Sunday, February 7, 2016

Should Your Tech Firm Hire an Economist (Not Required)

Economists are trendy in Silicon Valley. This post entitled “Should Your Tech Firm Hire an Economist” by Jed Kolko tells you why, and what economists do for tech firms.

Saturday, January 30, 2016

I Don’t Know Whether I’m Smart or Clueless

With respect to the previous post about China, it occurred to me right after I posted it that I actually did say something very much like what Batson said.

Here’s me, in a panel discussion, in October 2008 (a month after the Lehmann bankruptcy, when the Great Recession went from mild to horrible):

This latest round of trouble started about a month or so after the Olympic construction got finished. Essentially, the biggest expansionary fiscal policy project in the world just ended (official Chinese numbers are always dubious, but Rabinovitch 2008 reports spending of no less than $40 billion). If we are going to think seriously that a fiscal stimulus package coming out of Washington is going to boost the economy, then in order to retain our credibility we need to also acknowledge that the Chinese just slammed on the brakes of the global economy (note that the popularized dollar value of the Obama stimulus package is much larger). Experts may argue about the importance of that to other economies, so it should be emphasized that Olympic spending is a lot more like textbook fiscal policy than any of the stimulus proposals that have come out of Washington (see Colander 2007). [pg. 63]

The Beijing Olympics began on August 8, 2008. I have inside information: a very old friend was an architect on one of the stadiums, and told me they finished his venue on the morning of August 9 … with events starting that afternoon. Athletes were arriving while the architects were doing their final sign-offs.

Anyway, within a month of a minor downturn turning much worse, and within two months of the largest fiscal stimulus going on in the world at that time … I was saying something very much like what Batson said about housing construction in China.

So I do not know if I’m smart of clueless. But that’s the way macroeconomics is — lots of details and clues that critical thinkers have trouble assimilating, and too many “just-so stories” spread by other academics, the media, politicians, and bureaucrats.

Maybe China’s Growth Slowdown Is Easy to Understand

Academic economists (like me) get pessimistic about China for two big reasons:

  • Structural problems — basically, the country has some (definitely more than one) recognizable organizational problems that are hard to solve and likely to slow growth, and
  • The Middle Income Trap — basically, that most countries seem to stall at middle incomes (like Brazil), rather than cruise right through to higher incomes (like South Korea). So the odds for China just aren’t good to start with.

Andrew Batson (an economics consultant and reporter, on the ground in Hong Kong) has a different take.

I have to confess to some frustration with some of the recent commentary on China coming from academic economists. …But I think on China there is a tendency for some people to look past “simple” issues … Again, usually I’m all in favor of complex, historically nuanced explanations–but you can go too far with this stuff. Sometimes it’s really not that complicated.

He follows with a list of structural explanations which, if you’re paying attention, sound like the stuff I say in class all the time.

What I found amazing about these analyses is that they fail to even mention the most straightforward and direct explanation of why China’s growth is much slower today than it was in say, 2010 or 2007. It’s not like it’s a secret. From about 2003 to about 2010 China had the biggest construction boom of modern times and probably in all of human history. Then in 2011-12 the construction boom ended. That’s it. Really, that’s all you need to know.

None of the various structural reforms being debated today will do anything to change the fact that in the near term, China does not need to build a lot more housing. And that therefore business for companies related to housing construction (and there’s lots of those) will be poor.

I have to admit, I think he’s got a good point. So maybe I’ll back off on China a bit (don’t count it though). What really got me was his discussion of what critics of China think China ought to do if it actually has those structural problems:

If you think China is succumbing … the proper response is a set of carefully calibrated structural and institutional reforms. If growth ends up worse than expected, you put the blame on the government for not taking the right policy prescriptions.

I find that very convincing because it’s an argument about why my thinking about China may be weaker than I’d like to believe.* Batson is pointing out that if you think China’s government got them into this mess, then you also think they can get China out. But that contradicts the general assertion I make in class that politicians/bureaucrats … just don’t have that much control over the economy. Either they do or the don’t, but you can’t have it both ways.

Read the whole thing here.

Via Marginal Revolution.

* Macroeconomics is all about critical thinking skills. If you’re not introspective about how you interpret events, you’re going to have trouble in your career when you face news issues that don’t fit into your intellectual framework.

Friday, January 29, 2016

Real GDP Growth for 2014 IV

The first draft of GDP for 2014 IV came out this morning.

It’s not pretty: an annualized growth rate of real GDP of 0.7% per year. That’s not below zero, so it’s not recession territory. But, it is below the threshold — around the population growth rate of 2% per year — than needs to be exceeded for people to feel good about the economy.

