Thursday, November 29, 2018

Uh Oh (Mexico Edition)

Most countries do not have independent central banks.

Politicians don’t like independent central banks. Part of this is probably personal (it stands to reason that people who run for office that control things probably actually prefer to control things). But part of it is sketchier: if you’re a kleptocrat, getting your hands on a country’s bank might be the ultimate payoff.

This probably explains why economists have found, that while most central banks are not independent, the economies of countries with independent banks tend to perform better.

Mexico has not always performed well economically, but has had a pretty good run for about 40 years. It’s now the 15th largest economy in the world by exchange rates (93rd percentile), and 11th-12th largest by PPP (94th percentile), while its per capita GDP by exchange rates is around 70th (about the 61st percentile), and using PPP it’s in the ranked in the high 60’s (about the 64th percentile).

Part of this was a move to make their central bank more independent in 1994.

But, Mexico just elected a new government which takes office on December 1, 2018. And that government has appointed an official close to the incoming president as deputy governor of the central bank (at least the guy is an economist).

This is not necessarily bad. But as a sign, it’s sort of disturbing. American presidents, for example, may appoint members of the Board of Governors of the Federal System (subject to the advice and consent of the Senate). But it’s hard to come up with the name of any president whose appointed a political insider to one of those positions. The closest thing to this may be when Clinton moved Alan Blinder from the White House’s Council of Economics Advisors over to the Fed in 1994 (but Blinder was primarily a well-known academic, who while strongly Democratic has been in and out of different administrations and positions).

Anyway, this is a big enough deal that the appointment is getting coverage from the Wall Street Journal.

Tuesday, November 20, 2018

An ‘Angry Uncle’ Conversation Primer (Optional)

This is common: many families have members or holiday guests who are argumentative and sometimes distasteful.

Often they want to discuss politics, and frequently they want to argue macroeconomics.

This is so widespread that The New York Times has come up with an app about it.

If interested, Google "angry uncle conversation" and look for a link with in it. The site is free to use. (Here’s a currently working link).

It's a chat bot that plays the role of a holiday guest who's angry about politics. You can role play and figure out how to approach them in a way that makes them less confrontational.

It's much more fun than a real angry uncle ;-D

Where Do Your Tax Dollars Go?

Where Do My Taxes Go? is a cool interactive site. It takes in your pre-tax income, your state, and your filing status, and returns the amount and percentages of your taxes that go to various places. Go put in your numbers!

My guess is that most people will try it out and be surprised. The big deal is the percentages: most people have some unusual biases about what parts of government are large and small. My guess is that the percentages are roughly the same for everyone. Do note that the percentages are only for Federal taxes (including FICA); no breakdown for state taxes is included.

Below, I’ve used my own household situation to generate some percentages. I’ve also broken down a little differently, and ordered the results. For curiosity’s sake, a couple working at a mid-level state university, as a full professor and a lecturer, with not much other income, pays about $23,000 in federal taxes, and $7,000 in state taxes (the latter are not included in what’s below).

The first major distinction is between mandatory and discretionary spending. According to the laws, mandatory spending is very difficult to cut.

Worse, programs with mandatory spending often define benefits in terms of per person and per situation. So, population goes up, and so does mandatory spending. More people qualify for the benefits, and spending goes up, The thresholds for qualifying for benefits can be changed, but politically, these changes are often in the direction of more rather than less spending.

The breakdown explains a lot of why it’s so hard to make meaningful budget cuts in D.C.:

Category Percentage of All Spending
Mandatory 72
Discretionary 28

How does a program become mandatory? Easy. Congress passes a long saying this sort of spending is now mandatory. Done. That's it.

Mandatory spending was non-existent before 1935. Social Security was the first program to be designated this way. Unfortunately, here’s what’s happened with the passage of time:

What sort of programs are mandatory? Here you go:

ProgramPercentage of All Spending
Social Security24
Other Mandatory Programs13
Net Interest 8
Health Exchange Subsidies 1
Infrastructure Initiative 1

Note that percentages don't always add up due to rounding.

