Monday, July 13, 2009

A Bonus Tax Casualty


Until a year ago, I was The Wall Street Journal's personal-finance columnist -- and widely considered to be a friend of the ordinary investor.

But that was then. In April 2008, I left to join a new Citi venture. (What follows are my views -- not those of Citigroup Inc.) For the past year, I thought I was involved in building a wonderful, customer-friendly business that minimizes conflicts of interest, favors index funds, and helps everyday Americans with their entire financial lives.

It seems that I was sadly mistaken. If the rebuke from Washington is any guide, I have apparently played an integral part in the collapse of the global economy and the financial markets -- and I must be punished.

I used to read Jonathan Clements column, although he did seem like a bit of a dweeb. They were down to earth and practical, with a lot of personal information. I remember when he left the paper – I didn’t like his replacement very much.

Should the House bill become law, my bonus will be taxed at up to 90% once my adjusted gross income hits $250,000. …

I realize readers won't be shedding tears -- $250,000 is a decent chunk of change (though, trust me, it doesn't buy that great a lifestyle in New York). …

Not buying the hardship angle? Not persuaded that this tax is unfair? Consider this truly searing indictment: A 90% tax is downright stupid, creating bizarre disincentives. Exhibit A? That would be me. Once my total income hits $250,000 for the current calendar year, I will have no incentive to work a single day more in 2009. After all, for every extra dollar of income I earn above $250,000, I will lose 90 cents of the bonus I received earlier this year.

Being somewhat knowledgeable about personal finance, I'm trying to figure out how to finagle this. By minimizing my investment income in 2009 and pushing other income into 2010, I reckon I can delay the day of tax reckoning. But even with that finagling, by mid-October, I will hit $250,000 in total income -- and have no incentive to earn any more income in 2009.

At that point, I plan to ask Citi for an unpaid sabbatical. Forget earning more income. There's no point. Instead, you will find me hunkered down at home, desperately trying not to spend money. This will make entire financial sense for the Clements household. What about the struggling economy? Not so much. [emphasis added]

You know those children’s stories (and movie) where the bad fish are all caught in the fisherman’s net and the good fish too! That’s your Congress at work.

You know how the good fish always manages to break free of the net in some totally unrealistic way? The appropriate synonym for unrealistic is Orwellian.

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Monday, April 27, 2009

Are Economists More Conservative than Other Social Scientists?

My opinion on this is flatly “no”.

On the other hand, are there more conservatives among economists? I would say the answer to this is flatly “yes”.

I think what has happened here is that economists with theories and results that have pointed in conservative direction have been on a really long winning streak.

Economists who were intellectually “raised” a generation ago (like me) or even a bit longer, can clearly remember when economic results with conservative implications were widely ridiculed. The problem was, in case after case, they turned out to be correct. By the same token, economists with liberal ideas – John Kenneth Galbraith for example – increasingly seemed to be dinosaurs. Further, there was a flowering of new economists, starting in the 1970s, whose personal politics weren’t particularly conservative but whose results could be broadly interpreted as conservative by people outside the field.

A good example of this is Paul Krugman. Like him or not, he’s undoubtedly one of the top 2-4 economists to have come out of graduate school in the last 50 years. His personal politics are clearly liberal. Yet, his results, and most of his popular books would probably be ridiculed in a typical social science class. Heck: his thinking got him a job in the Reagan White House. He pooh-poohs that today, but I think that was a realistic match at the time.

Even better in Greg Mankiw. As a Harvard undergraduate he wrote one of the most important papers justifying Keynes’ thinking. Yet he will be forever identified as a conservative because he worked in the Bush administration.

This extends to presidents. When I rank presidents from left to right in terms of their economics, I put Clinton to the right of Nixon and Ford, quite probably Bush I and possibly Bush II. And Obama doesn’t scare me too much because he chose people like Romer and Sunstein who I think would’ve been unemployable in any of the five presidential administrations of the 60’s and 70’s.  And think about Larry Summers: chased out of the Harvard administration for being too conservative after serving in the Clinton administration.

I think contemporary economists are conservative enough that we don’t need to worry too much about their political leanings. But … don’t get me started about other academics that show up in Washington.

Responses to Matt Keyes

Matt asked some questions after the last class on Friday that might be interesting to the rest of you. I figured I’d post some responses here.

Broadly, the topics we covered were:

  • Why don’t a lot of people outside of economics classes “get” macroeconomics?
  • Why do people seem to be more worried about the little stuff than the big stuff?
  • Why do economists seem more conservative than other social sciences?

I’ll put up a post about each of these.

Remember, none of this is testable (for my Spring 2009 class).

OK. I’m Done

I could keep going, but this seems like a good place to stop for the semester. I may add a few things after this, but they won’t be tested.

Financial Markets Are Thawing

This is from the April 7 issue of The New York Times, but we’ve continued in the same direction: “Credit Markets Are Showing Some Signs of Life”.

The TED spread is back down to the level it was at before the Lehmann bankruptcy. This measures the difference in default risk between very low risk government bonds (which can be supported by printing money) and very low risk corporate bonds.

But … the article also talks about mortgage rates falling, and while this is interesting to a lot of people, I find it economically illiterate to focus on it. The reason is that it’s a price: whether its going up or down is viewed as good depends on whether your more biased towards buyers or sellers. I think if you’re unbiased, you shouldn’t care about something like this.

That’s in contrast to spreads, where the benefits to buyers and sellers net out when you take the difference between two rates.

The piece closes with an opinion that’s worth thinking about:

“The question to ask is not whether credit markets have improved,” said Jeff Rosenberg, head of credit strategy research at Bank of America/Merrill Lynch. “The question is, what is the source of the improvement? Can credit markets function without significant government intervention? Indisputably, the answer is no.”

I don’t have an answer to that question.

Revisionist Views On the New Deal

I’m agnostic about whether the New Deal did anything to alleviate the depression. For what it’s worth, my thinking has gotten more open-minded on this issue: 20 years ago I would’ve regarded this as a heresy.

The April 4 issue of The New York Times reported on a conference that revisited the economic interpretation of the history of the Great Depression.

… Critics of the New Deal credit Roosevelt with some important innovations, like restoring confidence in banks and establishing social insurance.

The big problem was busybodying:

When the federal government keeps changing the rules, it’s like having Darth Vader in control, John H. Cochrane, a professor of finance at the University of Chicago Booth School of Business, said during a panel. “I have changed the deal,” he intoned like Vader, the “Star Wars” villain. “Pray I don’t change it any further.”

Cochrane is another guy on everyone’s medium list for a Nobel Prize.

Two more points probably sound like something I could’ve said in class – first, that a lot of people lack perspective:

To ask at what point on the 1930s timeline the United States is right now, Harold L. Cole, an economics professor at the University of Pennsylvania and a consultant to the Federal Reserve Bank of Philadelphia, said with some exasperation, “really shows a misunderstanding of the severity of what went on there and the depths of the crisis.”

Secondly, that perhaps we try too hard:

Mr. Vedder playfully offered another analogy: the recession of 1920. Why was that slump, over and done with by 1922, so much shorter than the following decade’s? Well, for starters, he said, President Woodrow Wilson suffered an incapacitating stroke at the end of 1919, while his successor, Warren G. Harding, universally considered one of the worst presidents in American history, preferred drinking, playing poker and golf, and womanizing, to governing. “So nothing happened,” Mr. Vedder said.


The one word title is to avoid puns …

The New York Times reported on April 13 that the number of vasectomy surgeries also seems to be an inverse indicator for the economy.

… Dr. Goldstein … was performing about six vasectomies a month. Then, in November, the number rose to nine, where it was holding steady through the end of March.

The article has quite a bit more anecdotal evidence.

In particular, it notes that there is:

… A historical parallel in the Great Depression, when the birth rate fell sharply.

That’s an interesting piece of information from the perspective of the Solow model.

Tuesday, April 21, 2009

Risk-Return Cluelessness*

Male employment is more volatile than female. Men get paid more.


