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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