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221. American Gothic: How Chicago Economics Distorts “Consumer Welfare” in Antitrust

Author:
Mark Glick
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Since the publication of Robert Bork’s The Antitrust Paradox, lawyers, judges, and many economists have defended “Consumer welfare” (CW) as a standard for decisions about antitrust goals and enforcement priorities. This paper argues that the CW is actually an empty concept and is an inappropriate goal for antitrust. Welfare economists concede that there is no credible measurable link between price and output and human well-being. This means that the concept of CW does not legitimate limited antitrust enforcement, nor does it justify the exclusion of other antitrust goals that require more active enforcement practices. This paper contends that antitrust policy is not welfare based at all, and that if it were, antitrust policy and enforcement would differ significantly from the Chicago School vision. Without the fiction that economists can establish that in the short run lower price and higher output measurably increases welfare more than other goals, recent defenses of the CW standard resolve down to arguments based on unsupported assumptions.
Topic:
Economics, Law, Legal Theory, Economic Theory, Macroeconomics, Antitrust Law, and Microeconomics
Political Geography:
United States

222. Firm-Level Political Risk: Measurement and Effects

Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We validate our measure by showing it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm’s actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is neither captured by the interaction of sector and time fixed effects, nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.
Topic:
Economics, Economy, Business, and Risk
Political Geography:
United States

223. Expansionary Austerity and Reverse Causality: A Critique of the Conventional Approach

Author:
Christian Breuer
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In this paper we methodologically review and criticize a broad literature of empirical work on the effects of fiscal policy (the ‘conventional approach’). Beyond previous critiques of this approach, we show that the cyclical adjustment strategy as used in this literature entails erroneous assumptions that necessarily produce flawed results in support of expansionary austerity. Specifically, the cyclically-adjusted primary balance (CAPB) strategy this literature employs fails to correct for cyclical effects in the expenditure- GDP-ratio, so that the estimates of the results of expansionary fiscal consolidation are affected by reverse causality, i.e. increasing GDP causally decreases expenditure-GDP- ratios, rather than vice versa. We provide suggestions on how to fix this incomplete cyclical adjustment problem with a new approach. After replicating two famous articles of the conventional literature and controlling for this bias, the expansionary effects of fiscal adjustments disappear or turn into their opposite
Topic:
Economics, Macroeconomics, and Fiscal Policy
Political Geography:
United States

224. Macroeconomic Management Meets the New Economy

Author:
Commission on Global Economic Transformation
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Finance and the macroeconomy, both policy and industry practices as well as academic research, have evolved substantially in recent years. While the old questions of business cycles, macroeconomic management, financial regulation, and social protection are still being debated, we are now confronted with new developments in the economy, characterized by digital technology, new modes of production and business models, and changing employment relations. Macroeconomics and finance need urgent rethinking as the global economy transforms. Our gathering on March 5, 2019 brought together economists, policymakers, financial regulators, and industry practitioners from around the world. We heard diverse perspectives on multilateralism, pension and labor market reform, international trade, and risks in the world economy, and we grappled with issues on stagnant wages, public debt, fiscal and monetary policy, and banking reforms. Our discussion was by no means exhaustive or conclusive, but we attempted to harness the group’s collective wisdom to address some of the most prominent questions of our day. This document is intended to inform our commissioners as they develop CGET’s final report and to share our timely conversation with policymakers and the general public. Fomenting multidisciplinary, critical discourse is one of the most important responsibilities of this initiative, and we sincerely thank the staff at the Institute for New Economic Thinking (INET), our dedicated Commissioners, and our outside experts for helping us to promote this dialogue.
Topic:
Economics, Industrial Policy, Regulation, Digital Economy, Economic Theory, and Macroeconomics
Political Geography:
United States and Global Focus

225. Demand-determined potential output: a revision and update of Okun’s original method

Author:
Claudia Fontanari, Antonella Palumbo, and Chiara Salvatori
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper challenges the mainstream view of potential output, and enquires into the supposed effects of Great Recession on potential growth. We identify in the demand-led growth perspective a more promising theoretical framework both to define the notion and to gauge the long-term effects of a demand slow down. Based on the poor reliability of standard estimates of potential output, we also propose an alternative calculation. This is based on an update of Arthur M. Okun’s original method for estimating potential output, which, differently from the estimation methods currently in use, does not rely on the notion of NAIRU, thus being immune to its theoretical and empirical shortcomings. Our calculation, based on a re-estimation of Okun’s Law on US quarterly data, shows both how far an economy generally operates from its production possibilities, and how much potential growth is affected by the actual growth of demand over time. These wide margins for expansion of actual and potential output growth imply that a determined policy of demand expansion would create, given time, the very capacity that justifies it.
Topic:
Economics, Global Recession, Economic growth, Macroeconomics, and Demand
Political Geography:
United States and Global Focus