This is a classic risk-return trade-off.

Yet the legacy media is painting this as some sort of bizarre social contract in need of reform.

Here’s the normally lucid Financial Times; I’ll start with the fact in the article:

Men have lost almost 80 per cent of the 5.1m jobs that have gone in the US since the recession started …

Then we get this:

This is a dramatic reversal of the trend over the past few years, where the rates of male and female unemployment barely differed, at about 5 per cent. …

So … what they’re saying is that when we’re at full employment just about everyone has a job.

It also means that women could soon overtake men as the majority of the US labour force.

Gee … my guess is that this will be true until it isn’t any more.

Back to facts:

Men have been disproportionately hurt because they dominate those industries that have been crushed: nine in every 10 construction workers are male, as are seven in every 10 manufacturing workers. These two sectors alone have lost almost 2.5m jobs. Women, in contrast, tend to hold more cyclically stable jobs and make up 75 per cent of the most insulated sectors of all: education and healthcare.

“It shields them a little bit and softens the blow,” said Francine Blau, a labour market economist at Cornell University.

Francine Blau is an excellent economist, but the reporter seems to have missed the point that there is a trade-off here:

The widening gap between male and female joblessness means many US families are solely reliant on the income the woman brings in. Since women earn on average 20 per cent less than men, that is putting extra strain on many households.

So … let me get this right … households have sorted themselves so that they can choose a volatile high compensation job and a less-volatile lower compensation job. Sounds like portfolio diversification applied to permanent income to me.

* I cross-posted this from my non-class blog. It’s a bit too specific for this class, but it’s good exposure to the sort of nonsense you should be able to filter through in the media.

Sunday, April 19, 2009

Now I Remember

There was a point I was trying to make in Friday’s discussion of policy that I couldn’t remember.

Here it is.

We were discussing generalities about recessions, policy responses, political parties, and the political spectrum.

In Principles of Macroeconomics, I talk quite a bit about how Keynesian theory suggests that we should raise spending and cut taxes during contractions, and cut spending and raise taxes during expansions.

I also talk about how the problem with that in systems with elections is that elected officials only seem to be good at the raising spending and cutting taxes part.

This means they are pretty much always pursuing expansionary fiscal policy.

The metaphor I use for this is that they are “caffeinating” the economy.

Pundits and politicians make a big deal about the different nuances in policies, but for my part, a lot of this amounts to arguing about whether you’re better off taking your No-Doz with Red Bull or a pail of your favorite cola.

Obviously, I’m being irreverent, but it’s worthwhile applying the metaphor to the events of the last 8 months. The primary criticism leveled at the Bush administration and the Greenspan Fed was that they stimulated the economy with too much spending (directed to the wrong places) and too low interest rates. The response of the Obama administration and the Democratically controlled Congress has been to spend more money, and to push liquidity on to financial institutions in the hope that they’ll lower interest rates and lend more.

If that doesn’t sound like substituting Coke for Red Bull, I don’t know what does.

Saturday, April 18, 2009

Cool State Unemployment Map

Great interactive map in a piece from the online version of an April 18th issue of The Wall Street Journal entitled “Jobless Rate Climbs in 46 States, With California at 11.2%”.

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Tuesday, April 14, 2009

Recession Dashboard

Russell Investments Economic Recovery Dashboard shows:

  • All leading indicators pointing towards recovery (in the future)
  • All lagging indicators pointing away from recover (in the past)

A trough, perhaps?

Hat tip to A Random Walk.

Sunday, April 12, 2009

Is This Just Another Oil Price Recession?

Everyone wants to think that this recession is “special”.

What if it isn’t? How do we justify all of our panic and bizarre policies this go round if this recession is pretty much like all the others.

Consider this post by James Hamilton* of Econbrowser.

What he does is take us back to 2007 III, and forecast GDP out into the future. If you don’t know anything about the price of oil in the future, you’d forecast the economy to go up. But … if you include information about the huge run-up in oil prices … you’d predict a recession that matches up with ours fairly well.

This doesn’t constitute a proof, but it lends a lot of credence to the idea that we’re not seeing anything unusual at all, given that oil prices quadrupled in the space of a few years.

* Hamilton is on a lot of folks “medium-list” for a Nobel Prize. He was the first to put together a model in which business cycle turning points were unpredictable. This doesn’t make that a fact; but the usual assertion of non-economists that “someone should have predicted this” is vacuous unless it can be compared to a situation in which no can predict turning points. Once we had that in hand (after 1989) it became pretty obvious to macroeconomists that it would be really hard to dismiss the idea that they can’t be predicted at all.

Sunday, April 5, 2009

China Is Trapped

Paul Krugman in the April 3 issue of The New York Times:

… Just the other day, it seems, China’s leaders woke up and realized that they had a problem. …

… They are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency …

But there’s both less and more here than meets the eye. … there’s nothing to keep China from diversifying its reserves away from the dollar … nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes.

Again, this is a story we’ve seen before.

In the 80’s we were worried about Japanese money flooding into the U.S., buying investments everywhere.

That was a very bad sign for Japan: it indicated they didn’t have anything decent to spend the money on at home. The Japanese got burned when our financial system couldn’t continues to supply viable assets for them to buy after the savings and loan system failed.

It' seems like China is in the same spot now.

Greed vs. Stupidity

David Brooks April 2nd column from The New York Times entitled “Greed and Stupidity” outlines the two competing viewpoints on what’s wrong with the economy.

The greed argument goes like this:

… The U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. Johnson’s remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they can’t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.

The stupidity narrative goes like this:

… The primary problem is … that overconfident bankers didn’t know what they were doing. …

… You’d think that with thousands of ideas flowing at light speed around the world, you’d get a diversity of viewpoints and expectations that would balance one another out. Instead, global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time.

… What’s new about this crisis, he writes, is the central role of “opacity and pseudo-objectivity.” …

The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

Pick your poison, I suppose.

To me, your preference between these says a lot about your worldview and your politics.

I would say professional economists are currently divided about 50/50 on this.

Having said that, we’ve been down this road before and the greed narrative doesn’t tend to hold water through the passage of time. For example, everyone blamed greed for the dot-com meltdown of 7-9 years ago, but all the new technology we’ve gotten indicates that we were right to be greedy, but that we were stupid about where we were placing our bets.

Signs of Economic Spring

This is from a few weeks back. I misplaced my note to post this. I’ll link directly, since you probably already tossed the paper.

In the March 14 issue of The Wall Street Journal was a piece entitled “Signs of Stability Drive Up Stocks”.

I don’t care about stocks in this class. What I do care about is data indicating that we aren’t in free fall any more. Most of what I’m interested in is towards the end of the article and in the chart.

There it shows that futures prices for copper are up. This trend has continued over the last 3 weeks. Copper can be stored (which tends to take prices of other metals out of cycle with the rest of the economy), but we use so much of it that this can get really expensive, and it ends up tracking the economy pretty well.

It also shows the Baltic Dry Index – essentially a price for shipping containers by ship - going up, although it has faltered since then.

Friday, April 3, 2009

John Stewart, Sovereign Default, Sovereignty and the Treaty of Westphalia

John Stewart noted on The Daily Show that countries that default on loans are treated differently than regular people (got a link Anthony?).

A (loan) default by a country is known as a “sovereign default”. (If you don’t know it, type “define sovereign” into Google.)

This goes back to the point in history when the sovereign and the government were basically the same thing. Now that most countries don’t have sovereigns, we personify the government as the sovereign.

This is actually really convenient for unscrupulous politicians and bureaucrats because it allows them to avoid personal responsibility by saying the government did it, not themselves.

Sovereignty is a complex idea that came out of the Middle Ages. (You only need to briefly skim the linked article.)

Sovereignty was codified in the Treaty of Westphalia that ended the Thirty Years War. That codification is important enough to be known as Westphalian sovereignty. There are 3 basic principles:

  • Within countries, only members of those countries can make decisions about the country.
  • Countries are equal.
  • Countries shouldn’t interfere in the internal affairs of other countries.

