Tuesday, December 6, 2016

Why Is Macro So Hard? Voters Sometimes Get What They Want

The news this week is that President-Elect Donald Trump has convinced executives at Carrier to not move a production facility from Indiana to Mexico.

The backstory to this is that the business had bottom line reasons for wanting to move to Mexico, and government officials (with the explicit backing of the currently powerless Trump) bought them off with tax dollars.*

Here’s Larry Summers view:

Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders.

This is similar to this H.L. Mencken quote from just over a century ago:

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

If that seems like a micro-offense, please recognize that those were different times.

Hat tip to Greg Mankiw for noting Summers’ turn of phrase, and to Don Boudreaux for repeating this Mencken quote many times through the years.

P.S. A couple of days after posting this, Tim Worstall posted a similar quote:

Populism: the unpardonable sin of offering the populace what they appear to want rather than what they ought to.

* On the negative side, in the short-run, we’re all investors in Carrier whether we want to be or not. In the long-run, this may solidify the dangerous precedent of corporate executives holding out for government handouts. On the positive side, it’s still early … perhaps Trump will just do this once to establish credibility that obviates it’s future need.

Sunday, December 4, 2016

An Example of Bizarro Journalism About Cuba

After I wrote this, Tim Worstall linked to a supportive article about Castro.

The only data charted in it is GDP of Cuba, versus two comparables: The Dominican Republic, and Jamaica.

The chart is used to support the position that Castro did OK.

Except the variables charted are not corrected for either inflation or population growth.

That's kind of like asserting that Castro was great because he taxed away nominal wealth (with an inflation tax) but let people have babies.

Friday, December 2, 2016

Putting the Cart Before the Horse

Macroeconomics is generally not an experimental science. It’s observational.

One of the advantages of an experimental science is that you can control causes to isolate their effects. You can come up with different stories about what the causes are, but in principal you can confirm whether those stories are supported by the data. In some sense, you can go “fishing”.

In an observational science, you have to get your story about causality straight first. By that I mean what effects you expect to see and what you should not see. Then you can go and check your data.

Unfortunately, we’re bombarded with GDP data, but not with stories about the causality that generates it. This leaves a lot of room for getting things wrong.

Which brings us to Trump’s nominee for Secretary of Commerce: Wilbur Ross. Here’s his theory (taken from a Wall Street Journal editorial entitled “Trump’s Money Men”):

… Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. …

The causality Ross presumes is pretty clear: “… trade deficits … weaken…”

This is weird: GDP (and trade deficits) are something we measure after they occur. They’re a description of what did happen, not an explanation of how it happened.

It’s more correct to say that a trade deficit might be a symptom of a weak economy, rather than a cause.

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Ross is making a ridiculous logical mistake here, but one that is all too common in thinking about macroeconomics.

First off, GDP is what we count up after production and consumption happen. And as we’re counting, perhaps we divvy it up into different bins, including (gross) exports and (gross) imports.

  • This is analogous to going to one of those old-fashioned machines where you put in a quarter and it dumps out a handful of, say, Skittles. That’s your macroeconomy.
  • Then you count up your Skittles. That’s your measure of your economy’s GDP.
  • Then you divide up the Skittles by color, and call the yellow ones exports. And then you announce that if you’d gotten more yellow Skittles you would have gotten more Skittles in total.

A child might make that mistake. An adult should not.

Secondly, there are interconnections within GDP besides Y = C + I + G + X. Let me introduce 4 alternative variables:

  • DP►DC, this is Domestic Production that goes into Domestic Consumption
  • DP►FC, this is Domestic Production that goes into Foreign Consumption
  • DC◄DP, this is Domestic Consumption that comes from Domestic Production
  • DC◄FP, this is Domestic Consumption that comes from Foreign Production

My notation is a little bit weird: do not think of the the ► as a >, or the ◄ as a <. But there is a method to my madness.

Note that DP►DC and DC◄DP have to end up with the same number (although you might make a measurement error here or there).