226. Technological Disruption in the Global Economy

Author:
Commission on Global Economic Transformation
Publication Date:
04-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Technology has become the most powerful disruptive force in our economy. It bears on the future of work, competition, market power, and national security, and it binds the other major areas of our commission’s investigation: macroeconomics and finance, globalization, and climate change. In essence, technological progress propels global economic transformation. Our gathering on February 6, 2019 brought economists together with leading voices from academia, labor, private industry, and the nonprofit/NGO sector. We heard from industry leaders with deep roots and history in the Silicon Valley technology revolution, academics who have also spent time in the policy arena, and from individuals who are already considering new models and approaches to digital rights and the future of work. Our discussion was by no means exhaustive or conclusive, but we attempted to harness the group’s collective wisdom to address some of the most vexing questions of our day. This document is intended to inform our commissioners as they develop CGET’s final report and to share our timely conversation with policymakers and the general public. Fomenting multidisciplinary, critical discourse is one of the most important responsibilities of this initiative, and we sincerely thank the staff at the Institute for New Economic Thinking (INET), our dedicated commissioners, and our outside thought leaders for helping us to promote this dialogue.
Topic:
Economics, Science and Technology, Global Markets, Digital Economy, Global Political Economy, and Macroeconomics
Political Geography:
United States and Global Focus

227. 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

228. The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth’s Consistency Constraint in Modeling Aggregate Outcomes

Author:
Roman Frydman, Søren Johansen, Anders Rahbek, and Morten Tabor
Publication Date:
03-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper introduces the Knightian Uncertainty Hypothesis (KUH), a new approach to macroeconomics and finance theory. KUH rests on a novel mathematical framework that characterizes both measurable and Knightian uncertainty about economic outcomes. Relying on this framework and John Muth’s pathbreaking hypothesis, KUH represents participants’ forecasts to be consistent with both uncertainties. KUH thus enables models of aggregate outcomes that 1) are premised on market participants’ rationality, and 2) yet accord a role to both fundamental and psychological (and other non-fundamental) factors in driving outcomes. The paper also suggests how a KUH model’s quantitative predictions can be confronted with time-series data.
Topic:
Economics, Markets, Economic Theory, Macroeconomics, and Mathematics
Political Geography:
United States

229. The Contributions of Socioeconomic and Opioid Supply Factors to Geographic Variation in U.S. Drug Mortality Rates

Author:
Shannon Monnat
Publication Date:
02-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Over the past two decades deaths from opioids and other drugs have grown to be a major U.S. population health problem, but the magnitude of the crisis varies across the U.S., and explanations for widespread geographic variation in the severity of the drug crisis are limited. An emerging debate is whether geographic differences in drug mortality rates are driven mostly by opioid supply factors or socioeconomic distress. To explore this topic, I examined relationships between county-level non-Hispanic white drug mortality rates for 2000-02 and 2014-16 and several socioeconomic and opioid supply measures across the urban-rural continuum and within different rural labor markets. Net of county demographic composition, average non-Hispanic white drug mortality rates are highest and increased the most in large metro counties. In 2014-16, the most rural counties had an average of 6.2 fewer deaths per 100,000 population than large metro counties. Economic distress, family distress, persistent population loss, and opioid supply factors (exposure to prescription opioids and fentanyl) are all associated with significantly higher drug mortality rates. However, the magnitude of associations varies across the urban-rural continuum and across different types of rural labor markets. In rural counties, economic distress appears to be a stronger predictor than opioid supply measures of drug mortality rates, but in urban counties, opioid supply factors are more strongly associated with drug mortality rates than is economic distress. Ultimately, the highest drug mortality rates are disproportionately concentrated in economically distressed mining and service sector dependent counties with high exposure to prescription opioids and fentanyl.
Topic:
Economics, Health, Inequality, Macroeconomics, and Drugs
Political Geography:
United States

230. Finance in Economic Growth: Eating the Family Cow

Author:
Peter Temin
Publication Date:
01-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
It is hard to fit finance into the measurement of national product and of economic growth, and similar problems bedevil efforts to include other intangible investments as well. I describe how our current accounts deal with these problems, and I argue that existing NIPA data fail to describe the future path of growth in our new economy because they lack output data on financial, human and social capital investments. They fail to show that the United States is consuming its capital stock now and will suffer later, rather like killing the family cow to have a steak dinner.
Topic:
Economics, Finance, Economic growth, and Macroeconomics
Political Geography:
United States