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1. EfIP Online Panel: A New Macroeconomics?

Author:
Jón Steinsson
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Economics for Inclusive Prosperity (EfIP)
Abstract:
There is a narrative within our field that macroeconomics has lost its way. While I have some sympathy with this narrative, I think it is a better description of the field 10 years ago than of the field today. Today, macroeconomics is in the process of regaining its footing. Because of this, in my view, the state of macroeconomics is actually better than it has been for quite some time. The most important problem with macro over the past few decades has been that it has been too theoretical. When I say this, I don‘t at all mean to say that theory is useless. To the contrary, theory is an essential element of a healthy science. But a healthy science needs a balance between theory and empirical work. Macro lost this balance in the 1980s and is only regaining it now. Most narratives about the evolution of macro focus on the evolution of macroeconomic theory and the rational expectations revolution in particular. An under-appreciated part of this story is that the rational expectations revolution shifted the field away from empirical work. This was partly because building models that met the higher standards of rigor set by Lucas and his co-revolutionaries was a challenging and therefore highly absorbing task. But that isn’t the only reason. For reasons that are not entirely clear to me, a very substantial fraction of macroeconomists came to believe that the Lucas critique implied that quasi-experimental empirical methods could not be used in macro. The idea that changes in policy could radically alter empirical regularities (i.e., the Lucas critique) somehow came to be interpreted to mean that the only way to do empirical work in macro was to write down fully specified general equilibrium models of the whole economy and evaluate the entire model (either by full-information inference methods or moment matching). Sargent, for example, placed enormous emphasis on the idea of “cross-equation restrictions.“ It seems that this line of thinking led large numbers of macroeconomists astray in terms of how to think about empirical work in macro for several decades.
Topic:
Economics, Political Economy, and Macroeconomics
Political Geography:
United States

2. New Directions in Macroeconomics

Author:
Gillian Brunet
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Economics for Inclusive Prosperity (EfIP)
Abstract:
Without being overly prescriptive, macro research must meet two standards to keep the field moving in a productive direction: models must be tested empirically and researchers must think carefully about how underlying assumptions restrict the set of questions that can be answered with a given model. Models move knowledge forward through rigorous empirical testing. Matching moments in model calibration is not enough—nor should it be considered true empirics. When economics is done well, theory and empirics are complements: empirical research disciplines models and theory disciplines empirical research. In recent decades, macro research has tilted very heavily towards theory, forgoing the feedback generated by rigorous empirical testing and, as a consequence, dramatically reducing the ratio of insight to effort. Macro as a field must value empirical contributions to flourish fully. There has been significant progress in the last decade, but the balance still tilts heavily towards theory. Macroeconomists must stop dismissing empirical contributions as trivial for macro theory to reach its potential. It’s not an accident that many of today’s best macroeconomists stand out for their work in both theory and empirics: empirical work disciplines their theoretical research. Over the past 40-50 years, research in short-run macroeconomics has focused on the goal of creating unified, internally consistent models of the macroeconomy. While this is a worthy goal, it has perhaps become too dominant—and imposes hidden costs on research. The emphasis on developing a central baseline model to which idiosyncratic features are added for addressing a specific problem discourages many researchers from considering the suitability of the underlying model to the specific question being asked. As economists we are taught that every model is a simplification, so that the relevant question is not whether a model is good or bad but whether it is good or bad for answering a specific question. Yet choosing a single baseline model of the macroeconomy tends to obscure the closeness of the relationship between the model and the question it is used to answer. Often macroeconomists think carefully about the relationship between their question and the idiosyncratic features they add to the baseline model, but many of the assumptions underlying the baseline model become invisible and thus unquestioned. This is understandable given the complexity of modern macro models, but it has high costs. More careful consideration of the assumptions underlying baseline models and their appropriateness to individual research questions can help move the field forward.
Topic:
Economics, Political Economy, Macroeconomics, and Models
Political Geography:
United States

