that are worse than the disease. If demand is chronically too low, it is not just fiscal policy that can address this; so can a mercantilist trade policy aimed at boosting net exports. Secular stagnation quickly becomes a justification for the Trumpian fetish of seeing exporting as strength and importing as weakness, and all the bad policies such a view brings with it. It is true that at a global level, net exports must be zero and cannot add or subtract from demand — so only other demand-boosting policies work in the aggregate. But in our imperfect world with national policymaking, and (supposedly) “bounded” monetary policy, this may just reinforce zero-sum-game thinking, in which it is all about who wins the competition for national export surpluses.

Second, I am unconvinced that monetary policy cannot do more (unlike my colleague Martin Wolf, who has also commented on the Rachel and Summers paper). The “zero lower bound” is clearly not at zero since several central banks have lowered short-term rates below it. The idea of an “effective” lower bound somewhere below, but allegedly close to, zero is a theoretical construct. Nobody has seen any sign of it, which means there is at least some further way to go for conventional policy. Meanwhile, more unconventional policies, such as directly targeting long-term interest rates, retain a lot more scope. With the 10-year Treasury yield near 3 per cent, the US economy is far from any lower bound, if one exists.

Third, we must avoid confusing between stocks and flows. The arguments about chronically weak demand are “stock” arguments — reasons why the level of aggregate demand is lower, and has stayed lower, than the level of supply for surprisingly long. Economic growth, however, is a matter of changes in the levels of demand and supply. A low level of demand is perfectly compatible with steady-state solid growth in which all the components of demand change by the same percentage every year. And it is not clear how secular stagnation arguments that explain why the level is low also act as arguments for why growth should be low (except insofar as the forces depressing demand levels are slow-working ones that have not yet worked themselves out).

There are equilibrating mechanisms when the level of demand is below that of supply for some time. If it subdues price growth — and it seems to have done so — it will make for a greater real money supply over time, which should push up demand. But this could take time. Alternatively, inadequate demand levels may inhibit investment and employment, which reduces the level of supply capacity permanently — so-called “hysteresis”. Other stabilising (and indeed destabilising) dynamics set off by demand levels below supply levels can be found, and the secular stagnation discussion needs to say more about these. My own chief worry is that policymakers mistakenly take the “secular” part of stagnation so seriously that they snuff out any sign that demand is catching up with supply.

As the European Central Bank’s dovish turn last week illustrated, central bankers have often made this mistake in the past decade. Perhaps our stagnation is only as secular as macroeconomic policy timidity.