The incompetence of economic policy makers: why U.S. women are leaving the labor force
December 15, 2014Leave a commentGo to comments
from Dean Baker
The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.
Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.)
The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan.
But the failure of the United States to meet the needs of working parents doesn’t respond to the headline of the piece, “why U.S. women are leaving jobs behind.” The answer to this question is very clearly the state of the economy. After all, the employment to population ratio (EPOP) for prime age women peaked in 2000 at 74.2 percent, coincidentally the peak of the business cycle. After the stock bubble burst and threw the economy into recession in 2001 the EPOP for prime age women declined. It bottomed out at 71.8 percent in 2004 and then started to rise as the economy began to create jobs again. It peaked at 72.5 percent in 2006 and 2007 and then tumbled to a low of 69.0 percent in 2011. Since then it has inched up gradually as the labor market has begun to recover from the downturn.
Anyhow, it is good to see the NYT draw attention to the failure of the United States to provide adequate support for working families which leads to unnecessary hardships for both parents and children. But it is seriously misleading to imply that the causes of the drop in employment of women in this century can be found anywhere other than the failed macroeconomic policies originating in Washington.
In other words, U.S. women are leaving the labor force because Alan Greenspan and other financial regulators and the economics profession were too incompetent to recognize an $8 trillion housing bubble. And they are leaving the labor force because Washington politics are dominated by a cult of balanced budgets. This cult is so powerful that even the politicians who know it is nonsense are scared to challenge it. Washington politics is also dominated by powerful interest groups (e.g. Walmart, General Electric, the financial industry) who benefit from an over-valued dollar and don’t care about the millions of jobs lost due to the resulting trade deficit.
Anyhow, these macroeconomic forces are not really questionable. Unfortunately they are rarely discussed in the media. Stories like the one today and yesterday badly mislead the public by largely ignoring these forces.
Links. Price levels (plural)
A) A gentleman called Hume argued, back in 1752, that it’s not just about household consumption prices – differences in government consumption price levels are important, too.
B) Hume’s take on prices was actually more balanced than present day central bank ideas about ‘inflation targeting‘ which invariably but for no good reason target consumer prices only.
C) An no, the DSGE-modelling strategy which assumes that there is only a single final good and one ‘representative’ household in the entire economy is not a very good reason to do this (albeit consistent with new-classical thinking)
D) Recent data from the British ONS for instance show that in the UK inflation for poor households was 1% a year higher for eleven years in a stretch than for rich households (as they buy other goods and services, especially ‘housing’ is important). The ‘repreentative consumer’might not be that representative. By the way – consumer price inflation in the UK saw a sizeable 0,3%-point decline in October – the lowest rate of inflation in 12 years. Producer output prices even declined with 0,1% – but that’s not a problem as input prices (excluding wages) declined with a massive 8,8%. An oh, the country is still infected with wealth illusion: house prices increased with more than 10% (+17% in London: sell and emigrate!).
E) Which underscores the point that central bank strategy of average ‘consumer price inflation only’ targeting is, well, daft.
F) German inflation differences between income groups were somewhat smaller than in the UK, albeit still sizeable
G) Tyler Cowen argues, rightly, that inflation is about the purchasing power of income (i.e.: not about the purchasing power of money) and even when estimated inflation is equal for all income classes higher incomes do have the advantage.
Household wealth trends in the United States, 1962-2013
from David Ruccio
The chart comes from Ed Wolff’s latest, “Household Wealth Trends in the United States, 1962-2013: What Happened over the Great Recession?”—another in a growing list of investigations into the declining fortunes of the American middle-class.
Two trends can be seen in this chart: first, the enormous growth in mean net worth from 1983 to 2013 (after the post-2007 dip); and, second, the much slower growth in mean net worth through 2007, and the decline from then to 2013.
On the first, Wolff explains,
Between 1983 and 2013, the top one percent received 41 percent of the total growth in net worth, 43 percent of the total growth in non-home wealth, and 49 percent of the total increase in income. The figures for the top 20 percent are 99 percent, 98 percent, and 103 percent, respectively – that is to say, the upper quintile got it all!
As for the second, Wolff’s interpretation of the evidence is that, even with the rise in housing prices through 2007, the net worth of middle-class households rose very slowly because, with stagnant incomes, they expanded their debt in order to finance normal consumption expenditures (rather than to increase their investment portfolios). And that same income stagnation continued over both the 2007-2010 and 2010-2013 periods, which forced the middle-class to engage in significant dissaving to maintain its previous levels of consumption.
The result is that, while real mean net worth rose 67.4 percent from 1983 to 2013 (even after a sharp drop after 2007), real median net worth actually declined by 18.2 percent over the same period (which, in percentage terms, fell much more than the mean after 2007).
Right now, the American middle-class is stuck between the rock of stagnant incomes and the hard place of stagnant net worth. And it doesn’t look like that’s going to change anytime soon.
“This real-world attribute straightforwardly invalidates Walras’s Law”
. . . the totality of all goods cannot be traded by the totality of all agents at every single trading moment. Momentary analysis thus facilitates the recognition of an important real-world attribute: continual trade in different goods among different traders.
This real-world attribute straightforwardly invalidates Walras’s Law, understood as the necessary equality of the total value of goods brought to market and the total value of goods taken away from the market at its close. Walras’s Law does not describe an intrinsic quality of market exchange, but results from the stylisation of a single trading round per period during which a given set of agents seeks to trade a given and uniformly priced set of goods among each other. Hence when the identities of goods and traders are in continual flux, as they are in the real world, Walras’s Law fails (Tsiang, 1966). The scrapping of one arbitrarily chosen market facilitated by Walras’s Law has, unsurprisingly, no imaginable counterpart in economic reality. It is an absurdity. Yet it continues to be invoked (e.g. by Brunnermeier and Sannikov, 2011) while textbook LM theory also still employs it to rid itself of the bond market.
