ASSA 2019 part one – the mainstream: avoiding recessions

Past annual conferences of the American Economics Association have had some dominant themes: rising inequality, slowing productivity and secular stagnation.  But in 2018 and in the 2019 conferences, the focus switched – at least among the mainstream economic stream that overwhelmingly dominate ASSA – to whether there will be a new recession in the US and globally, which could be perhaps triggered by a trade war between the US and its main economic rival China. At ASSA 2019, the big issue was whether mainstream economics had learnt the right lessons from the debacle of the Great Recession; and what monetary and fiscal policies of stimulus are best to avoid another slump or at least get out of one quickly?

Of course, there were way more subjects discussed by the 13,000 participants attending the Atlanta Georgia ASSA 2019.  In the hundreds of papers and panels presented, there were some important longer term themes debated, in particular, the impact on jobs of robots and AI, whether China would become the leading economic power in the 21st century or was heading for a fall; and a continual subject for economists, namely whether the assumptions of mainstream economic theory bore any relation to reality.

In this review, I cannot possible cover all the issues, facts and fallacies presented.  So let me first concentrate on the headline panel discussions where the leading economic policy officials and economic gurus spoke.  On Friday, there was a heavily publicised and TV broadcast session with the current Federal Reserve chair Jay Powell and the two previous chairs, Janet Yellen (under Obama) and Ben Bernanke (under Bush).

The pronouncements of Jay Powell that the Fed was going to be cautious about pursuing further interest rate increases in 2019 and would look at the data rallied the stock markets where investors are clearly worried that global growth is slowing and further hikes by the Fed could provoke a recession.  But the overall line of the Fed chairs was that the US economy was looking good, there would be no recession and measures to avoid a new financial crash, while not fully perfect, were much better than back in 2007.

But when asked about what the economics profession needed to do, Janet Yellen said that the profession failed to see the global financial crash and the Great Recession coming. So now more research is needed on “systemic risk” (ie financial collapse). Jay Powell admitted that the Fed still did not have all the “tools” to avoid credit crashes in non-bank areas. And Bernanke was worried about rising inequality which he could not explain.

It seems that mainstream economics is putting its faith in what it calls macroprudential policies to avoid or mitigate future crises ie reducing risks of instability in the finance sector, where the last crisis is supposed to have originated. As Kristin Forbes of MIT put it: “Macroprudential regulations currently focus on where the last set of vulnerabilities arose, especially in banks and mortgage markets. These are critically important, but the next crisis could start in other sectors. In fact, the success of existing regulations in reducing the risks in banks could be contributing to the build-up of vulnerabilities elsewhere, such as by shifting exposures to currency and liquidity risk to the corporate sector and shadow financial system—sectors about which regulators have less information and where entities may be less prepared to handle surprises. Macroprudential policy has made impressive progress and significantly reduced the probability of another crisis unfolding in the banking system as it did in 2008. Macroprudential policy still has some way to go, however, to ensure that there is not another crisis and economists are not asked again by a future monarch: “Why did no one see it coming?”
(macroprudentialpolicywhatweknowdo_preview). Indeed. See here for my view on whether regulation of the finance sector will do the trick next time.

As for the current state of the economy, in another session, President Trump’s top economic adviser, Kevin Hassett, made what one observer called “a victory lap” over what he considered were the successful corporate and personal tax cuts and reductions in repatriating profits enshrined in the so-called flagship Taxes Consolidation Act (TCA).  Hassett claimed that his model that supported the large reduction in the corporate tax rate and predicted a sharp jump in business investment and economic growth as a result had been vindicated.

Hassett said the model predicted a substantial jump in business investment and a rise in the US growth rate by up to 1.4% pts in a year. With US real GDP hitting 3% in 2018, he had been proved right.  Interestingly, this showed that the trend growth rate of the US since the end of the Great Recession was just 1.6%, the lowest rate of expansion of any ‘recovery’ after a slump since the 1930s.

Hassett had to admit that his model was ‘ceteris paribus’ and there could be other factors that caused an acceleration in US growth from 2017 through 2018.  I can think of a few: heavy investment in energy sectors as oil prices rose; a pick-up in growth in Europe and Asia.  But it’s certainly true that the tax cut dramatically raised profits for US business (after tax profits were up 20% yoy in Q3 2018) and that has had an effect on getting business investment rising.  But most of the increased profit has been used by companies to buy back their own shares and raise dividends, leading to the stock market boom in 2017 and most of 2018.

