While you were nursing your post-New Year’s hangover this weekend, thousands of economists gathered in Boston for the annual meeting of the American Economic Association. The three-day conference was packed with panels and presentations on everything from the causes of income inequality in the United States to agricultural productivity in India. Much of that research hasn’t yet been published, so the meeting provided an early peek at where the economics profession is headed in the coming years.
One big theme that emerged: “Policy” is no longer a dirty word in economics. Economic research has always grappled with policy issues, of course — the minimum wage, trade policy, government spending — but academic economists often seemed to avoid making specific recommendations, or even discussing the policy implications of their work. In recent years, that caution has drawn criticism (some of it from within the profession) after economists first failed to predict the financial crisis and then argued about how best to respond to it.
This weekend’s conference suggests economists are beginning to listen to that criticism. Harvard economist Raj Chetty gave a standing-room-only lecture on applying economic methods to public policy. There were panel discussions on policy-relevant subjects such as inequality, climate change and even the possibility of a looming cold war between the U.S. and Russia. And perhaps even more significantly, much of the new research being presented – including research from young up-and-coming economists – was focused on subjects like unemployment, education and financial regulation.
There were, of course, still plenty of papers on esoteric topics that won’t soon draw newspaper headlines. That’s a good thing. Today’s little-noticed sub-specialty could well turn out to be tomorrow’s hot topic. But in the meantime, it’s good to see economists willing to grapple with the real-world implications of their work.
We attended the conference this weekend. Here are brief summaries of a few of the most interesting presentations we heard. One caution: Most of these papers haven’t yet been published, and in some cases the research isn’t yet complete. So treat their conclusions with caution.
Session Title: Behavioral Economics and Public Policy: A Pragmatic Perspective
Presenter: Raj Chetty
Key takeaway: Behavioral economics — the subfield that incorporates findings from psychology and other social sciences — can be used to make better predictions than the standard models of economics, and thus improve policies related to how much individuals save, how much they work, and where they live.
Discussion: Chetty’s first example of the advantage of behavioral economics concerned retirement. Americans don’t save nearly enough for it. Behavioral economists recommend default saving policies, in which workers automatically see a fraction of their paycheck go to a 401(k). According to the standard view, such nudges shouldn’t change someone’s thriftiness, since they would just offset their saving and spending elsewhere in their budget. But drawing on millions of records from a Danish retirement study, Chetty found that default policies do raise total retirement saving.
Chetty’s second example concerned the earned income tax credit (EITC), a $60 billion federal program that subsidizes the earnings of low-income individuals. Economists have a long-standing debate about whether the EITC encourages people to work only until a point — the point where they can maximize its benefit — or work even beyond that threshold. Chetty was interested in whether being aware of the program made people more likely to exploit it, but found it didn’t.
Finally, Chetty presented research showing where children grow up matters tremendously — even after adjusting for cost of living and other factors. So why don’t families move to areas that would make their kids better off? He says it’s inertia — people are biased toward the status quo. Chetty recommends subsidies via housing vouchers or non-monetary “nudges,” like counseling, to promote such moves.
Session Title: A Discussion of Thomas Piketty’s “Capital in the 21st Century”
Presenters: David Weil, Alan J. Auerbach, N. Gregory Mankiw, and Thomas Piketty
Key takeaway: Thomas Piketty, the French economist whose book “Capital in the 21st Century” — which documented a surge in economic inequality — was a surprising best-seller last year, stood by his work despite some academic economists questioning his statistical analysis and policy recommendations.
Discussion: In his book, Piketty argues that inequality rises when the rate of return on assets (“r”) is higher than the economy’s growth rate (“g”). To him, this is, the principal cause of the current high levels of inequality. He wants to tax wealth to reduce this inequality.
The other economists on this panel had some problems with Piketty’s data, but even more so with his analysis of rising inequality. Specifically, they thought Piketty overestimated “r” in not adjusting for other variables such as taxation and risk.
They further argued that even if he was right, they disagreed with his suggestion for a global wealth tax. Instead, they would favor a progressive tax on consumption — for example, an 80 percent tax on yachts.
Piketty responded that it’s hard to define and measure the consumption of the extremely rich. As he remarked, “billionaires consume more than food or clothes — they consume power, politicians, journalists, and academics.” He argued that a wealth tax has practical advantages over a progressive consumption tax: it’s easier to implement because wealth is easier to define.
Session Title: The Economics of Secular Stagnation
Presenters: Larry Summers, N. Gregory Mankiw, Robert Hall, Robert Gordon, Barry Eichengreen, William Nordhaus
Key takeaway: Many liberal economists think the U.S. economy is in a prolonged period of crummy growth, and that we need some major stimulus. Many conservative economists, on the other hand, either don’t think there’s anything special about this slow recovery, or that there’s little the government should do about it.
Discussion: The Great Recession ended more than five years ago, and while U.S. growth is starting to pick up, most Americans haven’t reaped the benefits of the recovery. Could this be the new normal? That’s roughly the notion of “secular stagnation.” The idea is a fuzzy one, because economists have so many competing versions of what it means. Six distinguished economists gave their definitions and, in some cases, their proposed fixes.
Half the panel subscribed to the idea of secular stagnation. The other half was doubtful.
Gordon said that we’re out of good ideas. He presented a pessimistic view of technological innovation, highlighting the long-term decline in U.S. productivity. According to him, the economy is in the doldrums because we’ve run out of good ideas.