In some sense, the story of the last century has been the continued application of the principals of Westphalian sovereignty to countries that should be excluded from that privilege on moral grounds:

  • Communist countries didn’t violate the letter of the first principle because they claimed that only the party members were the real members of the country, and the previous stakeholders were all imposters.
  • The UN is such a basket case because it isn’t clear that countries are equal. Nuff said. It’s also a problem when you create new countries: you can’t just make them equal by saying they’re equal. There’s also an issue with imperialism here: the Europeans were clearly not treating other countries as equal when they went out and added them to their colonial empires.
  • This is why the allies didn’t do much to save the Jews in Nazi Germany. It’s also why some people didn’t like Bush invading Iraq.

It was difficult to envision these problems in advance though. Potential political leaders prior to 1900 were heavily steeped in a sense of entitlement (that they could make decisions), basic decency (so others in the same position were treated well), and integrity (to respect the decisions of others’ countries). For all the faults of leadership by the elite, consistency with these principals wasn’t one of them.

This issue of Westphalian sovereignty is of specific importance in macroeconomics right now because it means that when an international agency loans money to a country:

  • Once the money enters that country, only the members of that country can decide whether to repay it or not.
  • The position of a borrowing country is legally equal to that of a lending country, so a sovereign default often devolves into a diplomatic version of “he said, she said”. Loans through the IMF or World Bank are perhaps worse, because it isn’t clear that they have any legal standing against countries. They certainly can’t enforce any standing that they do have.
  • You just can’t invade another country because they borrowed from your citizens and didn’t repay them.

These are all OK as long as leaders are trained to play by these rules. But they’re not any more: now they play by a different set of rules and then use these as cover.

So, the difference between a person defaulting and a country defaulting boils down to the country being treated differently on the middle count (where bankruptcy court does make lenders and borrowers unequal) and the last count (where there is some limited ability to use force or the threat thereof against individuals).

An economic take on this is that we created big moral hazard problems when we responded inappropriately to violations of the underlying foundation that makes Westphalian sovereignty workable. When confronted by countries that morally violated those foundations – like the Soviet Union for the first one, Belgium in the Congo for the second, and Nazi Germany for the third – we didn’t address the problems with Westphalian sovereignty, or throw the whole idea out the window. Instead, we 1) grafted kind--hearted ideas (e.g., the U.N, the IMF, or the World Bank) on to the system of Westphalian sovereignty without clarifying their position in the framework, and 2) hugely diluted the club of nations that were supposed to abide by Westphalian sovereignty with new members uneducated in its successes who had been recently exposed to violations that were weakly punished. We shouldn’t be surprised that there have been problems.

Our response to that has been to complain a lot and to stop teaching high school students about all this because it isn’t amenable to multiple choice exams.

John Stewart is a bright guy, with smart writers, who probably know most of this. But … it’s a comedy show … and most of the viewers can get the joke while puzzling over the irony.

ADDENDUM: I did mention, but forgot to put in the first draft of this post, that developed countries used to violate the sovereignty of less-developed countries quite routinely. This probably discouraged defaults! There isn’t an easy to way to convey how frequently this was done, but one thing that you can do is go to the Wikipedia page entitled “List of United States Military History Events” and search for the word “interests” as a polite way of saying it was all about money. You’ll only find one example after 1932.

The Difficulty of Macroeconomic Policy

I mentioned this September 18 Brad DeLong post several weeks ago:

Is 2008 Our 1929?

No. It is not. The most important reason it is not is that Bernanke and Paulson are both focused like laser beams on not making the same mistakes as were made in 1929.

They are also focused, but not quite as much, on not making the mistakes made by Arthur Burns in the 1970s.

And they are also focused, but not quite as much, on not making the mistakes the Bank of Japan made in the 1990s.

They want to make their own, original, mistakes...

James Hamilton – a future Nobel prize medium-lister who blogs at EconBrowser - has some more comments about those mistakes.

David Leonhardt on Stimulus Choices

David Leonhardt’s Wednesday “Economic Scene” column in The New York Times are always worth reading even if you don’t always agree with him.

The April 1 column raised an interesting point: countries that have thicker social safety nets are less inclined to pursue stimulus, while those with thinner nets are likely to spend more.

Specifically, western European stimulus packages are smaller than the American one because their baseline social spending is higher.

He also raises the interesting point that summits in time of crisis are common:

In the summer of 1933, just as they will do on Thursday, heads of government and their finance ministers met in London to talk about a global economic crisis. …

What’s interesting about that one is that:

More than any other country, Germany — Nazi Germany — then set out on a serious stimulus program.

I have a couple of issues.

First, he’s awfully sure that stimulus works, even though economists are a lot less sure of that than pundits and politicians.

Second, one problem with comparing the U.S. with other countries as he does in the accompanying chart is that it isn’t clear whether state and local spending is included for the U.S. Since our system is federal, a great deal of our social safety net is provided at the state and local level (that’s why places like Alabama and California can have such different social services). If the IMF source that he used compares central governments to central governments, it’s going to make the U.S. look lousy.

Funny thing: the IMF, like many international agencies, has a tendency to make choices on data that do make the U.S. look bad. So maybe I’m correct to be suspicious.

Unemployment Is Up Again

The unemployment rate went up to 8.5% in March.

This is more bad news. But, keep in mind that the unemployment rate is a lagging indicator, so when the economy does trough, the unemployment rate will continue to rise for a while.

Also keep in mind that we’re seeing a lot of record/date noting in the legacy media: statements like this is the highest rate since 1983.

This is correct.

But, last month was also the highest since 1983, so there isn’t anything new there.

It’s like saying the Jazz are still not the best team in the league: it would be more useful if they told us something we didn’t already know.

Thursday, April 2, 2009

Country Risk of the G-20

Credit default swaps (CDS’s) are a type of insurance that one buys against the potential default on a loan/bond.*

CDS prices are quotes in the percent of the loan you have to pay up front to get the whole thing insured. When judging these prices, you need to recall that a basis point is 1/100th of a percentage point.

Alea has posted current CDS rates for most G-20 countries. The U.S., Germany and France are the lowest at around 60 basis points (that’s something like a 1 in 150 chance of default). The worst is Argentina at 3,750 basis points, or a better than 1 in 3 chance of defaulting.

For perspective, Lehman CDS’s were selling for 475 on September 10 (the week before they went belly up).

* Having to pay off the insurance to parties whose investments did go bad is the main problem with AIG over the last year. Other than that, CDS’s have gotten a bad reputation: experts are actually rather surprised that this market has functioned as well as it has given the circumstances. Pundits more or less predicted complete collapse in this market last fall, and it didn’t happen.

Wednesday, April 1, 2009

The G-20 In Four Maps

These maps show the relative sizes of the economies of the G-20 countries, in order from smallest to largest.


Above we have:

  • Argentina in red,
  • South Africa in blue,
  • Saudi Arabia in green,
  • Indonesia in orange,
  • Turkey in brown, and
  • Australia in yellow


Above we have:

  • South Korea in blue,
  • Mexico in brown,
  • India in green,
  • Russia in orange,
  • Brazil in red, and
  • Canada in yellow.


Above we have:

  • Italy in blue,
  • France in green,
  • The United Kingdom in red, and
  • China in orange.


Lastly, we have

  • Germany in red, and
  • Japan in blue.

They’re currently having a summing about macroeconomics, in a forum in which equal representation (and equal photo-ops – except for the Michelle and Carla factor).

But, these maps should make it clear that macroeconomically, the countries are anything but equal. And the moose in the room is that the other 19 countries are economically small relative to the U.S. Collectively, they are about twice the size of the U.S. economy, though.

It’s worthwhile to mention why the U.S. Congress was put together with two houses: because proportional representation in the House would allow domination by the populous states, while equal representation in the Senate would give outsized power to the smaller states.

