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Brad DeLong: Worthy reads on equitable growth, October 26-November 1, 2021

Summary:
Worthy reads from Equitable Growth: 1. The excellent Anna Stansbury makes a very good point here—the size of the penalties multiplied by the likelihood of enforcement are such that a firm can, in all probability, make higher profits by violating than by complying with the Fair Labor Standards Act and the Nation Labor Relations Act. To the extent that firms do comply with these legal obligations, it is as part of a broader social contract of expectations of cooperative behavior. But that social contract has been degrading and decaying at least since the late 1960s. Read her “Do US Firms Have an Incentive to Comply with the FLSA and the NLRA?,” in which she writes: ‘To what extent do US firms have an incentive to comply with the Fair Labor Standards Act and the National Labor

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Worthy reads from Equitable Growth:

1. The excellent Anna Stansbury makes a very good point here—the size of the penalties multiplied by the likelihood of enforcement are such that a firm can, in all probability, make higher profits by violating than by complying with the Fair Labor Standards Act and the Nation Labor Relations Act. To the extent that firms do comply with these legal obligations, it is as part of a broader social contract of expectations of cooperative behavior. But that social contract has been degrading and decaying at least since the late 1960s. Read her “Do US Firms Have an Incentive to Comply with the FLSA and the NLRA?,” in which she writes: ‘To what extent do US firms have an incentive to comply with the Fair Labor Standards Act and the National Labor Relations Act ? I examine this question through a simple comparison of the expected costs of noncompliance (in terms of legal sanctions) to the profits firms can earn through noncompliance. In the case of the FLSA minimum wage and overtime provisions, typical willful violators are required to pay back wages owed and in some cases additional penalties, if detected by the Department of Labor. Based on available data on the penalties levied, a typical firm would need to expect a chance of at least 78–88 percent that its violation would be detected in order to have an incentive to comply with the FLSA. In practice, the probability of detection many firms can expect to face is likely much lower than this. In the case of the NLRA, a firm that fires a worker illegally is required to reinstate the worker with back pay if the violation is detected. Based on empirical estimates of the effect of unionization on firm profits, a typical firm may have an incentive to fire a worker illegally for union activities if this illegal firing would reduce the likelihood of unionization at the firm by as little as 0.15–2 percent. These analyses illustrate that neither the FLSA nor the NLRA penalty and enforcement regimes create sufficient incentive to comply for many firms. In this context, the substantial evidence of minimum wage and overtime violations, and of illegal employer behavior toward unions, is not surprising.”

2. This event, I think, went very well. I certainly learned an enormous amount. And, indeed, it made me think of that I had underestimated for nearly my entire career how important nowcasting was (relative to forecasting). Watch “Equitable Growth Presents: Opportunities and challenges of real-time economic measurement,” which “convened experts on the analysis and application of real-time data … Austin Clemens, Director of Economic Measurement Policy, Washington Center for Equitable Growth; Erica Groshen, Senior Economics Advisor, Cornell University; Jeehoon Han, Assistant Professor, Zhejiang University; Dana Peterson, Chief Economist, The Conference Board [all of whom discussed how] … The coronavirus recession led to a crop of economics working papers trying to understand the effects of the pandemic in real time. … The incredibly short turnaround time of much of this research was unprecedented. … The severity of the COVID-19 crisis, the availability of administrative data sources, and new statistical tools combined to produce an enormous amount of nearly real-time data.”

Worthy reads not from Equitable Growth:

1. Only once in my lifetime—1994—has the U.S. Federal Reserve successfully attained a “soft landing“ by maintaining price stability and tightening monetary policy without sending the economy into a recession, and so prematurely cutting short a useful and beneficial expansion. The fear of a repeat of the inflationary 1970s has indeed imposed heavy long-term costs on American economic growth. Read Antonio Fatás, “The short-lived high-pressure economy,” in which he writes: “In 2019, the U.S. economy had reached levels of employment that ensured that the gains of the economic expansion were shared across many segments of the labor market. Unfortunately, the benefits of this high-pressure economy were short-lived thanks to the recession that started in March 2020. This column argues that this pattern fits all previous U.S .cycles. Expansions end too early to allow for long periods of stable and low unemployment.”

2. I did not see this letter when people were looking for people to sign on, and that leaves me a little bit sad. The only thing I would add is that the social-spending package is only going to counter a small proportion of the harm done by the substantial decades of underinvestment by the public sector that began back in the days of Richard Nixon. It will take a much greater effort, and be a much heavier lift, to get the public capital stock and its pace of growth back to where it really ought to be. Read Juliana Kaplan and Ben Winck, “61 Economists including a Nobel call on Congress to pass Biden’s social spending framework,” in which they write: “The package would ‘counteract decades of underinvestment,’ the group said in a letter organized by Invest in America Action. The plan includes funding for universal preschool, affordable housing, and clean-energy projects, among other provisions.”

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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