Wednesday, April 16, 2014

Temporary Post

This is in response to Mike Ginsburg’s question in the Quodlibet. I’m again having technical difficulties with the cloud and the Cascade server for faculty web sites.

I will cut and paste this into the Quodlibet later today sometime.

Here is Mike’s question:

What are the major implications on businesses from political actions
including minimum wage laws, welfare spending, and tax policy.
Mike was late, so I made him flesh this out more as a penalty. Here’s
what he added.
The economic policies that the public sector pushes through the
legislature affects the way that the private sector. My question to you was,
“What are the major implications on businesses from political actions
including minimum wage laws, welfare spending, and tax policy?” As a
Political Science major, I put most of my focus on the public sector of the
economy; but I personally think that most of those policies of the public
sector negatively affect the private sector.
I am a firm believer in free markets and privatization of many of
the federal government’s programs. I know that the effects of government
action, although well intended, put strain on businesses as well as
businesses and families. For example, I like to look at taxes as a great
example of how the public sector influences and hurts the private sector.
From a business standpoint, one wants to make as much profit and work
as hard as possible to make that money. Taxes, though, discourage the
economy from growing. From an individual or family standpoint, the
taxes I have to pay hinder me from using that money for things that I
want or need. But I want to learn about how other macroeconomic
decisions made by politicians and through public policy negatively (or
positively), affect the way businesses run.
The government is responsible for many things, and I understand
that are seen by many as being responsible for the well-being of others. I, 
though, tend to disagree. The private sector has brought great growth and
wealth to society. Through the private sector, not the government, is
where we can see the most growth and best equality for society.

Here’s my answer:

You should get by now that there are two levels on which to address this question: aggregate and per capita. I’ve pushed you towards thinking primarily about per capitas.

At the aggregate level, the important determinants of how the economy does are the levels of capital, labor and technology. At the per capita level, it’s capital per capita, and the level of technology. In turn, capital per capita is driven by the saving rate, the population growth rate, and the rate of technological change. There are also effects from the depreciation rate, and the Cobb-Douglas alpha — but we really don’t think policymakers can influence those much.

For the per capita level, we also need to consider if a policy changes the steady state (a permanent change) or just the path to the steady state (a temporary/transitory change).

First off, we're at the point where I think I say (and have you already convinced) that the data indicates that government policy is unlikely to make much direct difference just because it comes from the government. But, it can make an indirect difference if it gets embodied in changes in capital, labor, and technology that have permanent effects.

For example, our null hypothesis should be that Obamacare (in and of itself) has no effect on the economy. But, we also need to consider that if Obamacare changes incentives, then it will make a differences; for example, if Obamacare reduces the incentive for the private sector to create new technologies, then that will have a permanent effect on the steady state (and the path we take to get there) through the rate of technological change.

Secondly, I think we need to think about whether a government policy changes the path we take towards the steady state, or just shifts us along the same path (so that we take a slightly different infinite amount of time to get to it). This is applicable for something like "cash for clunkers". People were ultimately going to get rid of those cars anyway, and buy new ones. All the policy did was change the timing.

Third, I think we need to think about whether a government policy may just substitute one-to-one with something the private sector might do. Take SUU for example. Could this be provided by the market? Yes. Would it be provided by the market? Maybe not. Would we be better off if the money was spent some other way? I think that depends on the quality of the decision making between the government choosing this path, and the private sector choosing some other way to spend the money. The results of that probably all boil down to incentive structures. A lot of our beliefs about whether it's better or worse if the government spends the money are about our beliefs about who has better incentives. On that issue, I know what I believe, but I'm not sure how concrete that is.

Fourth, we need to remember that governments have been evolving away from doing things, and towards collecting and sending checks. To the extent that they do that, the first two issues go away, and the third becomes about who wins and loses. If they tax my right pocket to give to my left, it's a wash. But if a net tax on my right pocket supports a net subsidy to your right pocket, then it might make a difference (might not, too, if we're similar). And if it does, it again comes back to whether that difference gets embodied in capital, labor and technology.

Lastly, we need to think about elasticity. The steady state is inelastic with respect to changes in the policy variables. So, it’s probably difficult to envision large changes coming through embodiment of policy in capital. The one variable that doesn’t operate that way is the rate of technological growth: that’s the most critical thing to the well-being of people, and changes in it have permanent effects because it moves the steady state. Through that lens, the only question we should ever ask about government policy is if it will increase or decrease the rate of technological change. Our experience around the world suggests that governments frequently get hijacked by interest groups that are threatened by technological change. To the extent that is true, we should be suspicious of all government programs.

Thursday, April 10, 2014

Real Gasoline Price

Stetson forwarded this chart:

It’s not uncommon for people outside of macro classes to suffer from the illusion that things have gotten more expensive. Of course, the evidence that things have not gotten more expensive is all around them — in overflowing closets, garages, basements … and that phenomenon that was unheard of before the late 1980’s … storage units. But people are still in denial.

Don Boudreaux, writing at CafĂ© Hayek, has made a cottage industry out of converting old and new nominal prices into the (real) amount of time you’d need to work to afford products. There are many of these posts on that site, but here’s one comparing 1982 to 2014.