By that mark, what we get with international meeting like this is too much emphasis on the interests of small economies.

Note that in no way am I advocating a U.S. dominated international meeting, but I do take the position that our views are not likely to carry the weight that they should in a forum like this.

Also notable, are the large economies that weren’t invited because of ethnic, religious and regional diversity considerations – with roughly equivalent states:

  • Spain = New York
  • The Netherlands = Florida
  • Sweden = Ohio
  • Belgium = New Jersey
  • Switzerland = North Carolina
  • Poland = Georgia
  • Norway = Virginia
  • Taiwan = Massachusetts
  • Austria = Washington
  • Greece = Maryland
  • Denmark = Minnesota
  • Iran = Arizona

Can you imagine if the U.S. Congress met without the members from those states?


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Monday, March 30, 2009

Perspective on Depression and Recession

The piece entitled “How a Modern Depression Might Look – if the U.S. Gets There” from the March 30 issue of The Wall Street Journal has some good graphs showing how far we off from what happened in 1929-33.

The graphs give you a pretty good idea that to get to that level we’d need to perpetuate the last few months for about 30 to 40 more (a point I’ve made in class more than once).

It also shows that the serious downturn in the statistics for the current recession really doesn’t start until several months after it started (a point I made in class about 3 weeks ago).

The article also has some good interview research with people who lived through the depression. I particularly liked the quote using the word “threadbare”. That’s just not a word that you hear any more because even homeless people’s clothes aren’t threadbare any more.

The Not-So Pervasive Recession

Recessions aren’t supposed to be bad everywhere (although they can be). Rather, the standard is that they be reasonably nationwide.

From the start, this recession hasn’t been that way. Big swaths of the country have been bordering on OK. Not good or even fair, but OK.

A case in point of this is the map in the article entitled “Many Smaller Cities Dodge Crunch In Consumer Lending” from the March 30 issue of The Wall Street Journal.

The map purports to show the many small cities around the country that are doing OK on this point. This borders on a lie.

The map shows clearly in red the major urban areas that are struggling on this count: Los Angeles, San Diego, San Francisco, Las Vegas, Kansas City and Detroit. And that’s it. OK … I’ll throw in some of the other places in California – like the OC, Riverside, Santa Barbara, Oakland, Berkeley, and Bakersfield.

In green are the “small” cities that are doing OK. You know, small places like New York City, Chicago, Philadelphia, Boston, Washington, Atlanta, Dallas, Houston, San Antonio, Phoenix (!!!), Seattle, Orlando, Miami, Nashville, Cleveland, Pittsburgh, Cincinnati, Columbus, Indianapolis, Minneapolis/St. Paul, Milwaukee, St. Louis, Memphis, Denver, Salt Lake City, Portland, Austin, Charlotte, Richmond, Raleigh-Durham-Chapel Hill, Buffalo, Rochester, Syracuse, Baltimore, Birmingham, Mobile, Montgomery, Huntsville, Jackson, New Orleans (!!!), Little Rock, Oklahoma City, Omaha, Anchorage, and so on. Gosh … eventually … by squinting … I did get to some small metropolitan areas.

The take-away from this is that there’s probably no way I can instill in you a BS filter strong enough to deal with the inability of journalists to report macroeconomics accurately.

U.S. Government Violates Mexican Law

Mary Anastasia O’Grady points out an interesting issue in her Monday column in the March 30 issue of The Wall Street Journal. Our government now owns a third of Citibank, which in turn owns Mexico’s 2nd largest bank (Banamex), and Mexico has a law against foreign government ownership of its banks. Big problem …

Part of what makes macroeconomic policy so difficult in practice is that the decision makers in most countries aren’t on the ball enough to catch stuff like this.

The AIG bonuses that were specifically approved before they were more generally disparaged is a case in point.

What makes it worse is that neither one of these was a secret. The government could have found this stuff out if it wanted to. In retrospect though, it doesn’t even seem like they made an effort. That’s not a recipe for success in spending $800B in stimulus money.

Of course, perhaps it wasn’t success they were after: maybe it was just spending.

The CBO’s Real GDP Forecasts

The Congressional Budget Office is a pretty good - but not completely nonpartisan –source of macroeconomic information. This agency tends to line up with the party that controls Congress, but not very strongly. In practice, they many times end up pointing out the unrealistic assumptions of policies.

Its director, Doug Elmendorf, has an (official) blog. Go check out his forecasts for where real GDP is going to go over the next 10 years.

Even though there are variations in the forecasts, they all show substantial growth, and they all turn this terrible, horrible, no good, very bad recession we’re in into just another hiccup.

You Say No One Predicted this Financial Crisis?

It’s popular for pundits on TV to remark that no one predicted any of this. (Recall that 94% of them aren’t economists.)

Here’s a good one: Larry Summers predicted something like this 20 years ago. Is he no one? That’s just for starters.

I think if we put our aluminum foil hats on to filter out the garbage, and wrote down what we thought of a statement like “no one predicted this” coming from someone paid to make predictions, we’d probably come up with two points: 1) someone did predict it, and 2) it wasn’t the person talking.

Having said that, forecasting the economy isn’t easy, and each recession is different from all the others, so a lot of this is akin to predicting that the Jazz will win the championship this season … at the beginning of every season.

Government Spending and Taxation

Amounts for government spending and taxation, by categories, at all levels.

One especially useful thing about the spending site is that it explicitly lists the transfers from the federal government to the states. About 10% of the federal budget is transferred to the states, most of it for healthcare.

A useful thing about the taxation site is that it makes it readily clear how little of the government is financed from corporate taxes. Many people seem to think that if we only taxed them a bit more we’d be OK. Try this for an experiment: ask them by what percentage we should increase corporate income tax revenue. The idea that we’d need to increase it by 400% to get rid of the personal income tax isn’t on most folks radar screens.

Friday, March 27, 2009

Final 2008 IV Real GDP Growth

The third and last take on the real GDP growth rate came out Friday morning. It showed a small downward revision: so the numbers have gone –5.8% to –6.2% to –6.3%,

Friday’s Spreadsheet

It’s updated and finished on G. Do take a look because I added a discussion of a “worst case scenario”.

Thursday, March 26, 2009

“A Smoot-Hawley Moment”

As a rule I don’t like to put editorial pieces out in front of students, but I did mention this one in Wednesday’s class in response to Anthony’s question, so I should post about it so that you can form your own opinion. This was in the March 23 issue of The Wall Street Journal.

When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930 …

It is certainly one of the more amazing and senseless acts of political retribution in American history. …

The House legislation may also be unconstitutional on equal protection grounds given that it treats a homogeneous group of individuals differently depending on which companies they work for. It is one thing to treat the companies that receive federal funds differently from those that don't. But the individuals receiving bonuses may have nothing to do with the decision to receive TARP money. The House's 90% tax on some bankers but not others is only a step away from deciding to impose a higher tax rate on employees of any company out of political favor -- say, tobacco companies, or in the next Republican Congress, the New York Times Co.

Which brings us to the Smoot-Hawley analogy. With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia. The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital …

The other Smoot-Hawley comparison relates to our new President. Herbert Hoover sent mixed signals about the tariff until he finally bent to a panicked GOP Congress. President Obama has behaved in the past week as if he can appease and "channel" Congressional anger without being run over himself. So not only did he incite the Members last Monday, he welcomed the House bill on Thursday. By the weekend, cooler White House heads were whispering that the mob had gone too far, but it will take more than words to kill this terrible legislation. Mr. Obama will have to fire a gun in the air -- which means threatening a veto.

On Inauguration Day, we wrote that our young President has a first-class intellect and temperament. Our question was whether he is tough enough. So far the answer is no. He has failed to stand up to a Congress of his own party on anything difficult -- from stimulus priorities, to earmarks, to protectionism against Mexican trucks. Mr. Obama needs to face down the AIG mob, or his Presidency may be its next victim.

The content of this post will not be on any tests – this is just about keeping you all on the same page with where I went with a classroom discussion about current events.

