Macro Roundup

Casey Mulligan estimates that, “…In Kansas, a family of four with two unemployed adults who had earned U.S. median wages could get paid, including the Biden add-on package, the after-tax equivalent of more than $135,000 on an annual basis without working an hour. In Massachusetts, where state unemployment benefits are the highest in the nation, the figure is $170,000. This doesn’t include any housing or rental assistance the family may also receive. The Biden package of benefits would exceed the wages and salaries of at least 85% of households….”

Casey B. Mulligan and Stephen Moore, "How Many Jobs Will the ‘Stimulus’ Kill?,"Wall Street Journal, February 25, 2021, https://www.wsj.com/articles/how-many-jobs-will-the-stimulus-kill-11614295867

Estimated impact on employment, “…The combination of benefits are likely to reduce employment by five million to seven million jobs.The $15 minimum wage, if it stays in the bill, would bring the total to more than eight million….”

Mulligan’s estimates of the impact of expanded UI on employment“…We find that if UI bonuses had stayed at $600 a week this fall, three to five million fewer workers would be employed today. Returning to the $600 weekly unemployment bonuses through March 2021 would reduce employment by 6 to 10 million jobs. Even a $300 weekly bonus would cost 3 to 5 million jobs compared to the option of letting the bonus expire and returning to the preexisting unemployment insurance system….”

Incentives matter, “…Figure 5 shows that many workers not only got paid as much for not working, but in some cases more than twice as much. This was especially true of workers who were not working 40 hours a week. Moreover, workers earning at or near minimum wage often could receive benefits well over twice the earnings they could make from returning to the job. Even the $300 weekly bonus puts many workers above replacement of wages from a 20- to 40-hour-a-week job….”

Note mentioned studies are attached.

Hanushek, “…He came to this conclusion in part by examining the experience of German students. In 1966 and 1967, the German government temporarily shortened the school year in a rejiggering of the school calendar. Longitudinal studies, he says, show that this lost class time reduced the incomes of that cohort of students by 5% over their lifetimes. Today’s students “are going to feel the long-term effects of Covid even when they are back in school,” Mr. Hanushek says….”

Jon Hilsenrath, "The Long-Term Economic Costs of Lost Schooling,"Wall Street Journal, February 25, 2021, https://www.wsj.com/articles/the-long-term-economic-costs-of-lost-schooling-11614286602

Blanchard, “…Mr. Blanchard and other economists worried about the lasting damage to people who sat on the sidelines of the job market and saw their skills deteriorate. Some stopped looking for work; others found income on federal disability rolls. As the expansion marched on, however, some were drawn back into the labor market. Mr. Blanchard, to his surprise, found evidence of hysteresis less compelling than he had expected….”

Rachidi, child support would be endangered by childhood allowance proposals, “….While Child Support Enforcement is a standalone program authorized by Congress,many single parents engage it through Temporary Assistance for Needy Families, or TANF, the country’s cash welfare program. TANF has a child support “cooperation requirement,” meaning that single parents applying for it are required to cooperate with the child support enforcement agency to locate the noncustodial parent and establish a child support order. This formalizes the financial obligations between unmarried parents, often to the benefit of single mothers who otherwise have no way to get support from the noncustodial father. It also sends a strong message that both parents bear financial responsibility for their children. A child allowance would replace the need for cash assistance through TANF with an unconditional cash payment to all children, unraveling the main connection single parents have to child support enforcement. Although single parents could still voluntarily engage the Child Support Enforcement program under a child allowance policy, the TANF cooperation requirement leads to much higher participation among single parents. Without TANF, fewer children would receive child support from their noncustodial parent…”

Angela Rachidi, "The unintended downside of childhood allowance proposals," American Enterprise Institute, February 25, 2021, https://www.aei.org/articles/the-unintended-downside-of-childhood-allowance-proposals/

FRBNY research on the impact of monetary policy and racial inequality. It reads like it was written preemptively defend the Fed from calls to use monetary policy address the racial wealth gap. Basically finds that reductions in inequality due to a tight labor market are offset by asset prices. "...We have shown that policy shocks that change asset prices have differential effects on the wealth of black and white households. White households gain more because they have more financial wealth and hold portfolios that are more concentrated in interest-rate sensitive assets such as equities. At the same time, monetary policy shocks reduce the gap between black and white unemployment rates and bring larger earnings gains for black households. Bringing the two together, however, leads to one stark finding: the reduction in the earnings gap pales in comparison to the effects on the wealth gap.Our analysis therefore does not bode well for the suggestion made by politicians and central bankers that a more accommodative monetary policy helps alleviate racial inequalities. With the instruments available - all of which work through effects on asset prices and interest rates - a central bank would not be able to design policies for an income gap reduction objective without increasing wealth inequality. Clearly, this does not mean that achieving racial equity should not be a first-order objective for economic policy. We strongly think it should. But the tools available to central banks might not be the right ones, and could possibly be counter-productive...."