The other counter to Hassett’s boasting is that the corporate tax cut is really a one-off and its apparent effect will dissipate as we go into this year.  According to two right-wing economic scholars, Robert Barro and Jason Furman of Harvard, in their paper, the tax cut could raise growth by 0.9% from trend in 2019 (taking growth to 2.5%).  But the long-term impact of the tax cut, if sustained for ten years would be to add a cumulative 0.4-1.2% to real GDP or just 0.04-0.13% a year!  But that boost would be cut if interest rates rose during that period.

Hassett was keen to argue that the poorest American workers would gain the most from the tax cuts. He put up a graph to show that there had been faster wage growth for low-paid workers.

The faster growth of the bottom 10% of wage workers was very slight however compared to the top 10% (and the latter’s wages are way larger!).  Moreover, back in 2013, the bottom 10% had bigger nominal wage increases than the top 10% when there was no special tax cut.  A more likely reason for the small acceleration in the wage growth of the bottom 10% was the recent hike in the federal minimum wage and the success of labour in some areas in raising the ‘living wage’.

Do corporate and personal tax cuts really boost economic growth?  Think of it the other way round: would higher taxes on the top 1% damage growth?  When left-wing Democrat Alexandria Ocasio-Cortez recently called for a 70% top rate of income tax for those ‘earning’ above $10m a year in the US, she was attacked for damaging growth.  Keynesian guru Paul Krugman rushed to her defence.  He claimed with this graph (below) that there was no correlation between a high personal tax rate and economic growth.  On the contrary, as the top marginal rate was cut over the decades, average economic growth slowed.

Clearly there is no long-term correlation because there are many factors in between the tax rate on income and the creation of that income from work or other sources.  Higher profits can mean that higher tax rates can be absorbed.  But when profitability falls then capitalist policy goes in the direction of cutting taxes on the rich (among other neo-liberal measures) to sustain profits and income for capital to invest and spend.  The real correlation is between profits and investment and investment and growth, the Marxist multiplier.  Indeed, that is what Hassett’s model shows.  When corporate taxes are cut, it provides a short-term boost to profits and thus to business investment and economic growth. But that does not last (as Barro and Furman show (macroeconomiceffectsofthe2017taxre_preview) and cannot reverse indefinitely any tendency in the capitalist accumulation for profitability and profits to fall.

Previous ASSA conferences had observed that the great period of globalisation: (rising world trade and capital flows) had ended with the Great Recession and ensuing Long Depression or slowdown since 2009. But in ASSA 2019, the big name headline speakers were concerned to talk about the end of globalisation slipping into outright trade war given the tit-for-tat trade tariff hikes already begun by the US and China during 2018.

A panel chaired by the IMF deputy director David Lipton were generally concerned that a trade war would be ‘disruptive’ to jobs in both the US and China. But as Jay Shambaugh at the Brookings Institution said, so was globalisation.  Yipian Huang from Peking University appeared optimistic that the US-China trade war would be avoided and things would improve (maybe that’s the Chinese leadership line).  Adam Posen, head of the Peterson Institute, was convinced that the trade war had been started by the US as a deliberate policy to isolate and weaken China.  And it could morph into a serious divergence bringing fragmentation to a previously US-dominated world.  For my view on that see here.

There were many papers at ASSA 2019 on China, its current situation and its future. US economists are putting a lot of effort into estimating where China is going, no doubt hoping they can find faultlines. I counted well over 70 papers on China, both from the mainstream and the radical. I cannot review these this post, however. I’ll be doing a a deeper analysis of China’s future development as a conference paper later this year.

But the theme that was highlighted most at ASSA 2019 is the impact of robots and AI on future productivity and jobs.  David Autor of MIT delivered the Richard Ely lecture called Work of the Past, Work of the Future .

Autor takes the view that robots and Ai are generally jobs creating and will not necessarily increase inequality of wealth and income in society.  He reckons that “it is great time to be young and educated” but not a clear “land of opportunity for non-college adults in the US.” One big problem is that young people are leaving the rural areas and moving to the cities to get qualifications and then staying there.  In the cities there are high wage, high education jobs that are less vulnerable to robots, but there are large numbers of jobs requiring less qualifications and mainly held by women that are vulnerable.  And the new jobs that will be created by the new technology displacing the old less qualified jobs constitute only 13% of total labour hours worked (see pix below).

Low skilled jobs that pay poorly like ‘gift wrappers’, baristas, marriage counsellors, wine waiters etc in leisure and care sectors are increasing but ‘mid-skill’ jobs are “falling off a cliff”.  Middle-skill work in cities has been hollowed out since 1980. Non-college educated workers have been pushed to do low-skill work in cities. In the 1950s, people living in cities were on average five years older than those in rural areas; now they are six years younger.  The rural areas and small towns are dying.