3. Is the Most Unproductive Firm the Foundation of the Most Efficient Economy? Penrosian Learning Confronts the Neoclassical Fallacy

Author:
William Lazonick
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Edith Penrose’s 1959 book The Theory of the Growth of the Firm [TGF] provides intellectual foundations for a theory of innovative enterprise, which is essential to any attempt to explain productivity growth, employment opportunity, and income distribution. Properly understood, Penrose’s theory of the firm is also an antidote to the deception that is foundational to neoclassical economics: The theory, taught by PhD economists to millions upon millions of college students for over seven decades, that the most unproductive firm is the foundation of the most efficient economy. The dissemination of this “neoclassical fallacy” to a mass audience of college students began with Paul A. Samuelson’s textbook, Economics: An Introductory Analysis, first published in 1948. Over the decades, the neoclassical fallacy has persisted through 18 revisions of Samuelson, Economics and in its countless “economics principles” clones. This essay challenges the intellectual hegemony of neoclassical economics by exposing the illogic of its foundational assumptions about how a modern economy functions and performs. The neoclassical fallacy gained popularity in the 1950s, during which decade Samuelson revised Economics three times. Meanwhile, Penrose derived the logic of organizational learning that she lays out in TGF from the facts of firm growth, absorbing what was known in the 1950s about the large corporations that had come to dominate the U.S. economy. Also, during that decade, the knowledge base on the growth of firms on which economists could subsequently draw was undergoing an intellectual revolution, led by the business historian, Alfred D. Chandler, Jr. He was engaged in the first stage of a career that would span more than a half century, during which Chandler documented and analyzed the centrality to U.S economic development of what he would come to call “the managerial revolution in American business.” In combination, the works of Penrose and Chandler form intellectual foundations for my own work on the Theory of Innovative Enterprise—an endeavor that has enabled me, as an economist, to recognize not only the profound importance of organizational learning for economic theory but also the illogic of the neoclassical theory of the firm for our understanding of the central institution of a modern economy, the business corporation. In this essay, I argue that the key characteristic of the innovative enterprise is fixed-cost investment in the productive capabilities of the company’s employees to engage in organizational learning. The purpose of this investment in organizational learning is to develop a higher-quality product than was previously available. When successful, the development of the higher-quality product enables the firm to capture a large extent of the market, transforming high fixed cost into low unit cost. The result is sustainable competitive advantage that enables the growth of the firm, contributing to the growth of the economy as a whole. I argue that to get beyond the neoclassical fallacy, economists have to stop relying on constrained-optimization methodology. Rather, they need to be trained in a “historical transformation” methodology that integrates history and theory. It is a methodology in which theory serves as both a distillation of what we have learned from the study of history and a guide to what we need to learn about reality as the “present as history” unfolds.
Topic:
Economics, Political Economy, Macroeconomics, and Neoclassical Economics
Political Geography:
United States

4. How Much Can the U.S. Congress Resist Political Money? A Quantitative Assessment

Author:
Thomas Ferguson, Paul Jorgensen, and Jie Chen
Publication Date:
01-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The extent to which governments can resist pressures from organized interest groups, and especially from finance, is a perennial source of controversy. This paper tackles this classic question by analyzing votes in the U.S. House of Representatives on measures to weaken the Dodd-Frank financial reform bill in the years following its passage. To control as many factors as possible that could influence floor voting by individual legislators, the analysis focuses on representatives who originally cast votes in favor of the bill but then subsequently voted to dismantle key provisions of it. This design rules out from the start most factors normally advanced by skeptics to explain vote shifts, since these are the same representatives, belonging to the same political party, representing substantially the same districts. Our panel analysis, which also controls for spatial influences, highlights the importance of time-varying factors, especially political money, in moving representatives to shift their positions on amendments such as the “swaps push out” provision. Our results suggest that the links between campaign contributions from the financial sector and switches to a pro-bank vote were direct and substantial: For every $100,000 that Democratic representatives received from finance, the odds they would break with their party’s majority support for the Dodd-Frank legislation increased by 13.9 percent. Democratic representatives who voted in favor of finance often received $200,000–$300,000 from that sector, which raised the odds of switching by 25–40 percent.
Topic:
Economics, Political Economy, Elections, Democracy, Finance, Legislation, and Money
Political Geography:
United States