Here are the discretionary programs. When people discuss any sort of “spending increase” it might come from mandatory, discretionary, or both. But when we discuss any sort of “spending cut” it almost certainly comes from discretionary spending.

Program Percentage of All Spending
Dept. of Defense 13.8
Overseas Contingency Operations 2.3
Dept. of Veterans Affairs 1.9
Dept. of Health and Human Services 1.6
Dept. of Education 1.4
Dept. of Homeland Security 1.1
Dept. of Housing and Urban Development 0.9
Dept. of Energy 0.7
Dept. of Justice 0.6
Dept. of State 0.6
NASA 0.4
Dept. of Agriculture 0.4
Other Agencies 0.4
Dept. of Transportation 0.4
Dept. of the Treasury 0.3
Dept. of the Interior 0.3
Dept. of Commerce 0.2
Dept. of Labor 0.2
Social Security Administration 0.2
Disaster Relief 0.1
EPA 0.1
National Science Foundation 0.1
Army Corps of Engineers 0.1
Program Integrity 0.0
Wildfire Suppression 0.0
General Services Administration 0.0
Small Business Administration 0.0
Emergency Funding 0.0

Note that percentages don't always add up due to rounding. Also, a 0.0 indicates something positive that was rounded down.


Here are more details about mandatory spending.

Social Security includes not just payments to retirees, but also to spouses and children (if the person who paid in dies young).

Many people are under the impression that they “deserve” Social Security because they get out what they pay in. This is not true. Unless one dies well below the median lifespan, outflows exceed inflows for just about everyone. So, it’s a morbid example, but the Federal government faces a moral hazard when it discourages smoking. Further, social security payments are gender neutral, while life expectancy is not, so if a man and woman pay in identical amounts it’s likely the woman will receive more outflows.

Medicare covers many health expenses for those over 65. It is composed of 4 programs. Two were created during the Johnson administration in 1965: Medicare Part A  covers in-patient care (e.g., hospitalization), while Part B covers out-patient care (e.g., office visits). Parts A and B offer better coverage, but less choice. Part C, passed in 1997, allows seniors to enroll in plans that limit spending but offer more choice of doctors and facilities. Part D, passed in 2003, covers most prescription medications consumed at home. Interestingly, Parts A and B were passed when Democrats controlled both houses of Congress and the White House, while Part D was passed when Republicans controlled everything, while Part C was a mix.

It is fairly common knowledge that Social Security has long-term viability problems. This is because it is difficult to collect enough inflows to cover outflows. This is mostly a problem of 1) people voting certain groups out of paying and into receiving, and 2) insufficient adjustments to the age at which benefits start to account for increasing lifespans.

What is very poorly understood is that Medicare is a worse problem than Social Security. This is because Social Security does have limits on how much one can receive in proportion to how much one paid in. Medicare has no such limits: the government has promised open-ended medical care to all seniors. So again, there’s a moral hazard in that providing better medical care extends lifespans which increases the lifetime costs per person. Yes, that is expected to spiral “out of control”. No, nothing has been done about it.

For future reference, you should also be aware of a long-standing curiosity with Social Security and Medicare: because contributions do not cover expenses, these programs should be thought of as “welfare” for senior citizens. However, since everyone makes contributions to these, and most people are in denial that their contributions do not cover what they are likely to receive, most people do not regard these as welfare.

Medicaid is a program in which the Federal government helps state governments provide healthcare for their poor. A critical difference between Medicaid and Medicare is that, by design, Medicaid can and will cover all a recipients healthcare expenses. Medicare always requires some patient contribution (which seniors can buy extra insurance, known as Medi-gap, to cover).

That means that when progressives tout medi-something-for-all, what they are envisioning is something like Medicaid in which the consumer pays no out-of-pocket expenses.