Wednesday, March 25, 2009

Giving It Back

An article in the Business Day section of Tuesday’s issue of The New York Times discusses the plan in the works for Goldman-Sachs to repay the TARP funds they received in the fall.

There are a number of issues going on here.

1) It’s probably a good sign for the economy that someone can start repaying the money they got.

Very soon, actually — ideally within the next month, according to people involved in the process. That’s a much quicker timetable than the end-of-year goal previously set out …

2) Goldman-Sachs has gotten some bad press the last month because they were one of the largest recipients of money from AIG. So there’s money that went straight from the Treasury through AIG to Goldman-Sachs.

Criticism of Goldman over revelations that the firm had been the largest recipient of government money as a counterparty of bets placed with A.I.G. …

3) Goldman-Sachs has also gotten some bad press because Bush’s last Treasury secretary – Hank Paulson – was the CEO of Goldman-Sachs before taking that position.

Goldman would also like to put an end to the whisper campaigns about ties between it and Mr. Paulson (and Timothy F. Geithner, too, for that matter).

4) If you recall back in the fall, Paulson and the Treasury made a group of large banks all take money – whether they needed it or not – so as not to reveal who was in trouble. Apparently, Goldman-Sachs wasn’t.

But here’s the asterisk, and it’s a big one. If Goldman succeeds in returning our money, it could put pressure on other banks to give their money back, too, lest they appear weak.

This, you’ll recall, was the logic used by the former Treasury secretary, Henry M. Paulson, last October when he strong-armed some of the chief executives of the nine largest banks to participate in the Treasury plan to inject $165 billion of capital into the banking system, even though some felt they didn’t need it.

The problem now is that many of them may still need the money. And yet they may try to follow Goldman’s lead. …

Richard M. Kovacevich, chairman of Wells Fargo, expressed outrage at the TARP money he accepted and the strings that might be attached to it after the bonus bill passed last week.

“Is this America, when you can do what your government asks you to do and then retroactively you also have additional conditions put on?”

5) Goldman-Sachs is also making very clear that they are doing this because they want to be able to pay bonuses to people who deserve them without government interference.

“It’s just impossible to run our business in this environment,” said one senior Goldman executive who insisted on not being quoted by name for fear of crossing the Treasury …

The firm’s famously well-paid executives — Mr. Blankfein made $60 million in 2007 (some of which was in stock, which has since fallen in value) — would be taxed at 90 percent of their bonuses if a bill passed by the House last week were to become law.


A front page piece from Tuesday’s issue of The New York Times discusses the current state of the candy industry and candy retailing.

It turns out that candy is an inferior good: its sales go up when incomes drop.

This makes it an important indicator for the economy as a whole. Lipstick and other sorts of make-up that women by a la carte are also a good indicator that moves opposite to the economy as a whole (Greenspan was known for paying a lot of attention to lipstick sales).

There may be historic precedent to the recessionary strength of the candy business. During the 1930s, candy companies thrived, introducing an array of confections that remain popular today. Snickers started in 1930. Tootsie Pops appeared in 1931. Mars bars with almonds and Three Musketeers bars followed in 1932.

Duh … the reporter must not be a baseball fan because the Babe Ruth probably came out around the same time – near the end of his career.

Wednesday, March 18, 2009

Bad Data from Bad Countries

I’ve commented a few times in class on the lack of believability of economic statistics put out by, say, China, because there isn’t any sort of ombudsman (another word to look up) who might humiliate them into being more honest.

Andrew Gelman posted some evidence of this for Russia:

To sum up, the official figures are somewhere between 1/15 and 1/3 of those for the U.S. That’s a lot of uncertainty.

Attribution Error, Elections and Macroeconomics

Attribution error is the name given to psychologists that we tend to attribute blame (or thanks) to people or things that are close by: it’s very similar to guilt by association.

In macroeconomics, this comes up with business cycles and elections. Reagan, Clinton and Bush II get reelected because the economy is doing OK, while Bush I doesn’t because the economy is doing badly. This is in spite of the weak connection – if there is one at all – between presidents and economics performance.

An excellent example of how strong this attribution error can be is contained in this post from Core Economics (the most important Australian economics blog) where they show that state elections in Australia can be predicted by the U.S. unemployment rate.

This doesn’t mean that unemployment in the U.S. causes Australian elections. That’s silly.

But, there is a strong correlation.

What’s going on here is that U.S. unemployment rates are strongly positively correlated with the U.S. economy, which is weakly positively correlated with the Australian economy, which is strongly positively correlated with Australian state economies, whose performance voters attribute to the prominent nearby targets: local politicians.

This is a big problem for the U.S. in the future. The presence of attribution errors suggests that Bush will always be blamed for the recession that started on his watch. Obama will get the credit for ending the recession, since they all end relatively quickly (on the scale of elections).

This will extend to the stimulus package as well. It is very likely to be declared a success if the economy recovers. However, if the economy starts to recover before very late in 2009, it’s very likely that it is the Bush stimulus of 2008 that made the difference, not the Obama stimulus of 2009.

Friday, March 13, 2009

Home Price Roller Coaster

Here’s the link to the video at speculativebubble.

FWIW: the people who crow that no one told them this was coming weren’t paying attention to sites like this – whose authors chose the name speculativebubble in 1999. I’m going to go out on a limb here and guess that they chose that name 10 years ago because they had a pretty good idea what was coming and weren’t afraid to talk about it.

February’s Retail Sales

The U.S. Census Bureau announced that retail sales were down 0.1% from January to February.

This isn’t good news.

Having said that, this means that January’s 1.8% rise wasn’t a fluke: both months are now above December.

Also, if we don’t count motor vehicles (generally I am against nitpicking like this, but gee whiz, do you think people are inordinately worried about buying some makes of car these days?) retail sales were actually up in February.

Lastly, retail sales tend to be a coincident indicator: they peak and trough at the same time as the whole economy. The more months we string together, the more likely it is that the economy troughed around the new year.

Stimulus Packages In Perspective

Another long piece in the March 9 issue of The Wall Street Journal entitled “U.S. to Push for Global Stimulus” has a table in which stimulus packages by country are scaled by the countries GDP.

The U.S. is near the top, but not at the top.

As a subtext, the article also discusses how western European governments are pushing for less spending as a cure for the recession, and more regulation. It will be interesting to see how things turn out for them over the next 10 years or so, since they are already known for more regulation, and that has correlated with weaker economic performance over the last 30 years.

Manufacturing In Recessions

There’s a great chart in a long article in the March 9 issue of The Wall Street Journal entitled “Lean Factories Find It Hard to Cut Jobs Even In a Slump”.

It shows employment growth and production growth – for manufacturing only -  over the last 40 years. It can give you a sense that recessions are rarer than they used to be, and that the ups and downs are not as volatile.

This is part of the reason that folks are so freaked out about this recession: many haven’t experienced something like this before.

A Shrinking Global Economy

I a March 9 piece entitled “Report Says Economy Will Shrink Worldwide”, The New York Times reports that the World Bank forecasts that for the first time since World War II (basically since the first time they started measuring) the global economy will shrink.

This is a reasonable forecast, but it would probably help to have some context:

  • The World Bank only started with the end of World War II, so its forecasts don’t go back very far.
  • Prior to 1960 most of the world’s countries weren’t independent yet, so it isn’t clear how accurate measures of global performance were back then.
  • The World Bank and other international agencies have had a bad habit of taking the economic estimates of disreputable governments at face value. We have less of those now, which suggests that past forecasts may not have been too good.
  • The World Bank also measured (not forecast) that 2003-6 were each the best year ever for the global economy, four years running. As many have pointed out, perhaps we’re unraveling some of those good times – the higher you fly, the harder you fall.

Monday, March 9, 2009

February’s Unemployment Rate

It’s up quite a bit to 8.1%.

That’s the highest since the wake of the 1981-2 recession.