In terms of the conventional textbook items:

  • C + I + G = DP►DC (or DC◄DP)
  • Gross Exports = DP►FC
  • Gross Imports = DC◄FP
  • GDP = DP►DC + DP►FC – DC◄FP (or DC◄DP + DP►FC – DC◄FP)

The cool thing about this is that we can think of these new variables in this way. Remember the fable about getting a mule to move with a carrot and a stick? The stick is work, and the carrot is your reward:

  • DP►DC, means that your carrot and stick are balanced
  • DP►FC, means that you’re all stick
  • DC◄FP, means that you’re all carrot

Now let’s think about some naive policy ideas.

Let’s export more! So we’re going to make DP►FC bigger. This means we have to both work more here, and somehow get foreigners to buy stuff they weren’t before. Maybe we could advertise to make the latter happen. But there’s only two ways to handle the former part: actually work harder (by using more stick), or divert some of our work by making DP►DC smaller to make DP►FC larger. Except that we can’t make DP►DC smaller without making DC◄DP smaller. If you think about it, this amounts to giving away our carrots. So there you have it: a proposal to increase exports either means more stick or less carrots.

Let’s import less! You can probably see where this is going. This means making DC◄FP smaller. One way to do that would be to make DC◄DP larger. That way we could keep the number of carrots the same, but just get less of them from foreigners. But again, it gets weird: we’re getting the same number of carrots, but because DC◄DP = DP►DC, we have to work harder. So there you have (part of) it: you get more imports with more stick and no extra carrots. You can work out on your own that you could also get less carrots with the same amount of stick.

I understand that these examples are not easy. But that’s the point: trade policy is not something that most people think about very clearly … including people we put in charge.

Sunday, November 27, 2016

Fidel Castro Is Dead

King Fidel died the other day.

What? You didn’t know he was a king? What do you call someone that ruled since 1959 without reasonable elections until they chose to retire, then abdicates in favor of a younger family member (i.e., King Raúl)? Oh, and there’s a son-in-law in the mix to succeed him; we’ll call him Prince Alberto. Oh, and somehow he’s worth a fortune, just like a king.

People call King Fidel a revolutionary. As if kings could not lead revolutions … hmmm … what was that bit in English history about a minor nobleman William of Orange being the military leader on the winning side of the Glorious Revolution and becoming King William III of England?

I’m going to pull rank here. King Fidel took over a country. The way to measure a country is with GDP. So, if you’re not getting information from a macroeconomist about Cuba and Fidel … you pretty much shouldn’t bother.

The thing is, it appears to be a huge mission of many people in the developed world to present Fidel as something that he was not, and this mostly begins with ignoring the GDP data.

From a macroeconomic perspective, Fidel is one of the worst humanitarian disasters in human history.

Data is not hard to come by on this. For all its faults, there is no competition for assessing economic conditions at the individual level than real GDP per capita. More on that later.

In the U.S., we are somewhat unsure of how we feel about Obama because the economy has struggled to grow real GDP at 2.0 to 2.5% per year. Even Obama’s supporters will typically admit that the economy doesn’t feel that great because we need to take away 1.5% to 2.0% population growth from the U.S. figure. Yet, from 1959 to 1999 Cuba’s real GDP per capita grew at 0.3% per year. Even in rather weak times, the U.S. has pulled away from Cuba.

Going further though, Cuba’s growth has lagged behind most of the world. It’s closest analogs in the Americas of 1959 were Jamaica, Panama, and Ecuador. All three have pulled away from Cuba, in terms of real GDP per capita.

One of the tightest arguments we make in science is to compare matched pairs. Try to find the closest analog, and then compare their differences with the passage of time. This is how we know North Korea is so bad — because it used to be comparable to South Korea. The same goes for the old West and East Germany. For Cuba, the closest analog is Puerto Rico. Both were Spanish colonies for 400 years. Both were occupied and dominated by the U.S. for the next 60 years. And Puerto Rico has quadrupled its real per capita GDP since 1959. The data on all this is solid, accepted, and widely used.

