Friday, August 22, 2014

More than Corporate Arm Candy?

All the big, famous, firms have to have one these days: a chief economist.

That’s the dream of the new tech company chief economist: Become indispensable, by using your employer’s data to create something the market didn’t know it needed.

Wednesday, August 20, 2014

Purchasing Power

Here’s a chloropleth from the Tax Foundation showing how much $100 buys:

The data here is something like the inverse of a price index (which takes low values where prices are lower).

N.B. Normally, you might see something like this with “heat map” shading. The problem with that is that the color blind have difficulty with that choice of colors. The use of blue-to-yellow here may not seem that comfortable, but it has the virtue that even the color blind can readily see the differences.

Anyway, blues are bad: stuff is expensive there and $100 doesn’t go as far. Yellows are better: your $100 will buy more there. The biggest difference, going from Mississippi to D.C., is 37%. So at the store, you’d walk out with a third more loot.

Sunday, August 17, 2014

Is Tax Complexity Discriminating Against Dumber People?

New research out of Harvard that is very disturbing (although probably not surprising).

  • To control for the weirdness of the real world, they did this as a lab experiment. In these experiments, subjects enter for free and play for real money that is proportional to their performance.
  • They simulated taxes. Subjects got to keep the after-tax money they earned.
  • They did this with the same people in two environments: one in which taxes were simpler (had less rules to follow) and one in which they were more complex (had more rules to follow). The subjects’ outcomes would be the same across the two environments if they were able to follow all the rules.
  • They found that subjects behavior was closer to optimal when the tax system was simpler. Basically, subjects left money on the table when the tax system was too complex.
  • It gets worse. Then they added an identical rule to each tax system — making each setup a little more complex — and had the subjects play again. Now, put on your thinking caps: in the simpler system, the marginal increase in complexity from an identical change will plausibly be larger. What they did was actually go from 2 to 3 tax rules, and from 22 to 23 tax rules, so this seems like a plausible conclusion. What they found was that performance went down under both systems, which isn’t very surprising. What is surprising is that they found that 1) performance got “more worse” (I know that sounds kludgy) with the complex system, 2) poorer performance was concentrated in the people who performed worse before the change, and 3) the measured decision-making time of those people didn’t change much.

The authors conclude from this that they were able to isolate subjects who found the complex system to be beyond their cognitive ability, and that when confronted with a rule change that made that problem worse, these people shut down and ignored the change.

This is a strong case that a complex tax system discriminates against people on the lower end of the intelligence spectrum.

That’s a bombshell: politicians, in collusion with bureaucrats, accountants and lawyers, may have set up systems that discriminate against people who aren’t as smart as they are.

Keep this research in mind the next time someone tells you that a flat tax system is bad, or that a progressive tax system is better.

BTW: In perusing the reference list, I conclude that the strain of literature these authors are targeting is liberal rather than conservative: it falls in the Elizabeth Warren, Cass Sunstein orbit of the Democratic party.

Friday, August 15, 2014

The Future You

Macroeconomics can be mind-bending.

I turned 50 the day I wrote this post. One of the things you need to take away from an advanced macroeconomics class is some sense of how things might be different 50 years out into the future, when you’re 70 or 75, and your grandchildren or great-grandchildren are taking a class like this.

I bring up that I turned 50 to make a point. When I took my first advanced macro class (Spring 1982), we didn’t think enough about the future. Let me give you an example. At that time no one imagined that (recorded) music, not just any music but the music you wanted to hear at the moment, would be free. The thing is, it was free to the tech savvy within 17 years (I should know, I downloaded a lot of it).

Going further though, let me tell you about 1998. At that time, very few understood that (recorded) music was going to be free. I saw the handwriting on the wall around 1990, and got myself pretty tech-savvy. When I found out about downloadable MP3s in October 1998, no one I knew could believe it when I showed it to them. And yet, by late 1999 many people started using Napster. That name probably sounds ancient to you. The recorded music supply chain industry should’ve seen that coming, but they had no clue. Thus all the lawsuits of the early oughties; those too are ancient history.

Alright, enough about me. My point is that whole categories of industry and employment disappear very quickly, without anyone seeing it coming, over the course of a couple of decades. So how will employment look when you’re old? Take a look at this video:

This sounds very disheartening about anyone’s specific career choices. On the other hand, it sounds very good generally: everyone will have more stuff and more time to enjoy it.

What I worry about is the choices of policymakers. They have no clue. They think people like to work (note their unemployment rate fetish). They think people’s consumption choices are the problem (not Obamacare’s focus on limiting consumers of healthcare, rather than producers of it). I could go on.

Instead let me focus on what you need to think about. For example, how are you going to convert the leisure you consume in your driverless car into productivity that gets you more or better stuff? Or will you just lay there like a slug? Try thinking about that, while also thinking about the video’s focus on people in transportation losing their jobs. Oops. Maybe the video got a big picture, but missed the bigger picture.

