Saturday, September 14, 2019

Test Post

For some reason a post will not load up here. You can see it by clicking through to my personal blog: it’s entitled “An Interactive Chart of Real GDP Per Capita Improvements”.

Saturday, August 24, 2019

A New Progressive Counterpoint About Median Income Over the Last Two Generations

I’m not going to offer any cites for this; it’s a commonplace for Democratic-oriented people to say that incomes have stagnated over the last two generations (say,back to somewhere in the 1973-1982 range). This is usually based on data from the Census Bureau, whose data is more favorable to that position.

This is countered by many economists, whose professional position gives more support to the  Republican-oriented parts of the public. The economists argue that the finding that incomes have stagnated is an artifact of using price indices that systematically overstate inflation, thus making real values lower than they should be. Former Senator and Texas A&M macroeconomist Phil Gramm had a piece with John F. Early (a former assistant commissioner of the Bureau of Labor Statistics — whose overstated inflation measures are at the core of this problem) in The Wall Street Journal just the other day, making this point (entitled “Americans Are Richer Than We Think”).

Mark Thoma (a macroeconomist at the University of Oregon), via Marginal Revolution, pointed me to the blog of Richard Green (a macroeconomist at USC). And he makes an interesting new point that tends to support the progressive side of this debate. Due note that he uses the Census Bureau data, so someone should apply the Gramm and Early critique to it at some point.

Phew … that’s a lot of background in a small space. Anyway, he asserts that the problem is a bit worse because we have a greater share of the population in the bins whose income has stagnated the most. He provides the following table:

Share in Age Category Median Earnings (2017 $)
1980 2017 1980 2017
15-24 0.216 0.120  $13,057  $13,734
25-34 0.232 0.183  $44,252  $40,575
35-44 0.161 0.167  $56,911  $52,403
45-54 0.136 0.169  $56,732  $53,985
55-64 0.127 0.165  $45,200  $48,863
65+ 0.127 0.196  $20,845  $32,654

Here’s what’s going on. The first row, people probably your age, have improved a bit from 1980 to 2017. That’s the two columns on the right. But there’s a lot less of them. That’s the second and third columns from the left.

The big problem is that there are 3 rows of people in their prime earning years, 35-54, who are both doing worse, and who are around in greater numbers.  These are somewhat offset by the two oldest rows (which correspond to baby boomers and older).

Personally, I hate most of the other names for generations (there’s a demographic reason to have labeled baby boomers with certain dates, but I feel the others are just random marketing choices). Anyway, other people do use them, and according to Green, it is Generation X and Millenials who are hurting, and that does correspond to general perceptions out in the public.

Tuesday, July 30, 2019

Some Background On the “Genealogy” of Obamacare, Romneycare, Bill Clinton’s Proposed Reforms, and Republican Ideas

Alan Blinder:†

… Before the ACA, the U.S. stood out from the international pack on health care in two very unpleasant ways. First, it spent a far larger share of gross domestic product on health care. Second, it was the only advanced industrial nation that left vast swaths of its population uninsured. These two doleful facts remain true …

There are several ways to get more people covered. One is to adopt a system in which the government provides or pays for universal coverage—the British or Canadian model. This won’t happen soon in the U.S., not even as Medicare for All.

A second route, advocated unsuccessfully by President Clinton in 1993, is to mandate that every employer provide health insurance to its workers. This approach might seem natural in the U.S. context because so many workers already receive health insurance that way. But the employer mandate has fatal flaws. It wouldn’t cover the nonworking population, and it would impose heavy burdens on small businesses.

For these and other reasons, many economists in the Clinton administration—including me—favored an individual mandate. But that idea was dead in the water in 1993 because it had been advocated by the Heritage Foundation starting in 1989. It was therefore a “right wing” idea.

There are problems with an individual mandate, too. For one, the high cost of U.S. health insurance means that many low- and moderate-income families cannot afford to buy policies on their own. For another, if for-profit insurance companies are made to lose money by covering people with pre-existing conditions, the government must also force young healthy people, who tend to have limited medical expenses, into the insurance pool.

Fortunately, both problems are easily solved—conceptually, that is, not politically—by mandating that everyone buy a policy and providing subsidies to the needy. Massachusetts legislators understood this in 2006. They also knew they were not writing on a blank slate; many citizens received health insurance through their jobs and didn’t want to lose it. Hence the hybrid system that became known as RomneyCare.