Fair enough. But supporters extoll the availability of free and effective healthcare and education in Cuba.

Let’s be very clear about this. If you don’t start with real GDP per capita, it’s easier to find claims about healthcare and education to be more convincing. But, if you do start with weak real GDP performance, then it should be clear that any claim that healthcare and educaton have gotten better in Cuba must be accompanied by a statement that everything else is even worse than we thought. Have you ever heard a statement like that? I didn’t think so.

Oh, and it’s very easy to find articles detailing how Cuba’s healthcare and education systems in 1959 were … already pretty good by international standards. Go ahead, dig into that on your own. Cuba only looks good on these counts if you forget the “compared to what” aspect.

Don’t believe me? Here’s a personal viewpoint from George Borjas. He’s a professor at Harvard, one of the top labor economists in the world, and a refugee from Cuba.

Tuesday, November 1, 2016

Why Is Macro So Hard: Putting the (Political) Cart Before the (Political) Horse

Yes, there’s an element to this news story that’s jokey, and there clearly was some lack of editorial oversight here. But it shows how mood affiliation leads to policy activity, with or without deep background thought.

Anyway, Canada has 2 main parties that are each a little to the left of the their American counterparts. And it has a big third party, the NDP (New Democratic Party), which is even further left. In America it would be Sanders-esque. It tends to be strongest in the West, and here’s what happened in the Yukon Territory. They released these by accident:

"It went live and immediately we started getting Tweets at us," says Yukon NDP communications manager Denise MacDonald. "You have to laugh once in a while."

NDP error 2

The key word here is “will”, the only verb shared by both slogans. That word implies future activity. It doesn’t seem to matter what the specifics are though.

There’s no goal in these images. There’s no objective. What there is … is a predisposition towards busybodyness.

In macroeconomics this can be a problem. We have 200 or so countries around the world, and the record of those that interfere with their macoeconomies is not very good. That makes busybodies dangerous.

Via Munger writing at Kids Prefer Cheese.

Monday, October 31, 2016

Why Is Macro So Hard? Activity Enslavement

Charles Coonradt:

In the absence of clearly defined goals, we are forced to concentrate on activity and ultimately become enslaved by it.

I don’t have a source for this. I got the quote from my colleague Greg Powell, who used it in a brown bag about motivating student engagement through questions.†

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But I like the quote because it applies to another problem we have in understanding macroeconomics. Bryan Caplan dubbed this the “activist’s fallacy”:

Something must be done; this is something; therefore, this must be done.

I have lost the cite, but Lynne Kiesling paraphrased it as:

Don’t mistake activity for accomplishment.

When we think about macroeconomics — and certainly politicians talk an awful lot about it — what are their goals? No recessions on their watch? Low unemployment rate (how low)? Low inflation rate? Increased spending? Higher real GDP growth rate?

Consider the stimulus package of 2009. It was chock full of activity. But what was the goal? If it was stimulating the economy … it doesn’t seem like it did much (although I’m aware that we don’t have a control for this experiment).

† Coonradt, Charles A. with Lee Nelson. The Game of Work, Shadow Mountain, 1991, p. 10.

Thursday, October 13, 2016

Touche

Adam Davidson skewers Navarro, the author of Trump’s economic plan:

The first hint of how Navarro’s ideas might play out in a Trump Administration came in the most comprehensive economic document so far released by the campaign. Navarro, along with the Trump supporter and private-equity investor Wilbur Ross, wrote “Scoring the Trump Economic Plan: Trade, Regulatory, & Energy Policy Impacts.” …

The document … presents no concrete prescription to correct the trade imbalance it abhors. One key sentence: “Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports.” This is a tautology, equivalent to saying one plans to weigh less in the future through a combination of losing weight and not gaining weight. [emphasis added]

That’s not a plan. That’s a wish.

Via Greg Mankiw.