Piet-Hein van Eeghen
http://www.paecon.net/PAEReview/issue67/Eeghen67.pdf
Why growth?
World War Two was followed by a period of economic growth. Yet in 1968 many young people in developed Western nations were questioning the lifestyles provided by their societies. They wanted a more meaningful lifestyle, and recognised that it had become physically possible to provide universal social services and good living conditions, including well-paid employment for all with liberal conditions and ample leisure time within a workweek of 30-35 hours. The leisure society beckoned.
At the same time, through the late 1960s and the decade of the 1970s, a considerable body of information described looming global problems. Since evidently all was not well, many decided to search deeper, to ask the major questions of the time and find the answers. Modern society, with its rapacious desire for never-ending growth, was foolishly pushing against limits on a finite planet while increasing inequality and joblessness within a consumer society tightly controlled by ubiquitous advertising.
Growth of population, the expansion of Homo Sapiens across the earth has long been accompanied by the extinction of other species. The first great period of human expansion was between 9,000 and 13,000 years ago after the end of the last Ice Age. The consequence was the Holocene extinction, the disappearance of large mammals from many lands. The process has accelerated in the last half-century. This “anthropocene extinction” is on par with the five catastrophic mass extinctions of Earth’s history. Yet how many economics texts mention any requirement to leave living space to what remains of the natural world?
The earth’s ability to cope with human activities has now been passed, as is evident with climate change, and resources are used nonsustainably for short-term gain – including oil and aquifer water. A number of estimates show that it would take more than two planets to support everyone at a Western standard of living; while no more than a few tens of millions could live in full balance with the natural world, perhaps two billion could experience a “developed” lifestyle. Desires for a better future most often fail to realise that equity and full development to a western standard is impossible.
A major question raised was whether the growing world population could be fed, even at a lower standard of living. If such a limit was reached, when would that be and how would events play out? Many global models, led by The limits to growth1 and followed by more complex models have provided the answer. Limits will be passed around 2030, with overshoot leading into collapse.2
The economy is a major defining force in such activity. The holistic scholar must combine information from so many disciplines. Expert information is gathered from many sources and, while suitable analyses of the physical world were available, mainstream economics texts and pronouncements were inadequate, with little or no appreciation of the changes coming. The frequently expressed belief in the triumph of modern growth capitalism is seen in the following two influential sources, the first a popular introductory textbook.
“Today, thanks to the intellectual contribution of John Milton Keynes and his followers, we know how to control the worst excesses of the business cycle. By careful use of fiscal and monetary policies, governments can affect output employment and inflation”, so that “the deepest depressions no longer appear to be a major threat to advanced market economies”.3
“I argued that a remarkable consensus concerning the legitimacy of liberal democracy as a system of government had emerged throughout the world over the past few years, as it conquered rival ideologies like hereditary monarchy, fascism, and most recently communism. More than that, however, I argued that liberal democracy may constitute the ‘end point of mankind’s ideological evolution’ and the ‘final form of human government’, and as such constituted the ‘end of history’. That is, while earlier forms of government were characterized by grave defects and irrationalities that led to their eventual collapse, liberal democracy was arguably free from such fundamental internal contradictions.”4
Despite such claims, the instability of developed economies is evident. It is important to understand why and to consider likely developments as other critical factors increasingly impact. My own search has been guided by experiences in scientific research, in particular by success in understanding non-linear instabilities in both a layer of fluid heated from below and in a shear layer where one body of fluid is moving across another. 5 In each case the system becomes unstable when a defined parameter passes a critical value, at a tipping point. The new flow follows a clear pattern, to cells in the heated fluid and to breaking waves in the shear layer. Then (depending on a number of other physical parameters) those patterns become more complex, eventually becoming turbulent. Each process can be followed, and understood, with the aid of simplified models that identify the key factor defining when the system is unstable, and the further factors that determine the subsequent behaviour. There is nothing random about these processes; there is a reason for the instability and for the resultant pattern, which in each case follows the laws of physics. These principles hold also in economics.
In science, if a model does not fit reality, if evidence is not in accord with a hypothesis, the assumptions are questioned and some rejected. The reason is sought and a new theory evolves. This process should be followed with a national, now global, economic system. Since the system is inherently unstable, will disturbances lead to some new situation, of either another regular pattern or breakdown and turbulence?
1 Meadows et al 1972
2 Robinson 2013
3 Samuelson 1948
4 Fukuyama 1992, Introduction, page xi
5 Robinson 1967 and 1973, 1974 and 1977
Proper use of math in economics
from Lars Syll
27. ii. 06
My dear Bowley,I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.
But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.
I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …
Your emptyhandedly,
Economic theory creates the world we live in, and the rules we live by.
How does it happen that we have given our quiet assent to a situation where the richest 85 individuals have more money than the bottom 3.5 billion? Where vultures wait for starving children to die, while others eat luxurious meals on private resort islands? Where horrendous military and commercial crimes leading to deaths, misery, and deprivations of millions are routinely committed by highly educated men with multimillion dollar salaries in luxury corporate and government suites?
A core component of the answer to these critical questions is that we have been educated to believe that this is a normal state of affairs, which comes about through the operation of iron laws of economics. Economic theories currently being taught in universities all over the world are an essential pillar which sustains the economic system currently in operation. These theories state that we (human beings) are cold, callous, and calculating. Microeconomic theory says rational individuals are concerned only with their own consumption. They are callous; completely indifferent to the needs of others. They maximize, calculating personal benefits to the last penny. They are cold – their decisions are not swayed by emotions of any kind. All this theorizing is not without power – it creates the world we live in, and the rules we live by.