Some good factoids on the racial wealth gap, "Comparing means and medians highlights the large skewness of the U.S. wealth distribution, with means being much larger than medians. For example, the racial wealth gap is larger at the median than at the mean.6For many asset types, the median holding is zero or close to zero because the share of households with holdings is small. Only 35 percent of black households own equities, just a bit more than half the share of white households. Many black households in the United States do not have any financial assets and if asset prices increase, such poor households will not benefit from this rise. Black households are heavily underrepresented at the top of the U.S. wealth distribution, where financial wealth is heavily concentrated. Their financial situation is therefore generally very similar to the wealth situation of the typical poor American households...."

Educational Status“….Figure 10 shows again the pattern of correlations, this time for educational status (measured as an indicator variable for attaining higher educational qualifications). Again the implied long run intergenerational correlation of occupational status is 0.88, and the implied genetic correlation of status in marriage is thus 0.76. But in this case the R2 of the fit is only 0.64….”

Accumulated wealth, “…. Figure 11 plots all the correlations in table 4 for wealth at death. Now b is estimated at 0.85, m at 0.69, and the R2 is 0.98.Wealth involves for richer families a physical transfer of property. But even here the recipients have choices about whether to spend this transferred wealth, or accumulate it. And their decisions will be influences by their current wage earnings. So it is quite possible for there to be important genetic components underlying wealth at death….”

Conclusion, “…It is generally assumed that the elements that define social status – occupational status, educational attainment, wealth, and even health – are transmitted across generations in important ways by the family environment. Above we show that the patterns of correlation of social status attributes in an extended lineage of 402,000 people in England are mainly those that would be predicted by simple additive genetic inheritance of social status in the presence of highly assortative mating around status genetics.Parent-child correlations for a trait equal those of siblings, and the patterns of correlation of relatives of different degrees of genetic affinity is mainly consistent with that predicted by additive genetics. Further family size and birth order, elements that would significantly affect the family environment for children, have modest effects on adult outcomes. The underlying persistence of traits is such that people who have likely never interacted socially, such as second to fifth cousins, remain surprisingly strongly correlated in terms of occupational status and wealth. The patterns observed imply that marital sorting must be strong in terms of the underlying genetics. If this interpretation is correct then aspirations that by appropriate social design, rates of social mobility can be substantially increased will prove futile. We have to be resigned to living in a world where social outcomes are substantially determined at birth. Personally I would argue that this should push us towards compressing differences in income and wealth that are the product of such inherited characteristics. The Nordic model of the good society looks a lot more attractive than the Texan one….”

Gregory Clark, “For Whom the Bell Curve Tolls: A Lineage of 400,000 English Individuals 1750-2020 shows Genetics Determines Most Social Outcomes,” London School of Economics and University Of California Davis, March 1, 2021, http://faculty.econ.ucdavis.edu/faculty/gclark/ClarkGlasgow2021.pdf

Core finding, “…Using a lineage of 402,000 English people 1750-2020 we test whether such mechanisms better predict outcomes than a simple additive genetics model. The genetics model predicts better in all cases except for the transmission of wealth. The high persistence of status over multiple generations, however, would require in a genetic mechanism strong genetic assortative in mating. This has been until recently believed impossible. There is however, also strong evidence consistent with just such sorting, all the way from 1837 to 2020. Thus the outcomes here are actually the product of an interesting genetics-culture combination… Above we show that the patterns of correlation of social status attributes in an extended lineage of 402,000 people in England are mainly those that would be predicted by simple additive genetic inheritance of social status in the presence of highly assortative mating around status genetics…”

Gregory Clark (who we’ve cited on the migration of talent out of the northern UK to greater London) working paper (he’s writing a book on the subject) looks at status across generations in the UK, using metrics such as wealth at death, occupation status (on a 100 point scale) and higher education and finds a robust relationship using a large sample (N 402,000) btw genetic kin groups and persistent status driven by highly associative mating around status genetics.

Just an FYI Krugman has some more thoughts on spending increases, “…In macroeconomic terms, I’d argue, it looks like a medium-sized war. And the historical experience of such wars is probably our best guide to the macroeconomics of the current plan….Actually, Korea may be one of the best real-world illustrations of the balanced-budget multiplier: even when increased government spending is paid for with taxes, some of the tax hike comes out of savings, so the net effect is still expansionary. On prices, I slip a derivative here, because I believe that prices were a lot stickier in the 1950s than in the earlier episodes, and Korea was never followed by actual deflation. Nonetheless, what we see is a temporary bulge in inflation, not a sustained rise..”

The macro equivalent of war?

This ain’t no party, this ain’t no disco

History is the great laboratory of economics, certainly of macroeconomics. I love to talk about miniature economies that illustrate macroeconomic principles, like baby-sitting coops, but by and large the only place we can test theories about how the economy works is on the economy itself. And nobody is willing to try out potentially disastrous policies just to see how they work in practice.