Tuesday, April 8, 2014

April Fool’s In a Macro Class

In case you haven’t seen the video …

Saturday, April 5, 2014

One View On a Master’s Program In Economics (Not Required)

If interested, check out this piece at Confessions of Supply-Side Liberal.

Is There Truth In Advertising: Minimum Wage Increase Edition

Revisiting a subject from the first half of the semester: the marginal tax rate on poor people.

The Obama administration wants to raise the minimum wage. Fair enough.

But, did you know that the marginal tax rate on that is over 50%? Yep, for a single mother who is paid the minimum wage now, and is later paid the proposed minimum wage, the marginal tax rate is a little over 50%.


Digression: I figure, for household financial discussions, that our our marginal tax rate is around 45%. So, a minimum wage worker pays a higher marginal tax rate than a dual-professor family.


Now, do keep in mind that the usage of marginal tax rate in the two cases is different.

For the single mother, we are talking about her:

  • Increasing her hours by 0%
  • Increasing her wage by 39.3%
  • And so increasing her gross income by 39.3%
  • And increasing her net income by 19.6%

For me, we are talking about:

  • Increasing my hours by 39.3%
  • Increasing my wage by 0%
  • And so increasing my gross income by 39.3%
  • And increasing my net income by 21.6%

This is still a no-brainer for the single woman, not so much for my case.

So, it’s not like this is horrible. And you could make an argument that conservatives are overplaying their hand with this point.

But, for the purposes of this class, it’s useful for keeping in mind that not many people in policy positions are giving any thought to marginal tax rates on the poor.

P.S. I wonder if there’s any truth in advertising here: does the government let people know that they won’t get all of their minimum wage increase? I doubt it.

Via Carpe Diem.

Thursday, April 3, 2014

Malthusians Again

Malthus was one of the first economists, writing between Smith and Ricardo.

Malthus is also best-known for being completely wrong (at least … for over 200 years now).

He argued, without a growth model, that the end result of diminishing marginal productivity was that we would all starve: enough food leads to more babies which eventually leads to less food on average.

As we’ll show in class when we get a descriptive growth model working in a spreadsheet, Malthus used diminishing marginal productivity, but he was ignorant of constant returns to scale. Add that, and his result goes away.

But Malthusians are still around, most predominantly in the more radical parts of the environmental movement. Eduardo Porter writes about what’s new in this area in a piece entitled “Old Forecast of Famine May Yet Come True” that appeared in the April 2 issue of The New York Times.

Now it’s the IPCC. That’s the UN group that issues reports every few years warning of anthropic global warming. Like many bureaucracies, the IPCC morphs into something different when it needs to. Now they are warning about crop prices rises they view as imminent:

Nonetheless, Malthus’s prediction was based on an eminently sensible premise: that the earth’s carrying capacity has a limit. On Monday, the United Nations Intergovernmental Panel on Climate Change provided a sharp-edged warning about how fast we are approaching this constraint.


Digression: Did you recognize the implicit time series analysis here? I expose you to that, in part, so that you can recognize it when you see it. Saying that there’s a constraint is also saying that you can’t have a trend that is permanent. That means the IPCC is assuming Case 3 from the text. Of course, that would be reasonable if the data tended to support stopping at Case 3, rather than Case 4 or 5. Generally, it doesn’t.


I’m not necessarily against the IPCC’s positions on global warming, or the possibility of food scarcity.

But, I’m offended at the data used to justify this position. They focus on recent inflation in food prices. A more likely explanation for this is that we’ve moved a lot of people out of poverty over the last few decades … and the first thing they like to do is eat better. This is an issue that economists have been talking about for decades: price rises are an unpleasant symptom of a sorely hoped for improvement in well-being. The IPCC is coming late to the table and calling this a bad thing. That bugs me.

Anyway, Porter makes another point related to growth theory:

Still, there are good reasons to take prophesies of doom with more than a pinch of salt. Ecological Cassandras have consistently underestimated humanity’s capacity to invent ways around constraints, using resources more efficiently and switching from scarcer commodities to more abundant ones.

One of the things you’re going to learn over the next month is that if growth was determined by diminishing marginal productivity (primarily of capital) and constant returns to scale, then it should be done by now. The fact that we’re still growing indicates that technology has taken over from capital accumulation as the primary cause of growth. And that’s precisely what Porter is noting has a history of solving our problems.

Thursday, March 27, 2014

Does Income Inequality Matter for the Economy?

The answer seems to be … not much.

… Jencks, a renowned professor of social policy at Harvard, abandoned his 10-year-old project of writing a book about the consequences of inequality on the nation’s health and opportunity, on its politics and crime. Why?

“I came to see a book with six or seven chapters that all said the same thing: It’s hard to tell,” he told me.

What does he conclude from this?

“The most common moral arguments for and against inequality rest on claims about its consequences,” Professor Jencks wrote more than a decade ago. “If these claims cannot be supported with evidence, skeptics will find the moral arguments unconvincing. If the claims about consequences are actually wrong, the moral arguments are also wrong.”

Mr. Jencks describes the state of the debate between friends and foes of inequality in these terms: “Can I prove that anything is terrible because of rising inequality? Not by the kind of standards I would require. But can they prove I shouldn’t worry? They can’t do that either.”

In short, don’t dismiss income inequality as a potential problem, but forget about assuming that it is a problem.