If this short description reminds you of the ACA, it should. The two plans are not identical twins, but there is a family resemblance. In 2010 Democrats didn’t follow in the footsteps of Romney Republicans to make them look good; they designed their plan that way because under the constraints of precedent, the underlying logic practically forces you there.

Keep that in mind: If there ever is a TrumpCare, an unlikely proposition, it’s bound to resemble RomneyCare and ObamaCare—no matter what the president claims.

Parse that again: yes, the individual mandate that Obamacare included, and which drew from Romenycare in Massachusetts, that was struck down in 2018 (to the cheers of Republicans), was originally a Republican idea which the Clinton administration rejected (The Heritage Foundation is a conservative think tank).

Read the whole thing, entitled “The Individual Mandate Is Here to Stay”, in the April 14, 2019 issue of The Wall Street Journal.

Alan Blinder is a pretty big name in macroeconomics, and one you should familiarize yourself with. He’s been a professor at Princeton for a long time, served in the Clinton White House, was vice chair of the Federal Reserve Board of Governors, and is co-author of one of the major principles texts. While he’s published a ton, my sense is that he’s never had the one hugely cited article that puts you on any list for a Nobel Prize.

Sunday, July 28, 2019

Barro On GDP and Welfare

Barro [2019] observes that GDP is not a good measure of welfare. Yes, we already knew that, but we use it anyway because it so comprehensive.

But that comprehensiveness gets us into trouble because GDP is a better measure of effort than consumption/welfare.

In particular, he points out that we double-count investment. It’s counted initially when it’s purchased and added to the existing stock of capital. But it’s counted a second time when we include the income from what the existing capital stock produces.

It’s a good thing to count his somewhere, but it’s probably not a good thing to count it in something you’re going to use to assess welfare.

The upshot is that countries that invest more have higher GDP without necessarily making their people better off. That’s not an argument to not invest, but rather an argument that ranking outcomes by GDP will make countries that gyp their citizens look better off than they are.

Here’s a low level discussion of the results, asserting that over half of the capital share of GDP (that thing progressives are so worried about going up) should not be included in GDP at all.

FWIW: this paper shows one of the top macroeconomists of the last 50 years using a model not much beyond what we do in ECON 3020 and the Handbook for the class to make a fundamental point about how we should think about the world. And the method is calculatable with currently existing data.

Saturday, July 27, 2019

Why Is Macro So Hard? Marx, Engels, and Plato

The Open Syllabus Project tracks over 100K college syllabuses to see which texts are used.

At number 3 is The Communist Manifesto by Karl Marx and Friedrich Engels (this is the shorter, more political than economic book, that is often paired with readings from the 3 volumes of Marx’ Capital).


My guess is that this may be the primary exposure to economics that many students get.

An analogy would be if Paley was read by far more students than Darwin.

This is not to say that Marx wasn’t a great economist. He definitely recognized and discussed the big unsolved or unaddressed problems of his day. But that was half to 2/3 of the way back to Adam Smith. A lot has happened since then. That’s like contemporary chemists reading Priestley: old, seminal on some points, and woefully wrong and out of date on others.

And Marx’ labor theory of value, his core idea, was a failed attempt at explaining the paradox of value. An important aspect of why it failed is that he came up with an answer before others did, that was later shown to be flawed by the marginal revolution. In most fields, that would be called a valiant attempt, with emphasis on the attempt part.

And yet, I have never, ever, had an incoming student at any level who could explain why it was wrong. This makes me think that while # 3 is being covered a lot, an essential part of the story is being left out.

In context, Marx is best thought of as a low and thick branch on the tree of economics knowledge. It was a worthwhile direction to go as the field explored new directions. But when it didn’t work out, economics as we now understand the field to be, backed out of that branch and went down the others, and flourished.

At number 2 is Plato’s Republic. OK. I’ll give on this one. It’s a great and seminal piece of social thought. But I wonder how many students get through as much of it as they can and come out the backside understanding that it doesn’t have much to do with democracy, republics, and elections as they’ve come to understand them?

In an event, as an economist, I find this work to be blissfully unaware that decentralized exchange is important or worthwhile. And yet understanding of decentralized exchange is what economics is all about.

A case in point is the prisoners’ dilemma. It wasn’t until halfway through the 20th century that a couple of mathematicians hit on a fundamental problem for understanding economics: optimal choices do not always lead to optimal outcomes. Plato knew nothing of this when he considered the best government to be that of an all-wise and all-knowing philosopher king, who made nothing but optimal choices.

So why is macro so hard? Because these authors are blithering idiots on the subject of what we now call economics, or on the subject of economics as presented in the news every day. If this is informing students’ viewpoints on some topics, no wonder they find what we do difficult.