Summers said that the government hasn’t provided enough stimulus. He pointed to excessive savings relative to investment opportunities, and called for more fiscal stimulus like infrastructure spending.
Hall thinks people are less willing to work. His definition of secular stagnation is the flatlining of average real earnings per household. He pointed to trends in the declining labor share, reduced productivity growth, and depleted capital, all of which seemed to have a remarkable inflection point in the year 2000. Citing a curious theory from Steven Davis, a University of Chicago economist, Hall said that was the year cheap video entertainment became available.
The nonbelievers had different reasons to go against the stagnation hypothesis. Eichengreen gave a historical overview, which left him “between agnostic and skeptical” on the idea’s validity. While proponents say low interest rates are proof of secular stagnation, Eichengreen’s work shows interest rates are not excessively low, but merely reverting to their long-term mean.
Mankiw was even more skeptical: he doesn’t believe the U.S. economy is in secular stagnation at all, only recovering from a bad recession. And if it were stagnated, he doesn’t recommend more fiscal stimulus, but instead investing in education.
Nordhaus bucked the rest of the panel, rejected the notion of stagnation and expounded upon a radically different view: the theory of the singularity, or “accelerationism.” This view, prominently espoused by Ray Kurzweil, sees exponential growth in technology, especially artificial intelligence. Not only is there no stagnation, in this view, we’re in an era of ever-increasing advancement that traditional economic statistics can’t capture.
Session title: Entrepreneurship and Creativity
Presenter: Antoinette Schoar
Key takeaway: Making entrepreneurship less risky can make people more likely to start businesses — and can make the economy more productive as a result.
Discussion: Entrepreneurship in the U.S. is on the decline, and has been for decades. In theory, the government could help spur entrepreneurship by making it less risky, perhaps by providing the equivalent of unemployment benefits for failed entrepreneurs. But while that would almost certainly encourage more people to start businesses, it’s less clear whether those businesses would succeed. After all, maybe the reason people are reluctant to become entrepreneurs is because they wouldn’t be very good at it.
Antoinette Schoar and her coauthors tried to answer that question by taking advantage of a policy change in France that allowed unemployed people to start businesses without sacrificing their jobless benefits. Predictably, the number of startups jumped. Less predictably, those new businesses did just as well as those started before the policy change. The policy didn’t have much of an effect on overall employment: The new businesses created lots of jobs, but mostly at the expense of jobs elsewhere in the economy. Importantly, though, those new jobs were better paying and the new companies were more productive, meaning the change made the overall economy more efficient.
Boosting the startup rate could have even wider consequences. In a separate session, University of Maryland economist John Haltiwanger presented preliminary results of new data on the output of U.S. businesses. Haltiwanger has previously shown that a small subset of fast-growing startups play a disproportionate role in job creation; the new work finds the same is true for economic output as well. The vast majority of startups don’t grow at all. But the handful that do are key to overall employment and productivity growth – which is another reason to worry about the falling startup rate.
Session title: Impacts of the Great Recession on Low-Income Households
Presenters: Marianne Bitler, Diane Schanzenbach
Key takeaway: The recent recession hit low-income families harder than past downturns, in part because of changes to government safety-net programs.
Discussion: Recessions are always hardest on lower-income families, who tend to have less stable jobs and have fewer resources to help them weather hard times. But those disadvantages appear to have grown worse in recent decades. In a new, not-yet-published paper, economists Marianne Bitler and Hilary Hoynes find that the recent recession pushed more families into poverty than the last similarly severe downturn in the 1980s. The recent recession also reached further into the middle class than the 1980s slowdown, likely, the researchers say, because of the unprecedented rise in long-term unemployment.
Bitler and Hoynes cite the weakening social safety net – particularly welfare reform of the 1990s – as a key factor explaining why this recession hit so hard. A separate paper by Patricia Anderson, Kristin Butcher and Diane Schanzenbach helps illustrate that point. They find that the use of food stamps, unemployment insurance and the earned income tax credit all rose significantly in the recession. But the Temporary Assistance for Needy Families program – what used to be called welfare – saw no similar increase, even though the number of Americans living in poverty saw a clear rise. “That is maybe not how a safety net program is meant to work,” Schanzenbach said.
Session title: Housing Price Shocks and Household Behavior
Presenters: Rucker Johnson, Jennifer Milosch
Key takeaway: The housing boom helped more families send their children to college, and those children attended better schools and completed more education. The housing bust, however, wiped out those gains.
Discussion: As college tuitions have risen, more parents have tapped the value of their homes to help pay for their children’s education. Using data from the Panel Study on Income Dynamics, Rucker Johnson finds that children in parts of the country that saw a big run-up in home prices were more likely to enroll in college, were more likely to go out of state for school and were more likely to complete their degrees. The effect was greatest for lower-income households, who were more likely to rely on home equity to pay for college. But when home prices collapsed, that advantage disappeared.
Interestingly, while Johnson finds that the housing boom led more young people to go to four-year colleges, a separate paper at a different session (“Macroeconomics with Rich Microdata: Implications for Policy”) found that the boom made young people, and especially young men, less likely to attend community college. That makes sense: The housing boom created wealth, which meant more people could afford higher education, but it also created lots of construction jobs, which many young people may have seen as an attractive alternative to an associate degree.