Unfortunately, Medicaid is also the program that doctors and hospitals complain about so much. If you have lived in an area where you have heard about doctors or hospitals not accepting patients, they are talking about Medicaid rather than Medicare. The problem here is that Congress routinely does not supply funding for Medicaid that keeps up with expenses. This has been a problem for decades, both when Republicans and when Democrats controlled Congress.

Health Exchange Subsidies are part of “Obamacare”. These include payments to private health insurers to stay in business in regions in which they would otherwise lose money.

Net Interest is fairly obvious: gross interest paid on federal debts minus gross interest received by the federal government on its loans.

The Infrastructure Initiative is new under the Trump administration. What they did here was try and reduce overall infrastructure spending (which was discretionary and volatile), with mandatory spending that was smaller, but also tied to a formula that provided reliable increases with the passage of time.

What’s in those other mandatory programs? Ooh, lots of stuff that’s individually smaller. he Earned Income Tax Credit (EITC) returns some taxes to the working poor. Most welfare programs are here too: Supplemental Nutrition Assistance (SNAP) helps pay for food for the poor (and was formerly known as food stamps), Temporary Assistance for Needy Families (TANF) is what most people think of as conventional welfare, as well as Unemployment Insurance. Also in here is Supplemental Security Income, which is available to seniors, the blind, and the disabled if their other support is insufficient. All of your retirement programs for former government workers, including the military, goes here. Agricultural subsides are in here too. Lastly, it’s very small, but all the salaries and benefits of top government officials are here too. This is because some jobs — President, Senators, Representatives, Supreme Court and other Federal Judges, Ambassadors, and so on — are mandated by the Constitution or other laws. On the other hand, when you here that the President is not paid as much as most CEO’s, the reason is that while their salary is part of mandatory spending (making it hard to cut) it also requires a special act of Congress to increase.


Here are more details about discretionary spending.

First off, in the income breakdown of GDP in the National Income and Product Accounts, about 70% is compensation. So, in all of the programs listed here, roughly 70% is employee compensation. If the budget numbers underlying these percentages go up or down, it’s mostly because employees went up or down.

Defense is obviously the biggest one. Part of the reason you hear so many calls for reductions in defense spending is not that people are not in necessarily in favor of that, but rather that it’s literally the biggest thing by far so a little cut to defense could hugely increase some other budget you favor.

Overseas Contingency Operations are for funding help for political disasters (civil wars and peacekeeping) and natural ones too. Basically, when sh*t happens, it comes out of here.

Veterans Affairs is mostly hospitals and other more routine medical care for veterans.

Other agencies include many familiar government entities that report straight to the White House: the CIA, the FCC, the FEC, the FTC, the NLRB, the NTSB, the SEC, the Selective Service Administration, the Smithsonian Institution, the revenue shortfall of the Postal Service, and many more.

The Army Corps of Engineers is separated out because they do most of the fresh water control (with levees), and salt water control (with breakwaters) around the country.

Program Integrity is bridging over from old programs that are being done away with, to new programs to deal with the same issues.

The General Services Administration is the one that runs all the buildings: rent, repairs, utilities, copier paper, and so on.

Friday, November 16, 2018

An Interesting Site (Optional)

I do not know enough about the methodology used by this website to say that I support its conclusions. (I especially distrust that it’s just a website, and not a peer-reviewed publications). Whatever.

This was put out by ThirdWay, a progressive think tank based in D.C. What they’ve put together is some indices of how possible it is to have a good life in various U.S. urban areas. They ranked 204 metropolitan areas, and came up with some interesting (but not too surprising) “heat maps” of what they call the opportunity index.

ThirdWay's Opportunity Index Capture

Reddish is worse, greenish is better. Not surprisingly, it’s tough for a lot of people to have a good life in California. The Southeast doesn’t look too good either. The Wasatch Front is OK to good. The best parts are the Midwest, parts of the Northeast, the big urban areas in Texas, and few cities in the west: Denver, SLC< and Seattle.

Perhaps some of you will find this useful for planning a relocation.

Friday, November 2, 2018

Who’s Better: Trump or Obama?