For the whole year, real growth was 2.4%. Nominal growth was 3.4%, so inflation was about 1%.

A Bad Sign

The government of China is investigating the head of it’s own National Bureau of Statistics for corruption. This bit from the BBC sounds Orwellian:

The Central Commission for Discipline Inspection said that Wang Baoan was "suspected of serious violation of discipline", a phrase that usually refers to corruption.

It gave no further details of the investigation.

The announcement came hours after he held a media briefing on the state of China's economy.

Here’s a CV for Wang Baoan. His briefing was about capital outflows being more than double what was forecast for last year. Here’s what the South China Morning Post (the big newspaper in Hong Kong) said.:

The sound bites were broadcast on state radio’s main daily news bulletin. But minutes later the news presenter read out a brief statement about the investigation into Wang. The apparently hasty arrangement is rare given the tight editorial and censorship procedures at top state media.

It’s possible that this genuinely related to a criminal issue.

However, it’s more likely that this is about either 1) Wang not producing lower and more realistic GDP growth numbers, or 2) Wang being the one who wanted lower and more realistic numbers and being shut up for saying so. Who knows?

Thursday, January 28, 2016

Why Do Technology Firms Hire Economists? (Not Required)

Majoring in economics? Silicon Valley (and other tech centers) hire quite a few. Susan Athey (a really big name economist from Stanford, who’s on the board of a lot of tech firms, and a consultant on retainer for Microsoft) provides some information about that in this post from Quora.

Wednesday, January 27, 2016

How Do They Decide When the Economy Peaked?

We know economies peak and trough. Who decides on those dates?

Many people (even countries) use the convention that 2 or more consecutive quarters of declining real GDP is what makes for a recession. This has the advantage of transparanecy. But its disadvantages are that you’ll probably be waiting 7-9 months for that GDP data. Also, some country’s GDP data is sketchy.

In the U.S., we have an official committee that provides official dates. It’s called the NBER Business Cycle Dating Committee. NBER is short for National Bureau of Economic Research. This is a private group of economists, mostly from top universities. The committee is composed of several top macroeconomists. They typically pin down dates of peaks and troughs a few months after they occur.

Over the decades, they have looked at a huge number of variables. Most of them have the false negative and false positive. Over the last 20 years or so, they’ve settled on four that they think are better than the rest. Do note that these four are coincident indicators: they peak and trough when the whole economy does. The Committee is not doing forecasts, so they’re not looking for leading indicators (and, of course, everyone tries to avoid lagging indicators … like the unemployment rate). Those four variables are:

  • Non-farm employment (farms are excluded because they have big seasonal fluctuations)
  • Industrial production (most of the economy isn’t industrial, but this is easy to measure and available monthly)
  • Real retail sales (the two previous series are real by definition)
  • Real personal income excluding transfer payments (because including transfer payments would smooth out personal income).

Here’s how these four look since the last trough:

This graph is copied from the excellent page entitled “The Big Four Economic Indicators: Real Personal Income for November” at advisorperspectives.com. As of the November data (the December data should be out any day now), only industrial production is showing signs of weakness. It’s been doing that for over a year.

Keep in mind that because these are coincident indicators, that if they all started going down this month, we’d probably call that the peak. We’d then expect them all to continue dropping until around the trough.

Here’s what they’re doing right now, if we measure each variable as a percentage off its peak, and then average those figures. (It’s a little tricky, but in the table above, this would be the sum of all the green entries in a column, minus the pink entries in that column, minus all the immediately precedings and uninterrupted pink periods — because no new peak has been set for those series. So that’s 0.18 + 0.34 + 0.25 – 0.90 – 0.16 – 0.02 = –0.31).

Big Four Average Since 1959

All recessions have to start somewhere, so maybe this little downturn we’re in is the start of something. But, for now, we’re not down enough to be too worried. We probably need to get to at least –2.5 to really think recession. For December, you can see that we’re still waiting for one number, whose components come come out on February 1. So far, we’re at –1.34.

Those components are:

  • Personal Income = 15,617.6 for November
  • Personal Current Transfer Receipts = 2699.7 for November
  • Personal Consumption Expenditures: Chain-type Price Index = 109.782 for November.

Subtract the second from the first, multiply by 100, and divide by the third to get the NBER’s preferred number which was 11,766.9 in November. The –1.34 means we’re off the trouble zone by 0.66%, or maybe a bit more. That works out to a drop of 77.7 in this index. So roughly, we should be thinking we’ve peaked with a figure of 11,690, and we probably won’t have any doubts if it’s 30 or 40 points lower than that.