In another paper, Daron Acemoglu, MIT and Pascual Restrepo, Boston University reckoned that the aging population of the US and other countries will be the major contributor to automation
(automationandnewtaskstheimplicatio_preview).
It’s why older nations like Germany and Japan are on the forefront of replacing workers with robots.  It will soon be a driver in China where the population is about to peak at 1.44bn in 2029 and decline steadily afterwards as the population gets older.  Acemoglu and Restrepo took a balanced view of the future with automation.  capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect.  This reduces the share of labour in value-added.  But the effects of automation counterbalanced by the creation of new tasks in which labor has a comparative advantage: the reinstatement effect.  The slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, and a weaker reinstatement effect, and slower growth of productivity than in previous decades.”  They leave open the question of which way it will go from here.

In another paper (recentunitedstateseconomicperformanc_preview) in this session, Dale Jorgenson, Mun Ho and Jon project long-term growth of only 1.8% per year for US GDP growth, derived from a 0.50 pts of hours growth (more labour), 0.45 points from TFP (robots), 0.76 points from capital deepening (investment), and only 0.12 pts from labor quality (more skill). So as robots take over, education will matter less and less!  Interestingly, Robert J Gordon, the arch pessimist in the past on US productivity growth in 21st century took a more optimistic view for the near future in his paper
(prospectsforaproductivitygrowthrevi_preview).

So will robots, AI and automation mean less jobs or more?  The answer of the mainstream experts seems to be that there will be less jobs in the middle (manufacturing and clerical), some more jobs for a future workforce in new sectors but many more poorly paid jobs in sectors like leisure services and social care.  My own view is outlined here. Automation can create new jobs and income and destroy it. The balance will depend on the trend of profitability in an economy; if profitability is rising, companies will expand investment and production in new sectors to compensate for labour-shedding in other areas – and vice versa.

The issues of poverty and inequality that have dominated previous ASSA meetings have not disappeared. Bruce Meyer at the University of Chicago analysed US poverty and inequality of income over the last two decades.  He suggested that poverty and inequality was not as bad as researchers like Thomas Piketty and Gabriel Zucman have claimed because they have underreported transfer incomes from various US ‘safety nets’ in housing and medicare.

Indeed an argument over measuring the data has broken out between Davids Auten and Splinter
top1incomesharescomparingestimate_preview)
and the Piketty researchers. Auten and Splinter reckon that Piketty’s tax return based measures are biased. Correcting for this bias reduces the increase in top 1% income shares by two-thirds! Further, accounting for government transfers reduces the increase over 80%! However, in another session, Zucman questioned the assumptions and methods used by Auter and Splinter.

Pascal Paul at the Federal Reserve Bank of San Francisco presented empirical evidence for the view that rising and extreme inequality of income plus low productivity growth are harbingers of financial crises (historicalpatternsofinequalityandpr_preview).  But, as he said, he only shows evidence of high correlation not a causal connection.  I remain sceptical that financial crises are caused by high inequality and low productivity – if anything it is the other way round.

Finally, there was an inconclusive debate about whether mainstream microeconomics and its assumptions (free markets and ‘rational expectations’) were necessary for (the Lucas critique) or not compatible (heterodox) with macroeconomics.  The neoclassical view was expressed by Harvard’s Jacob Furman that “more and more research shows you can’t think about macro without thinking about what’s going on with individuals and firms. Furman: Inequality matters for macro and we can’t think about inequality if we ignore microfoundations.”  In contrast, Keynesian Amir Sufi says: macro data are super useful. For example, Sufi said, higher debt leads to a much larger contraction in household spending in response to unemployment. This is now well established. This has big implications for macro. But it also means representative agent macro models shouldn’t be used for business cycles.

My problem is not just with the neoclassical Lucas critique , but also with Keynesian-style macro models based on neoclassical DSGE that start from the idea that economies grow harmoniously but then get hit by ‘shocks’. This approach fails to recognise the uneven development of capital accumulation.  Any way going from the micro to the macro cannot work because of the fallacy of composition – the whole can deliver a different result from the sum of its parts.

A couple of interesting facts from some other papers:  1) “there is no simple causal relationship between economic conditions and the abuse of opioids.” in the US (unitedstatesemploymentandopioidsis_preview); 2) in 18 US states, budget spending on prisons is greater than spending on education!

In part two, I’ll try and cover the deliberations of the non-mainstream and radical economic sessions at this year’s ASSA.