Economics Conference Showcases Booth Research

Five Booth professors figured prominently at the 56th annual meeting of the National Association for Business Economics in Chicago. The three-day conference featured academic thinkers, corporate leaders, and financial journalists who looked beyond the business cycle to take a long-term view of the economy.

Not surprisingly, the 2008–09 financial crisis dominated many of the presentations, as participants sought to explain the causes of the financial meltdown and how such upheavals could be averted. Speakers agreed that the problems that led to the Great Recession were rooted in changes that began in the early 1980s.

Professors Steven J. Davis and Erik Hurst tackled the issue of labor quality at a session on Sunday, September 28.  The following day, professors Austan Goolsbee and Randall Kroszner explored fiscal choices for the long run.  Professor Anil Kashyap discussed lessons from monetary policy when interest rates are at or near zero.

Hurst, V. Duane Rath Professor of Economics and the John E. Jeuck Faculty Fellow, noted that greater numbers of workers than ever before are leaving the workforce. He explained that some are retiring, but that many are simply giving up. His research shows that since the recession, a whopping 5 percent of the workforce no longer works.

Those most likely to have given up or not found work are those without higher education or special training, a group especially hurt by the loss of manufacturing jobs. From 1980 to 1999, according to Hurst, 1 million manufacturing jobs disappeared from the US economy. From 2000 to 2007, another 4 million manufacturing jobs vanished. The size of the loss was masked by the housing boom during the early 2000s, which allowed many of those without education to continue working and even to earn more income. But the crash of the housing market revealed the structural problems in the labor market that resulted from declining manufacturing.

What is more, because the housing boom created so many lucrative jobs, a significant number of workers from the early 2000s who might otherwise have chosen to go to college or to get specialized training gave up those opportunities and now have permanently put themselves in a disadvantaged labor category. “Low-skilled workers are getting hammered much, much harder than higher-skilled workers,” Hurst said, “and this erosion really started long before the recession.”

Davis, William H. Abbott Professor of International Business and Economics and deputy dean for faculty, said the future of the US labor market is uncertain, especially because of the exceptional decline in labor market fluidity over the past few decades. Fluidity is the rate at which employers hire workers and the rate at which jobs and workers are separated. Fluidity has declined by more than a quarter since 1990 and has been declining since the early 1980s, according to analysis by Davis. Thus, while fewer people are losing jobs, when they are laid off, they have an even more difficult time finding new work.

Part of the reason for this change is a shift away from younger businesses and a loss of entrepreneurial dynamism in the US economy. An aging workforce also contributes to declining fluidity, because younger workers switch jobs more often. The erosion of the traditional employment-at-will doctrine and other policy developments have made employers more cautious in their hiring and firing decisions, which also reduces fluidity, Davis said.

The Monday session on the future of fiscal policy featured Goolsbee, Robert P. Gwinn Professor of Economics and former chairman of the president’s Council of Economic Advisers, and Kroszner, Norman R. Bobins Professor of Economics and former governor of the Federal Reserve System.

They agreed that the US corporate tax system is flawed and is inhibiting economic growth.

“We retain culpability as economists in creating the system we have,” Goolsbee pointed out more than once, referring to thinking on the subject that dated several decades. “It doesn’t make sense that we have the highest rate and the narrowest base in the world, rather than the broadest base and the lowest rate.”

Kroszner agreed, pointing out, “The rest of the world is under a territorial system. Roughly half of the revenues of the firms in the S&P 500 are not generated in the US, and we have got to accept that global reality.” Both professors advocated for a redesigned corporate tax structure that would focus on growth, but both agreed that was unlikely to happen. “Growth, savings, investment—these are what our tax code should be promoting, but instead the code is a Frankenstein patchwork that impedes them,” Kroszner added.

Late Monday afternoon, Kashyap, Edward Eagle Brown Professor of Economics and Finance, joined Donald Kohn, former vice chair of the Board of Governors of the Federal Reserve System board of governors, to discuss monetary policy at a time when interest rates have hovered at zero. Kashyap discussed lessons from the zero lower bound experience and remarked that that Fed fell short when it came to communication strategies.

He offered a three-step approach to effective communication for the central bank: First, the bank should state what it is doing and why. Second, explain the mechanism by which the actions will be enacted, and third, give the public and the markets a roadmap that can be monitored to determine whether the new policies are working.

The Fed did reasonably well explaining why it was taking extraordinary actions, but it ran into problems explaining the mechanism and monitoring progress, Kashyap said.

He used the Fed’s forward guidance about interest rates as an example of the challenges.

“Aggressive forward guidance does seem to spur more risk taking,” Kashyap said. “I still think the taper tantrum from last year should make us cautious about judging nonstandard policies at this point. The first time there was the slightest hint of taking the foot off the gas, markets reacted way more than would be expected.”

The Fed eventually calmed things but only by doubling down on the forward guidance, Kashyap noted. “So what we don’t know is what happens once the forward guidance is withdrawn.”—Robin Mordfin