5. Payroll Share, Real Wage and Labor Productivity across US States

Author:
Ivan Mendieta-Muñoz, Codrina Rada, Ansel Schiavone, and Rudi von Arnim
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes regional contributions to the US payroll share from 1977 to 2017 and the four major business cycles throughout this period. We implement two empirical exercises. First, we decompose the US payroll share across states. Utilizing a Divisia index decomposition technique yields exact contributions of real wages, employment structure, labor productivity and relative prices across the states to the aggregate change in the payroll share. Key findings are that the decline in the aggregate (i) is driven by decoupling between real wage and labor productivity; and (ii) is initially driven by the rust belt states, but subsequently dominated by relatively large states. Second, we employ mixture models on real wages and labor productivity across US states to discern whether distinct mechanisms appear to generate these distributions. Univariate models (iii) indicate the possibility that two distinct mechanisms generate state labor productivities, raising the question of whether regional dualism has taken hold. Lastly, we use bivariate mixture models to investigate whether such dualism and decoupling manifest in the joint distributions of payroll shares and labor productivity, too. Results (iv) are affirmative, and further suggest a tendency for high performing states to have relatively high payroll shares initially, and low payroll shares more recently.
Topic:
Economics, Political Economy, Labor Issues, Productivity, and Workforce
Political Geography:
United States

6. The Global Impact of Brexit Uncertainty

Author:
Tarek A. Hassan, Laurence van Lent, Stephan Hollander, and Ahmed Tahoun
Publication Date:
01-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Using tools from computational linguistics, we construct new measures of the impact of Brexit on listed firms in the United States and around the world: the share of discussions in quarterly earnings conference calls on costs, benefits, and risks associated with the UK’s intention to leave the EU. Using this approach, we identify which firms expect to gain or lose from Brexit and which are most affected by Brexit uncertainty. We then estimate the effects of these different kinds of Brexit exposure on firm-level outcomes. We find that concerns about Brexit-related uncertainty extend far beyond British or even European firms. US and international firms most exposed to Brexit uncertainty have lost a substantial fraction of their market value and have reduced hiring and investment. In addition to Brexit uncertainty (the second moment), we find that international firms overwhelmingly expect negative direct effects of Brexit (the first moment), should it come to pass. Most prominently, firms expect difficulties resulting from regulatory divergence, reduced labor mobility, trade access, and the costs of adjusting their operations post-Brexit. Consistent with the predictions of canonical theory, this negative sentiment is recognized and priced in stock markets but has not yet had significant effects on firm actions.
Topic:
Economics, Political Economy, Regional Cooperation, Brexit, Global Political Economy, and Economic Policy
Political Geography:
Britain, United States, United Kingdom, Europe, and European Union

7. The Political Economy of Europe since 1945: A Kaleckian perspective

Author:
Joseph Halevi
Publication Date:
06-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes the early stages of the formation of the Common Market. The period covered runs from the end of WW2 to 1959, which is the year in which the European Payments Union ceased to operate. The essay begins by highlighting the differences between the prewar political economy of Europe and the new dimensions and institutions brought in by the United States after 1945. It focuses on the marginalization of Britain and on the relaunching of French great power ambitions and how the latter determined, in a very problematical way, the European complexion of France. Because of France’s imperial aspirations, France, not West Germany, emerged as the politically crisis prone country of Europe acting as a factor of instability thereby jeopardizing the process of European integration, Among the large European nations, Germany and Italy appear, for opposite economic reasons, as the countries most focused on furthering integration. Germany expressed the strongest form of neomercantilism while Italy the weakest.
Topic:
Economics, Political Economy, Global Political Economy, World War II, and Common Market
Political Geography:
United States, Europe, Germany, and Global Focus