We talked a bit in class about the historical perspective on this, and you can get that data from the Bureau of Labor Statistics. On their graph, recessions are steep upward climbs on their time series plot of the unemployment rate, while expansions are flatter and longer downward sloping portions. The real question about this recession on that graph is how long that steep climb can persist; there’s simply no good way to figure that out.

Over the weekend I downloaded that data, got it into Excel and color-coded it to give you a better sense of how to interpret the numbers. It’s on the G drive, and is called Unemployment Rates.

Thursday, March 5, 2009

Barro On the Chance of a Depression

Scary research from Robert Barro on the op-ed page of the March 4 issue of The Wall Street Journal.

He got data going back to 1870 from 33 countries on 251 stock market crashes and 97 downturns that he labels depressions (depression is not a technical term with a fixed definition, so he classifies any decline in per capita GDP of more than 10% as a depression). He does this because:

The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data.

He finds that 3/4 of depressions are associated with stock market crashes, but that only 1/4 of stock market crashes occur with a depression. This translates to:

There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

Wednesday, March 4, 2009

Unemployment Rates by County

Unemployment rates, broken down by county, shaded for your pleasure by The New York Times, complete with cool interactive filters.

I was most surprised by the fact that unemployment rates are not more correlated with housing bubbles.

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Tuesday, March 3, 2009

Best Policy Advice I’ve Heard Recently

Bill Polley links to this opinion piece from the editors of Notices of the American Mathematical Society. It’s general advice for people using mathematics to design policies for complex adaptive systems (like macroeconomies full of decision-makers):

i) Complete control … is impossible … decisions should instead be guidelines. Detailed plans should be left to those executing them.

ii) Expect some failures. Hence continuous revision and updating are required.

iii) There is no single solution …

iv) [Solution] Diversity should be preserved and encouraged.

v) Transparency and trust have to exist.

vi) Decisions can result only after serious consultations with those executing them and those affected by them (bottom-up approach).

vii) Deserved decentralization should be encouraged.

Read the whole thing: it’s short, and they “get it” in ways a lot of policy authorities don’t.

Monday, March 2, 2009

More Signs the Economy Might Be Thawing

Irwin Kellner at MarketWatch has a list of all the good news in a February 24 post entitled “Signs of Life”.

It’s a fairly long list of encouraging signs, but keep in mind that there are hundreds of economic indicators, and here we have just a few dozen going in the right direction.

Again, I’m not making any claims that this is the turning point, but I am claiming that when later on when we realize a turn has definitely taken place, this is the sort of evidence we’ll be looking for.

Obama’s Economists Position

Christina Romer is chair of the Council of Economic Advisors in the Obama White House. That makes her arguably the top (real) economist in the administration.*

Here’s her official statement about the stimulus plan.

* One could argue that Larry Summers, the chair of the National Economic Council, has a loftier position. It remains to be seen whether one, both, or neither of them really has much influence.

Sunday, March 1, 2009

Comparing Recessions

The Federal Reserve Bank of Minneapolis has a fantastic site that allows you to compare this recession against any of the other 10 most recent recessions, on the basis of where were are now versus where they were then.

The news isn’t good for optimists: a lot of recessions were over by now.

But, the news isn’t good for pessimists either: on employment, 3 of the 10 were worse than this one, and on output 4 of 9 were worse (there’s a tie in there I didn’t count).

Now, past behavior is no guarantee of future performance, but 10 out of 10 recessions suggest that employment and output will bottom out and start improving by summer.

Friday, February 27, 2009

Bad News That Isn’t “New”

The revised rate of real GDP growth for the 4th quarter of 2008 was released this morning.

This is the second of 3 releases of this number. Every quarter gets 3 announcements, coming 1, 2, and 3 months after it ends.

This revision to –6.2% is much worse than the first estimate of –3.8%. That’s bad. The –3.8% was the worst in 26 years, and the –6.2% is still the worst in 26 years (although it is a lot closer to the –6.4% we registered in 1982 I).

Keep in mind that the media likes to push this as new news. It is new, but not really that new. We tend to hear about these later revisions more when they change the estimate up or down substantially (like this time around). And, the news business being what it is, we hear more about this when the revision is downward.

For example, this news item was at the top right of the headlines on Drudge Report when I got up this morning, and it was listed in red instead of black. In other quarters, where there is less change, I sometimes forget about the announcement date (which I know by heart) because the news sites don’t put it up front like this.

Wednesday, February 25, 2009

Pessimism Porn

Pessimism porn is the meme of the new year, eh?

Paul Kedrosky, in an op-ed in the Globe and Mail has the best description:

People are revelling [sic] in sending one another scary stories about the awfulness of the current awfulness.

Even better:

The Greater Depression!

Kedrosky has a very good finance/macro blog and has even used pessimism porn to title some posts (here and here).

The original source was an article in The New York Times Magazine, entitled, what else, “Pessimism Porn: A Soft Spot for Hard Times”.

There are lots of players in this mini-industry, but the biggest is probably Nouriel Roubini – a very bright NYU professor whose been preaching financial doom and gloom for … well … since before the last recession. Who knows – maybe he’s right.

So, why the porn metaphor?

I searched for a site that would list the warning signs of porn addiction. I don’t know if they’re good, but they seem reasonable. Here they are:

1. Time - looking at porn is taking up more time and more time. It is no longer just a means to an end.

2. Cost -  looking at porn is beginning to cost you because you are neglecting other areas of life (for example, you're not doing your job properly or your relationships are deteriorating.)

3. Objectification - after a porn session you're looking at everyone in a sexual, porn-filtered way. (In the Friends episode The One With The Free Porn, Chandler realises [sic] he and Joey have to turn off their free porn channel when he goes to the bank and is surprised the teller doesn't ask him to 'do it with her in the vault.' Funny but it reflects the truth.)

4. Desensitisation - in some cases, people find themselves looking at harder and harder porn, even at material which conflcits [sic] with their personal values.

5. Acceptance of the message - wanting to take what you have seen in the fantasy of porn into the reality of your life. (For example, wanting to suggest it to your partner or wanting to join a club or chat room could well be warning signs.)

Now, to turn this around, the signs that someone has a problem with pessimism porn are:

  1. Spending a lot of time reading and talking about the bad economic news.
  2. Focusing on bad economic news is interfering with other parts of life.
  3. Surprise that others aren’t quite as obsessed with the bad economic situation as they “should be”.
  4. Worse economic news is rush.
  5. Acting on the bad economic news when there isn’t need to.

Does this sound like anyone you know? It sounds like quite a lot that I know.


Most people go to TV news for information on macroeconomic issues.

So, you’d think it would be really important to have macroeconomists on those shows.


Media Matters did a study of this and found that only 6% of the pundits on TV discussing the current economic situation and the stimulus package were economists.

Media Matters purposefully used a broad definition of "economist" to be inclusive, coding as an economist any guest who has a master's degree or doctorate in economics or who has served as an economics professor at a university or college, as best as we could determine.

Note that this is economists; macroeconomists is a subset that is no doubt smaller still.

I don’t think you can get those kind of numbers by accident. I think it is useful to ask why it is so important for the legacy media to misrepresent their talking heads as economists.

N.B. If you don’t know the meaning of the word in the title, this is a good time to plug in the keywords “define” and “poseur” into Google.

Monday, February 23, 2009

Policy and the Ongoing Financial Crisis

The problem with a lot of policy is that it is like holding a water balloon: if you see a problem and respond to it, another problem is created somewhere else (just like pinching a water balloon in the spots where it is bulging).

I bring this up for two reasons, and bear with me while I explain.

First, about a month ago I remarked casually that everyone is supposed to know that primary residential real estate (a home you own and live in) is a lousy investment. Many people – including some of you – don’t know that.

Second, Peter has brought up a book he is reading for Harrop’s class called The Wealthy Barber. Peter noted that the book confirms part of what I said (and adds other arguments that I didn’t make, but don’t disagree with).

