The problem of time consistency is one of the most profound in social science. With applications in areas ranging from economic policy to counterterrorism, it arises whenever the effectiveness of a policy today depends on the credibility of the commitment to implement that policy in the future.
For simplicity, we will define a time consistent policy as one where a future policymaker lacks the opportunity or the incentive to renege. Conversely, a policy lacks time consistency when a future policymaker has both the means and the motivation to break the commitment.
In this post, we describe the conceptual origins of time consistency. To emphasize its broad importance, we provide three economic examples—in monetary policy, prudential regulation, and tax policy—where the impact of the idea is especially notable.... Read More
Economists build models around simple facts to isolate what drives behavior. In macroeconomics, perhaps the most famous of these facts has been the observed stability of the shares of income paid to labor and to capital. At least since Kaldor wrote 60 years ago, this pattern of income distribution has been at the top of the list of regularities to be explained by theories of economic growth.
Well, it turns out that what was stable for much of the 20th century looks as if it is unstable in the 21st. For at least the past 15 years, and possibly for several decades, labor’s share of national income has been declining and capital’s share has been rising in most advanced and many emerging economies.
It is important that we understand why labor's share has declined, and whether that decline will continue. The answer could influence a range of policies, from education and training to taxation and transfers. In what follows, we describe what we know about the evolution of labor's share (including key measurement issues) and highlight several explanations of the observed decline that have recently been proposed. Read More