8. Economic Consequences of the U.S. Convict Labor System

Author:
Michael Poyker
Publication Date:
03-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
I study the economic externalities of convict labor on local labor markets and firms. Using newly collected panel data on U.S. prisons and convict-labor camps from 1886 to 1940, I calculate each county’s exposure to prisons. I exploit quasi-random variation in county’s exposure to capacities of pre-convict-labor prisons as an instrument. I find that competition from cheap prison-made goods led to higher unemployment, lower labor-force participation, and reduced wages (particularly for women) in counties that housed competing manufacturing industries. The introduction of convict labor accounts for 0.5 percentage-point slower annual growth in manufacturing wages during 1880– 1900. At the same time, affected industries had to innovate away from the competition and thus had higher patenting rates. I also document that technological changes in affected industries were capital-biased.
Topic:
Economics, Political Economy, Labor Issues, Capitalism, Domestic Politics, Macroeconomics, Mass Incarceration, and Manufacturing
Political Geography:
United States

9. Oh Mother: The Neglected Impact of School Disruptions

Author:
David Jaume and Alexander Willén
Publication Date:
03-2019
Content Type:
Working Paper
Institution:
Center for Distributive, Labor and Social Studies (CEDLAS)
Abstract:
Temporary school closures (TSC) represent a major challenge to policymakers across the globe due to their potential impact on instructional time and student achievement. A neglected but equally important question relates to how such closures affect the labor market behavior of parents. This paper provides novel evidence on the effect of temporary school closures on parental labor market behavior, exploiting the prevalence of primary school teacher strikes across time and provinces in Argentina. We find clear evidence that temporary school closures negatively impact the labor market participation of mothers, in particular lower-skilled mothers less attached to the labor force and mothers in dual-income households who face a lower opportunity cost of dropping out of the labor force. This effect translates into a statistically significant and economically meaningful reduction in labor earnings: the average mother whose child is exposed to ten days of TSCs suffers a decline in monthly labor earnings equivalent to 2.92% of the mean. While we do not find any effects among fathers in general, fathers with lower predicted earnings than their spouses also experience negative labor market effects. This suggests that the parental response to TSCs depend, at least in part, on the relative income of each parent. A back-of-the-envelope calculation suggest that the aggregate impact of TSCs on annual parental earnings is more than $113 million, and that the average mother would be willing to forego 1.6 months of labor earnings in order to ensure that there are no TSCs while her child is in primary school.
Topic:
Economics, Education, Markets, Political Economy, and Labor Issues
Political Geography:
United States

10. Structural Exchange Pays Off: Reciprocity in Boards and Executive Compensations in US Firms (1990–2015)

Author:
Olivier Godechot, Joanne Horton, and Yuval Millo
Publication Date:
06-2019
Content Type:
Research Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
We study the influence of the corporate board network on executive pay for 3,395 US firms over the period from 1990 to 2015. Drawing on structural anthropology and social exchange theory, we identify three elementary structures through which the interlocking network captures an obvious form of objective reciprocity between executives from different firms: restricted exchange, when two executives sit on each other’s respective boards; delayed exchange, when y sits on the board of x after the end of x’s mandate on the board of y ; and generalized exchange, when x sits on the board of y, who sits on the board of z, who sits on the board of x. Our results suggest that these ties, although not very common, are more frequent than those calculated by chance. We also find that the three structures of reciprocity have a positive impact on executive pay, especially on bonuses and total cash. We use the Sarbanes-Oxley Act (2002) as a natural experiment to confirm our first findings. The impact on pay disappears after 2004, once these types of exchanges are constrained. Although linked to executive pay, these structures are not tied to any indicator of firm performance. This leads us to interpret them as a rent extraction phenomenon.
Topic:
Economics, Political Economy, Income Inequality, Business, and Public Sector
Political Geography:
United States