People get fooled into thinking that primary residential real estate is a good investment by not recognizing or understanding the leverage involved. For example, if you buy a $100K with 20% down, and the value of the house goes up by 10%, you now owe $80K on something worth $110K. That gain is yours, not the lenders, so you’ve made a 50% profit on a 10% appreciation. What leverage does is amplify gains and losses - you get higher returns because you’re taking on extra risk.

So what does all this have to do with policy and water balloons?

After the Great Depression, our government set in place laws and regulations to strongly discourage the use of leverage in the purchase of stocks. This was felt to be a big contributing factor – through margin calls – to the huge stock market (and wealth) declines that started in 1929.

In its place, they created an industry out of thin air – the now defunct savings and loan industry – whose role it was to facilitate the leveraged purchase of primary residential real estate.

So … the economy is the water balloon, and government sanctioned leverage investing is the hand squeezing it. Moving the hand doesn’t change the problem. You’d think they learn.

Michelle Muccio’s Policy Suggestion

A video about a policy suggestion by Michelle Muccio has been getting a lot of airplay on the internet (and she got interviewed on the legacy media the other day).

In short, her idea is a tax holiday for FICA taxes.

The pros are that it is simple, transparent, and cheap to implement.

The cons are … well … um … you can’t make people spend the money they get to keep, and you can’t control what they spend it on. Cafe Hayek has a good quote about this:

If ordinary Americans truly are struggling to pinch pennies these days, there should be little worry, even for a Keynesian, that the extra money workers get from a suspension of their payroll taxes won't be spent.  However, if you're a politician, the ways private citizens will spend these monies are not under your control -- a fact that renders the political class terribly allergic to Michelle's plan.

I mentioned this in class on Friday: the real conflict with the stimulus package is not between Democrats and Republicans, it is between centralizers and decentralizers. The Republicans voted against the stimulus package because they are out of power. When they were in power, what they did was pretty much constantly centralize and stimulate the economy (and the Democrats were against their policies).

More broadly, I think you should recognize how problematic this is: Ms. Muccio is connected in the D.C. political scene, and yet to get anyone to talk about this as an alternative she has to promote it as a viral video. That’s twisted.

Urban Myths

After most of you left on Friday, I grabbed Mike Terry and said we should look his e-mail right then and there.

So, we put a few keywords that roughly fit the e-mail he mentioned into and quickly found information that supported the points I’d made in class. I’d like to repeat this experiment in class today.

In the future, if you hear something about the macroeconomy that seems odd, there are other sites that collect and check urban legends like this: urban legends page, the AFU archive, and scambusters.

In macroeconomics, urban legends come up in two contexts.

First is innumeracy (just like illiteracy, but with numbers). If people can’t or won’t do the math for the sort of numbers we talk about in macroeconomics, then they are more open to manipulation by the unscrupulous.

The second context is related to critical thinking. Research on critical thinking shows that the problem when this doesn’t occur is not usually that people can’t think critically about an issue, but that they have certain issues for which they “turn off” their critical thinking ability. A broad term for that is “faith”. A lot of political issues boil down to faith, and when they do, there is a lot of room for urban myths: politically faithful Republicans will believe all sorts of nonsense about Democrats, and vice versa.


I recommended that you look up “hyperbole”, and its adjective form “hyperbolic”. I can’t remember the context for using those words, but there’s cause to use them a lot when talking about policy.

I also recommended you look up “ossified”. That’s a medical term, but one often borrowed to describe how bureaucracy works in practice.

Wednesday, February 18, 2009

The U.S. Saving Rate (tee hee)

We always hear that the personal saving rate is low and that this is bad.

This is a data artifact: we really ought to know better than to talk about this without knowing more, but the fact is that most reporters and pundits don’t.

It shouldn’t take a rocket scientist to figure out that there’s no way we can have the wealth we do (and until last summer the growth in wealth we’ve had) without a lot of saving supporting it.

What we really have here is a number called the “personal saving rate” which ought to be renamed: it misleads people because it misses most saving. No wonder it’s low.

This piece from the Federal Reserve Bank of San Francisco goes over some of the details, and shows that the low personal saving rate can be predicted fairly tightly as a response to increase in real and financial wealth, and declines in the rate of return on saving. Here’s another one from the Federal Reserve Bank of Chicago indicating we should worry less.

There’s more irreverent coverage of this at Seeking Alpha, and InvestmentU.

Most of these are technical. They’re light on the big picture. People save because:

  • They lack insurance
  • They lack social security
  • They lack a pension
  • They lack material possessions
  • They’re more worried about the future than the present.

The top 4 operate in the U.S. at all times, and the 5th one generally. So, we probably shouldn’t be too surprised that savings is low.

An additional factor is our target wealth. If we have a target in mind for wealth, and we exceed it, then we lose interest in saving. This is why we should see lower saving in financial and real estate booms.

An additional problem with thinking about this is that our current rate is often compared to a reference point that was higher. The problem is cherry picking those reference points. One commonly used is the U.S. in World War II. Another is the current saving rate in China. A third is the current saving rate in other developed countries. The problem with these is that consumption is like “anti-saving”: if we’re not savings we must be consuming. But what we forget is that consumption requires two things: 1) available and worthwhile stuff to consumer, and 2) a place to put it. Going back to these three examples, it shouldn’t be surprising that saving was higher in the U.S. during World War II (when there was nothing to buy), is higher in China currently (where there isn’t much worthwhile to buy away from the ports), or is higher in Japan and Europe (where smaller homes mean bigger consumption of intangibles like vacations).

A last factor is purchases of new homes. In all countries national income and product accounts this is counted as investment. But, since there is a lot more of this in the U.S. than most other countries, it means that what many families regard as their big wealth vehicle – their home – isn’t counted as saving. Try telling them that sometime …

The bottom line is that you should roll your eyes and harumph when you hear someone complain about the low saving rate in the U.S. Saving is the part of income we don’t consume (after allowing taxes and government spending to go through the circular flow). If we’re only consuming 70% or so of GDP, we’ve got to be saving 30%.

I have in mind pieces like this one from MSNBC: the level of discussion here could have come out of the mouth of a 17th century Puritan.

Fixed Assets

We spent some time in class looking for a number that we could use to represent aggregate capital in the U.S.

We started out with some keywords and got to capital formation first. This is akin to net investment in (new) capital, when we really want existing capital.

Fixed assets was mentioned and seemed more like what we need. Data on fixed assets is collected by the Department of Commerce.

Calibrate a Solow Growth Model

You’ll get several thousand hits if you put that phrase into Google – not Paris Hilton numbers certainly, but definitely showing that a lot of people besides you are thinking about this.

A lot of these aren’t very accessible for students, but this one should appear near the top of the list Google gives you, and isn’t too unreadable. Around page 10 it talks about reasonable values for parameters.

The author is Stephen Parente – a fairly well-known young-ish macroeconomist known for his work with Edward Prescott (who won a Nobel Prize in 2004 in part for applying the Solow growth model to understanding business cycles).

GDP Around the World

The developed world revolves around 3 economic axes: the U.S., Japan, and Europe. U.S. real GDP growth was –3.8% in the last quarter of 2008.

Japan is off by a ton more : see “Japan's Slump Is Broadening to Service Sector” in the February 18 issue of The Wall Street Journal.

The news isn’t quite as bad for Europe, but it’s still worse than the U.S.: see “Euro-Zone Economy Registers a Grim Performance” in the February 16 issue of The Wall Street Journal.

Did We Just Hit the Trough?

Note: in no way am I claiming definitively that the economy just troughed, or even that there is a high probability of last month being the trough.

Having said that though, there is better data coming in.

Recessions are always a mix of bad and good data with the former predominating (just as expansions are mostly good numbers with a few bad ones thrown in).

What is going to happen when the economy troughs though, is that the data is going to start getting better at a certain point, and after several months of improving data the NBER will declare that the trough occurred at that point in the past when things started getting brighter.