I’ll even update my analogy. Paley was at least talking about some of the same things as Darwin. Better yet would be Origen and Augustine, discussing diversity without any conception of the random part of random selection producing it. That’s what teaching Marx, Engels, and Plato is doing to college students.

Friday, July 26, 2019

Proposed Social Security Reform

It’s an opinion, but I feel that for 20 years or so, students have been fairly well-informed that Social Security is not sustainable in its current form. (Unfortunately, like the general public, they do not seem aware that Medicare, because it is both trending upwards and currently has no boundaries is the bigger long-term problem).

Having said that, most seem to lean towards the idea that social security will simply not be around, or won’t be a major contributor, to their retirements around mid-century.

In class, I’ve generally voiced the opinion that I thought it would be around, in much like its current form, and that it would be contributions from younger working people that would change. The big problem here is that older people vote with more frequency, and the politics is you don’t hurt the people who vote more.


Reform proposals come and go, and the new one on the table is from the Democrats (here are some recent proposals from Republicans).

So, this is not a very specific criticism of Democrats or the proposal, but it will point out some of the design features adopted in this proposal that have been touched on in my macro classes over the years.


What’s in the new proposal?

Increased taxes on working people. I hate to say I told you so, but …

Increased benefits for seniors. This is probably necessary to secure their support. It belies the fact that the wealthiest population segment in America is already seniors. On the bright side, it does increase social security payments to the poor by more than to the rich.

A particular bugbear of Democrats is the willingness to create additional tax brackets. The problem is the resulting complexity of the outcoming tax planning. This one is worse because it creates two tax bracket changes, one for the rich and one for the very rich, neither of which is indexed to inflation, making them more complex with the passage of time. This has been dubbed the “doughnut hole”. Do note that on top of this, the change in benefits from the previous paragraph is like creating an implicit third new tax bracket.

On a good note, the proposal does reduce the number of brackets that recipients in middle incomes face.

Probably most importantly, the reform would change the adjustment for inflation. We’ve known for about 25 years that using the CPI to adjust for inflation creates long-term problems because it overstates inflation rates. The new reform would make this worse by switching to a new measure of inflation known as CPI-E. This new measure actually results in higher inflation rates than the old one. So this is a sneaky way to amplify an old problem. This is pure politics again: if you choose a more accurate measure of inflation to use, because we’re too high that must be lower, benefits for seniors will grow at a slower rate. Lobbyists for seniors (like the powerful AARP) are the one who keep that sort of thing from going through, and they’ll love using the new index.


Keep your eye on the ball here.

Social Security needs reform.

Reform will happen eventually. Both parties want to be the ones who get credit for it.

Each party proposes a set of compromises, looking for the set that will ultimately pass.

Those compromises will always have bad stuff in them, to get some good stuff too. This just happens to be the Democrats current bad stuff, and my honest opinion is, that increasing tax complexity and a preference for biased inflation adjustment are fairly normal for how they operate.

Wednesday, July 24, 2019

Why Is Macro So Hard? Don’t Measure What You Don’t Want Others to Find Out

Here is an example from Berkeley passing a sin tax on sugary sodas. The goal of these is allegedly to combat obesity. If so:

The problem with the way the soda tax is implemented, however, is that the city treats the policy as a settled issue rather than an experiment. It does not account for the possibility that the policy may fail. In fact the city’s decision-makers do not even bother to outline what they would consider a success for the soda tax in terms of reduced obesity. They have not announced any plans to track the tax’s impact on obesity rates. Thus, even if the policy fails to reduce obesity, the tax will likely continue.

Maybe the purpose of the tax isn’t really to combat obesity at all. Maybe it’s just to raise money. Cold Spring Shops (linking to this article, with more here and here) quotes that those two probably don’t go together

As with all sin taxes, there's a contradiction at the heart of California's proposed soda tax: the policy is supposed to both dissuade soda purchases and raise significant revenue from taxing them. To succeed on one metric is to fail on the other.

The reasoning is nothing if not obvious:

  • If the tax is going to reduce obesity by discouraging people from buying sugary drinks, then their demand must be elastic. So little tax revenue will be collected.
  • If the tax is going to raise revenue, it must do so because people will buy the sugary drinks in spite of the tax, because their demand is inelastic. So obesity won’t change much.

Ya’ can’t be elastic and inelastic at the same time.

Thing is, if they knew this, it would make sense to discourage collection of data.

It all makes sense now …