How about … neither?

Former student MC sent me a link to this piece entitled “Two Charts Show Trump’s Job Gains Are Just a Continuation from Obama’s Presidency”. It’s by Chuck Jones, and appeared in Forbes.

I am not sure how much I’m supposed to read in to the word “continuation” in the title. To me, it’s not clear if the author means that Obama is responsible for Trump’s good numbers, or just that the economy is doing its thing, and Obama and Trump just rode the same wave.

Either way, it makes a point that I made in principles classes just this morning: the labor market data doesn’t show that Trump is doing anything special.

U.S. employment

U.S. unemployment rate

The big point here is that the differences are overblown (so I’m of the opinion that they are both lucky to be riding a good wave). If you’re a Trump-lover, he’s nothing special. And if you’re a Trump-hater: he’s not wrecking anything either.

P.S. At the time that I write this, I’ve barely begun the revision of my text for Spring 2019. One thing I intend to include is some simulations looking at whether we could have forecast the economy’s performance over Trump’s first 7 quarters at the time of the election. So there will be more to come.

Thursday, October 18, 2018

Putting Real GDP Per Capita In Perspective

The Philippines is not one of the poorest countries on the planet. But it certainly was a century ago, and it has not grown as well as its neighbors. Currently, its real GDP per capita is about 3K/yr in American Dollars. Ours is about $60K.

What does that get you? Check out this gripe from the comments at Marginal Revolution:

Airspace homogenuity is a 1st World gripe. Here’s some of my 3rd World concerns: do we have any more Philippine spitting cobras in our backyard? (We’ve killed two in the last year, one of them at 10:00 am in the outdoor kitchen, slithering up to somebody; it can shoot their venom up to 10 feet, kills many within 30 minutes, too short to make it to the hospital); are we going to run out of water in this rain forest climate that has no dams, though we just dug a second pressurized well?; does burning plastic (there’s no trash pickup here) cause cancer though we’ve taken precautions to build a big pit and stay upwind? (diesel fuel helps but it’s so rainy here it’s hard to burn anything); did the diseased bat that almost landed on my head carry Ebola or rabies (I have anti-rabies shots, but not Ebola)?; will the volcano erupt again and bury us with pyroclastic flow, like it almost did earlier this year (the magma the size of a football stadium that rolled down the mountainside was spectacular, I saw it when it happened); will our new concrete house get damaged by an earthquake (I think not, we used good concrete not the crumbly stuff they use here to save money), or a typhoon (we have a steel roof; the Philippines gets something like a dozen typhoons a year, and we’re in ‘typhoon alley’); will we have another power cut just when I’m typing this? (the PH regional power plant is geothermal, which sounds good but in fact is prone to breakdowns, a brownout for a few hours every week is common, and more common during rain, a coal-fired plant is actually more reliable and btw electricity costs are about 2-3x more than in the USA, and people here are poor). Why are fruits and vegetables so expensive here ($1 for an ordinary apple; 80 cents for a small fist sized greenish tomato or huge, dirt filled–it’s comical–carrot) and why won’t my next-of-kin eat them? (sad people here eat nothing but sugar, white rice, pork, chicken, and the bony talapia fish, all fried of course since nobody even sells ovens and the one oven I bought, imported, had a gas leak and is inoperative, serves me right for trying to buck custom and buying things knowing everything here is sold from First World county rejected equipment, I kid you not).

It’s both amazing from the perspective of history, but not so amazing from the perspective of the internet that this commenter chimes in rather often on the world’s most popular economics blog.

Wednesday, October 3, 2018

Hyper-Local Institutions, Family Income, and Future Prospects

As time progresses, we get better and better data about what helps people avoid poverty.

The old school story was that it was about your parents’ income: the richer they were, the richer you were likely to be.

The new school story, developed in other parts of macroeconomics over the last 30 years, is that once we correct for readily observable differences (like parents’ income), what’s left over as a residual is the effects of the harder to measure institutions that make up societies and cultures. And those institutions seem to make a lot of difference, although we have trouble pinning down what they are.