So, take a look at “Data Hints At Slowing of Decline” from the February 17 issue of The New York Times. (Also note that the title indicates a slowing of decline rather than a turning point, although the reporter is putting in an opinion there that a macroeconomist wouldn’t dare to.)

Manufacturing shrank at a slower rate in January from December, and new orders rose slightly …

… Retail sales crept up 1 percent in January …

Sales of existing homes jumped an unexpected 6.5 percent in December …

A Little Macro Humor

The largest number has been discovered. (Beware of mild insensitivity – site is usually office safe.)

Monday, February 9, 2009

Lucas On the Unimportance of Business Cycles

Robert E. Lucas Jr. won his Nobel Prize in 1995 for work he’d done in the the 1970’s on business cycles.

By the late 1980’s his tune had changed subtly. He didn’t think that his earlier work was unimportant (no one does) but that it allowed him to quantify how important business cycles were to the average Joe, and the answer is “not very”.

He made this point most forcefully in a 1988 book entitled Models of Business Cycles.

Models are the key for how we think about the world. Lucas’ big contribution in macroeconomics was in developing models that were more difficult to find faulty with:

… Participants in the discussion [about policy and business cycles] must have, explicitly or implicitly, some way of making a quantitative connection between policies and their consequences. [pg. 6]

This points to a big problem in our current situation. No one seems to be able to figure out what model the Bush people had in mind when thinking about the recession, and while everyone agrees that Obama won because voters believed he could bring change, with respect to macroeconomics this seems to be a change back to a discredited model of the economy.

Lucas’ particular sort of model is capable of showing two things about growth and business cycles that no one was able to quantify before.

  • The welfare gains from small changes in growth rates are huge: that Americans would be willing to give up something like half of their current level of income in exchange for the growth rates they have in China. This is broadly in line with what the Chinese actually have forsaken to get those growth rates – although Lucas wrote this before there was any awareness that China was undergoing a growth miracle. [pp.20-25]
  • The welfare gains from reducing the variability of our growth rates to zero (i.e., eliminating business cycles) are almost non-existent: we appear willing to give up between 0.1% and 1% of our average annual growth rate to live in a perfectly stable world. [pp. 25-31]

Note the elephant in the room of the first point: many people around the world have given up that amount of current income to not get growth anywhere near what the Chinese are getting. Something must be really goofed up with their economies.

And, putting some numbers on the second one might help a bit. Our business cycles have growth rates that are broadly like 3% plus or minus 5% each year. Lucas is saying that to get the second number down to zero, we’d only be willing to go down to between 2.0 and 2.9%. That isn’t much.

All of this is a hugely strong argument for spending a lot more time looking at growth rather than business cycles, and it is one that the profession of economics has not been able to seriously weaken in 20 years of trying.

Fogel On Well-Being

Robert Fogel won his Nobel Prize about 15 years ago for applying economics to history. His paper “Catching Up with the Economy” shares a lot of content with his book The Escape from Hunger and Premature Death … that I put on reserve in the library.

His main assertion is that we are far better off than our GDP statistics are capable of measuring, mostly because we:

  • Count input costs instead of output benefits for big chunks of the economy, and
  • We don’t value leisure at all in GDP, even though it is already the major component of what we “consume”, and growing faster than other components.

The first part is mainly a measurement problem: it is a lot easier to count the budget of SUU than the value to Utah of SUU graduates. The bigger problem is that education, health care, government and leisure services all have this problem, and they’ve gone from a fraction of the economy 150 years ago to the vast majority of it today.

The second part is because GDP was developed at a time when just about everyone toiled almost constantly. A lot of the world is still like this, but the U.S. and other developed countries aren’t any more. Many countries are currently like the U.S. of 100 years ago. The U.S. of today is not: we work between a third and half less than we did the in exchange for better goods and services and 4 times as much lifetime leisure.

This means that we miss a huge amount of what makes us rich. This isn’t stuff – goods and services – but rather what Fogel calls spiritual assets. This isn’t spiritual in a religious sense (although it can be), but rather spiritual in the sense of virtues that make our spirits rich:

  • A vision of opportunity
  • A work ethic
  • Self-esteem
  • Family solidarity
  • Sense of discipline
  • Impulse control
  • Sense of community
  • Benevolence
  • Thirst for knowledge

The fundamental problem in developed society is not a maldistribution of goods and services that might be rectified through government transfer programs, but the rather the uneven investment of leisure time in the nurturing of spiritual assets.

It isn’t possible for the government to tax a sense of community from, say, Utahns, and transfer it to south central LA, but we also shouldn’t be under any illusions that this is the sort of thing we should be worrying about instead of the usual class warfare nonsense that comes out of D.C. 

Taylor on Policy as a Cause of the Financial Crisis

John Taylor is another macroeconomist on everyone’s short list for a Nobel Prize. He as also an undersecretary of Treasury in the Bush administration, which means that a lot of politicians and pundits in D.C. are currently more inclined to dismiss him than they ought to be.

His piece entitled “How Government Created the Financial Crisis” in the February 9 issue of The Wall Street Journal makes the point that – like all recessions – this one was caused by a number of things we’ve seen before, just not in this combination.

One mistake was that most past financial crises have been about liquidity, while this one was about solvency.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

The Bush Treasury and the Bernanke Federal Reserve didn’t “do nothing”, rather they did several things that weren’t right. Then they made it worse:

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP) …

The two men were questioned intensely and the reaction was quite negative … It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others …

It’s worth remembering that Taylor is probably on a first name basis with all the principals in the story. He isn’t blaming anyone, but he is trying to do some forensics to figure out what they did wrong.

Sunday, February 8, 2009

Rogoff on Financial Crises

Ken Rogoff is another guy on everyone’s medium-list for a Nobel Prize in economics.

In the February 3 issue of The Wall Street Journal he had an op-ed piece entitled “What Other Financial Crises Tell Us”.

His basic point is that so far our crisis looks like a whole bunch of other countries’ crises – and so we have a ways to go (9 months to a a couple of years) before things start brightening up.

Chinese Unemployment

While America is being all self-centered about its economic problems, there’s news out of China (see “China’s Migrants See Jobless Ranks Soar” in the February 3 issue of The Wall Street Journal) that they have 20 million newly unemployed people – and that’s just migrants from rural areas.

The article does not put this in perspective well. China has – maybe – 4 times the population of the U.S. Yet, U.S. unemployment is up by about 3 million in this recession.

What China is seeing is quite a bit more than 4 times what we have in the U.S., so things are worse there.

Further, the Chinese labor force is a smaller share of the population – it’s a lot easier to be a two-earner couple with the services and amenities we have in the U.S., so again, things are worse there.

Lastly, this is just out of China’s internal migrant labor force – at 150 million people, that’s probably about a third of their total labor force.

In sum, they have a proportionally higher number taken out of a fraction of their labor force.

And yet … we will continue to see published estimates of how quickly the Chinese economy is growing (I saw that they were down to about 6% last month). That number and the unemployment number can’t both be right.

The Great Leap Forward and the Cultural Revolution

A few weeks ago we talked about the big downward movement in Chinese real GDP in the late 1950s and 1960s.

While it is correct to de-emphasize the importance of business cycles because they are of secondary importance relative to growth, it is important to keep in mind that we are talking about real people who are hurt in real ways, not just dips on a graph.

In this case, these look like a depression-scale event in China.

Unfortunately, depressions aren’t caused by people and policies, while the downturn in China was in fact a policy that had effects that look like a depression.

To make matters worse, Chinese policies created a depression-scale event in a country full of people living at subsistence level. The result was starvation on a scale never seen before or since.

The Great Leap Forward was an agricultural reorganization policy of Mao Zedong that ended horribly. In part, it also led to a loss of some of Mao’s political power, who responded with the Cultural Revolution – a policy that amounted to getting rid of everyone who knew what they were doing. The bottom line is that depression-scale blip in Chinese real GDP corresponds to the deaths of millions under each policy – so we’re talking Hitler-scale.