Now I need to go on one step about policymakers. How are they going to react when the “old school” GDP numbers suggest things are getting worse (because of all the drivers pushed out of those jobs), when they don’t have “new school” numbers to tell them that the rest of us just got all their income transferred to us in the form of consumer surplus?

One way to think about this is that Obama may be the biggest dead wood, dinosaur, who just doesn’t get it, President we’ve ever had. Until the next one.

This may be a good time to go back and look at two older posts on this blog.

First, there’s this one from Spring 2014 on what’s wrong with America. Pay particular attention to the Thanksgiving dinner analogy in the middle. What’s wrong may very well be that we have a fetish for our jobs.

Second, there’s this one that I first discussed in Spring 2011 on what the world is going to look like if growth accelerates (not the growth the government can measure, but the stuff that you and I actually enjoy).

Back to me being 50. When I was born in 1964, people imagined many things about the future. But their view of daily life was a bit skewed. No one envisioned the amount of time spent on Facebook. How about drones? How about drones that deliver stuff from Amazon on the day you order it? How about computers that grade papers (used by me, in class, this past summer)? Did they imagine that income inequality would matter to some people even when so many things are free? Or that most of our debates about healthcare would be about how to get someone else to pay for the portion we consume?

I hope you think back on your advanced macro class at SUU in 50 years. You may have heard it here first.

Sunday, August 10, 2014

An Obvious Point that Isn’t Repeated Enough

Economists talk about traded and non-traded goods. By this they mean traded across borders.

So cars are traded, and haircuts are not. Typically, goods are very easy to trade, and services are harder to trade.

Now, add a second thought: trade (at least the voluntary kind) is beneficial to both parties. In particular, for the argument I’m making, trade benefits buyers by reducing prices.

Now the third thought. Who spends a greater portion of their income on traded goods? The answer is probably the poor.

That might not be immediately obvious. But, if you think about it, there’s a lot more inequality in spending on goods and services than there is in spending on goods alone. The reason is that for many goods, your utility diminishes very quickly. For example, there’s only so many Chilean grapes you can eat. But, services on the other hand, include things like personal shoppers, concierge services, legal and accounting services, and live entertainment. As people get richer, the consumption of all of those continues to rise long after our consumption of goods plateaus.

Which brings me to a quick quote posted at Marginal Revolution. As an economist, it made immediate sense to me, but to my readers … I felt the explanation might be necessary:

…trade typically favors the poor, who concentrate spending in more traded sectors.

This is from an NBER working paper by Pablo D. Fajgelbaum and Amit K. Khandelwal.

Saturday, August 2, 2014

Why Government Can’t Do Much

It’s a continuing problem with students: they either believe the government can do a lot more than it does, or they believe that it does too many things.

Neither is true … and those beliefs are shockingly “old school” for college students who pride themselves on bringing a breath of fresh air to stodgy adults.

In the U.S., and generally in developed countries, governments have evolved (mostly over the last 50 years) from institutions that have free cash flow to spend on desirable projects (or alternatively, to return to taxpayers), into institutions in which spending and spending increases are on “autopilot”, and consequently no longer under the control of legislative bodies.

Don’t believe me? Here’s a chart of the Fiscal Democracy Index:

This shows the percentage of federal government spending which is discretionary: that members of Congress can actually control with their votes.

Most interestingly for students in conservative Utah, this is a metric developed at The Urban Institute. That’s a think tank that’s generally regarded as left of the center of the Democratic party. And they have developed a metric of how strictly the hands are tied of people who might actually approve progressive spending ideas.

And this is going to get worse. The real problem is Medicare (the one that pays for the care of seniors), and not Social Security (or disability), Medicaid (the poor), unemployment benefits, corporate welfare, defense spending, or foreign aid. The problem with Medicare is that it’s an open-ended promise to pay for medical care. But, because medical care extends life, it also extends payments.

Friday, August 1, 2014

(Physical) Capital Is Basically Working at Capacity

There’s an unemployment rate for labor. Round it to 6%. That implies there’s also an employment rate for labor that must be 94%.

We measure the same thing for physical capital. But here, the primary measure is called “capacity utilization”, and it’s roughly comparable to the employment rate. Except for one thing: machines don’t starve if they’re not used, so typically the economy gets away with a much lower capacity utilization rate than employment rate.

And right now, capacity utilization is certainly about where it should be in mid-expansion, and approaching the level that we only see near a business cycle peak:

14-07-21, New York Times, Capture of Capacity Utilization Chart

This is from The New York Times. The columnist takes a pro-Democratic position that this suggests that it’s time for firms to start investing in more capital because we’re using everything we’ve got. I can’t disagree with that, although I will note that Democrats in D.C. have been crowing for years about firms needing to invest more, without addressing the question of whether or not they just don’t want to invest because they don’t trust the Democrats to not screw things up. At least that’s what owners and managers say, and I don’t see any reason to disrespect them on this.

Whatever. The chart does show that this expansion is pretty much as good as it gets, and we should stop complaining about it.