There’s new research discussed in an article in The New York Times entitled “Detailed New National Maps Show How Neighborhoods Shape Children for Life” that shows this. You have to click through to run the interactive graphic: I just have screen captures below.

What they found is that children of poor families in some neighborhoods did better than those from other neighborhoods. A half-mile radius makes a difference, which is why they use the word hyper-local for this effect.

Of course, my guess is that most of you could identify a neighborhood close to where you grew up where you could just bet that many peoples’ lives didn’t work out well.

Cedar City doesn’t work too well for this (we’re too small). I’m going to go back to a neighborhood where I used to live in New Orleans. If you saw the house we used to live in, by Utah standards you’d think we were poor. But New Orleans is expensive, so I assure you it was an upper middle class neighborhood. But it wasn’t rich. It’s the greenish area under the darker blue rectangle in the center, next to the big park (in white). It would take 10 minutes or less to walk it from west to east.

Poor Kids from New Orleans Neighborhood Capture, NYT 18-10-03

You don’t know this, but I do: New Orleans is a great example for something like this because rich and poor live much closer and more spottily than in other cities (if you’ve never been to the South, more limited zoning makes them far less segregated than you’d expect).

Even though this was a good neighborhood, the map shows only outcomes for kids that grew up in poor households in these neighborhoods (richer kids are not shown here at all).

And what you see is that a poor neighbor where we used to live, would have kids that would grow up into middle incomes, but only so far. The poor kids just to the north, who would have gone to the same elementary school ended up a lot better off. The poor kids just to the north and a little west did well, but not as well as the ones straight north (our best — and much richer — friends lived in that neighborhood that somehow did less for the poor). All the way to the north along the lake … which was super rich, poor kids did pretty well, but not as well as in other neighborhoods nearby. That little greenish triangle southeast of where I lived was not regarded as a great neighborhood … but somehow kids there do fairly well.

Here’s Salt Lake City, which I’m guessing is far more segregated by income:

Poor Kids from Salt Lake City Neighborhoods Capture, NYT 18-10-03

Yes, the south end of the valley is richer, but that isn’t shown here. But there’s something about it that helps poor kids turn into rich adults. And if you look at The Avenues, there are some neighborhoods there (that are pretty much all rich) where poor kids are not getting something they need to improve their lives.

You probably need to go to the interactive graphic to zoom in, but in my old neighborhood (now called Westpointe because no one liked being associated with Rose Park) the dividing line goes down the main street by our old apartment. The neighborhood was all apartments, but poor kids in our complex turned out better (on average) than poor kids in the complex just across the street. Weird.

It’s also interesting to compare the two maps. These are all for kids whose families had the same incomes in New Orleans as they did in Salt Lake City. But there’s something about Salt Lake City that helps those kids grow up to be financially better off than kids from big chunks of New Orleans. Somehow the culture in SLC is one in which the poor do better.


On a different note, the article discusses a policy choice made by the Seattle Housing Authority.

This should be fairly obvious by the time you reach this class: passing policies is easy, finding policies that work is hard.

In this case, they’ve assumed that it’s something in the good neighborhoods. So they’re subsidizing poor people with vouchers to cover higher costs in the good neighborhoods. That will have a direct effect of increasing the number of poor households in those neighborhoods. But there will be an indirect effect: the vouchers will shift demand to the right, pushing up prices, and pushing out some of the marginal people who could afford those neighborhoods without the voucher.

Even so, this is problematic. This policy does not acknowledge that people may have self-selected into those neighborhoods, and their choices may be correlated with other behaviors. If good outcomes result from what residents do rather than what they have, then this sort of policy is likely to be a waste of money. An important caveat to that is that it may be helpful to push poorer families to move nearer to families with better habits, in which case the policy will work. But in contemporary society, that’s viewed as inappropriately judgmental. Politically, that tends to trump whether it works or not.