So we turn to historical examples that, we hope, provide natural experiments. The problem, however, is how to select these examples — and in particular how to avoid selecting examples that aren’t especially relevant but that confirm your prejudices. Germans, for example, are taught endlessly about the 1923 hyperinflation, but generally know little about the Brüning deflation of 1930-31, which was what actually brought to power. After 2010 I used to protest about the Hellenization of economic discourse — the way the woes of Greece, which was very much sui generis, became Exhibit A for everyone who, for whatever reason, wanted us to panic about debt and deficits.

And one enduring source of bad economic discussion has been the tyranny of disco-era economics — the weird grip the stagflation of the 1970s still has on economic discourse, even though real incomes suffered more in later crises, from the Volcker recession of the early 80s to the 2008 financial crisis to, of course, the pandemic than they ever did in the 70s:

Now, as the Biden economic relief bill marches toward passage, we’re hearing a lot from talking heads (as opposed to the Talking Heads) about the return of stagflation — mainly, but not only, the same talking heads who predicted stagflation from Obama’s policies. And let’s be clear: while the American Rescue Plan is mainly disaster relief rather than conventional stimulus, it’s a big proposal that will, in fact, provide a lot of economic stimulus, and could well have some temporary inflation impact.

But the ARP isn’t at all like the events that (we think) brought on the 1970s — a long period of economic overheating followed by the two oil shocks. What does it resemble?

In macroeconomic terms, I’d argue, it looks like a medium-sized war. And the historical experience of such wars is probably our best guide to the macroeconomics of the current plan.

I’m not the only person to make this comparison. Joe Gagnon at PIIE argues that we should think of this plan as being something like the Korean War — a temporary shock that was pretty big but not sustained, as opposed to the long guns-and-butter stimulus of Vietnam. I agree, but think it’s useful to look at a wider set of examples.

A brief history of wartime inflations

The Congressional Research Service has compiled estimates of military spending on wars throughout U.S. history, and in particular peak spending as a percentage of GDP. Here’s a partial view, with the current estimated size of the ARP (8.6% of GDP) included:

Note that I don’t include World War II, which was vastly bigger but also took place in the context of a controlled economy, with pervasive rationing and price controls. I also omit Vietnam, which was modest as an annual expense but went on and on — long enough that as a college student, class of 1974, I received a draft lottery number (although my year never did get called.)

I do include Iraq, but only to highlight the fact that it was, in dollar terms, a small war, however significant it was politically (and however many people died.)

Other than that, the Biden plan is in the same general range as a number of wars: the Civil War (from the Union side), World War I, and Korea.

Now, there are some reasons to believe that the Biden plan will lead to less overheating than these wartime episodes. For one thing, some estimates — like these from Goldman Sachs — suggest that we’re starting from an economy operating well below potential, so that much of whatever expansion takes place will simply fill an output gap:

Also, unlike military expenditures, many (most) of the outlays under the ARP will take the form of transfer payments rather than purchases of goods and services; since some of these transfers will be saved, the overall multiplier will probably be relatively low.

Still, we may be able to learn something from these wartime episodes. And what we see in each case is a bump in prices, but not a sustained rise in inflation.

Here’s what happened during and after the Civil War (again, on the Union side; the Confederacy experienced hyperinflation):

There was a big runup in prices, but it didn’t translate into permanent inflation; in fact, it was followed by deflation, as advocates of monetary orthodoxy did their best to crucify the country on a cross of gold.

World War I was a seemingly endless conflict for the European powers, but it was a relatively brief if intense effort for the United States. My numbers, drawn from Historical Statistics of the United States, look a bit different from the CRS estimate, but not in any important way; here’s what the war looked like compared with the current relief package:

In case you’re wondering, the war was overwhelmingly debt-financed:

And what happened to prices looked a lot like the Civil War — even the magnitudes were similar, with a rough doubling of prices during the war but no sustained rise in inflation:

Finally, Korea looks somewhat different. For one thing, while the war was temporary, it marked the beginning of a sustained period of high military spending with the realization that the Cold War wasn’t going away:

In part because of this realization, much more of the military buildup was paid for with taxes than in previous episodes. Nonetheless, the war was clearly expansionary:

Actually, Korea may be one of the best real-world illustrations of the balanced-budget multiplier: even when increased government spending is paid for with taxes, some of the tax hike comes out of savings, so the net effect is still expansionary.

On prices, I slip a derivative here, because I believe that prices were a lot stickier in the 1950s than in the earlier episodes, and Korea was never followed by actual deflation. Nonetheless, what we see is a temporary bulge in inflation, not a sustained rise:

So while there are risks to a big economic relief package, the risk of replaying the 1970s isn’t one of them. Democrats may say to themselves, how did we get here? They may ask themselves, my God, what have we done? But it’s not going to be 1979 redux.

Paul Krugman, “The macro equivalent of war?,”Krugman Wonks Out, February 27, 2021, https://paulkrugman.substack.com/p/the-macro-equivalent-of-war