Friday, December 31, 2010

What If We Reworked GDP?

What we’ve learned since we developed national income and product accounts before World War II is that growth can work through accumulation (Solow), that growth is far more important for welfare than business cycles (Lucas), and that ideas are more important for growth than capital (Romer).

If our NIPAs reflected this, how would they change? Brian Domitrovic:

The key to Mr. Romer's analysis is that ultra-developed economies tend to have a high and rising degree of non-depreciable capital. Driving production in these economies are increasingly fewer machines—which wear out, must be serviced, and replaced—in comparison to "book knowledge"—the formula for a drug, computer code, a distribution system—that does not depreciate at all. Therefore, ultra-developed economies come to devote fewer resources to maintaining the capital stock and more to actual production.

In light of the new growth theory, a good portion of what counts as output—fixing all those old machines—should be minimized in the aggregate output statistic, just as development of non-depreciable capital, in which the U.S. specializes, should be given extra weight. In recent years, America has been doing far more than Europe to create permanent (not to mention sharable) capital goods, and this fact at present is not captured in GDP.

Don’t even get me started about China. They’re putting up huge growth numbers based on stuff that no one else wants to do, in a system that’s rigged to measure those things from the age when we were interested in doing them. And yet people worry about that.

The Tail That Wags the Dog

It’s hard to get across to undergraduates, politicians and pundits that trade in goods doesn’t count for squat, and that trade in assets like currency is what’s driving international economics.

Perhaps this chart will help:

Yep, back when most of us were kids, currency trading was already 10 times larger than trade in goods and services.

Currency markets, in fact, do in a week what containers ships do in a year.

I’ve thought for a while that there’s a market for a textbook that focuses on grosses of things like the capital account, the market for hires and fires (i.e.,  JOLTS data), and government finance, rather than the net figures that the legacy media focuses on.

Via Paul Kedrosky’s Infectious Greed.

BTW: “Tail that wags the dog” is an aphorism that is almost unknown in Utah. This is one of those weird quirks of language for which I have no explanation. Utahs, in fact, find this phrase hysterical when they hear it: they immediately “get it” but also find it wonderful to learn such a cute phrase. It’s almost like when Utah’s “my heck” swept the rest of the country about 8 years ago.

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Thursday, December 30, 2010

Keynesian Theory Suggests the Stimulus Package Was Just Crap

John F. Cogan and John B. Taylor:†

The key tenet of Keynesian economics is that government purchases of goods and services stimulate additional economic activity beyond the amount of the purchase itself. …

[The stimulus package] attempted to stimulate government purchases in two ways. First, it provided funds to finance federal government purchases of goods and services … Second, it provided grants to states and local governments to enable them to increase purchases of similar goods and services.

… Of the $862 billion stimulus package, the change in government purchases at the federal level has, thus far, been extremely small. From the first quarter of 2009 through the third quarter of 2010, government purchases have increased by only 3% of the $862 billion ($24 billion). …

… State and local government purchases of goods and services did not increase at all in response to the large federal stimulus grants. These purchases have remained slightly below their pre-ARRA level since the fourth quarter of 2008.

In sum, the stimulus package was a bunch of crap, pushed by politicians, who lied about how it fit into a particular economic theory.

Note that this isn’t even belaboring the point that Keynesian theory doesn’t seem to be correct on all – or even many – counts.

And it tends to support Paul Krugman’s point, albeit in a backhanded way. Krugman has asserted that the stimulus didn’t work because it wasn’t big enough. He’s right. Most of it was crap. He’s naive to think that others should pony up more cash for stimulus he pushed so hard for, when the last load of that crap got flushed down the toilet.

† Most economists would agree with me that Taylor is probably on the "medium" list to get a Nobel Prize in the future.

Monday, December 27, 2010

How Not to Increase GDP

There’s a scene in an excellent but little known movie called Blue In the Face, where a hustler played by Michael J. Fox (!!!) asks another character “How much would I have to pay you to get you to eat a bowl of dog shit right now?” Which leads me to:

Seth Roberts’ joke post about China:

Person A to Person B: “See that piece of shit? If you eat it I’ll give you 100 million yuan.”

Person B eats the shit.

But Person A doesn’t want to give him 100 million yuan.  He says to Person B: “How about I eat shit too? Then we’ll be even.”

Person B agrees.

Person A eats some shit. “Now we’re even,” he says.

They have just increased GDP by 200 million yuan.‡

I'm a big fan of GDP - it's the best game in town - but this is a good illustration of what can go wrong with GDP.

The practical concern is how much of reported GDP in a place like China is actually transactions like this. Certainly the Chinese are building things like high-rises that no one wants only to tear them down again shortly thereafter.

† The backstory with Blue In the Face is that the cast of Smoke had such a good time filming it that they decided to do another movie right then and there. I recommend both.

‡ For those inclined to think that GDP hasn't changed here, in principle, in-kind transfers like this do count as part of GDP. What’s key here is that the market value of eating the shit has been established. But, in-kind transfers are not measured well. So theoretically, this would be part of GDP, but for practical purposes it would probably be missed.

Compensation Growth by County

It’s 2009 data, but it shows the pattern of the most recent recession: compensation grew the most in the upper midwest (blue), and declined the most on the west coast, and along a diagonal from Florida through Wisconsin.

Bourgeois Dignity as a Source of Growth

Deidre McCloskey argues that what changed around 1700 to produce consistent growth was sociological: we stopped thinking of people making money as a bad thing, and not surprisingly people went off and made a lot of it.

Here’s an interview.

… What people like about the Weber hypothesis [i.e., the Protestant work ethic] is that it combines a spiritual change inside the souls of businesspeople (Geist was the German word) with a focus on routine investment (savings rates were supposed to be higher among Calvinists). It combined idealism with Marxism. No wonder everybody likes it. But alas, it’s wrong.

What changed was the sociology. That is, what changed was the attitude of the rest of the society toward businesspeople, and with that new attitude came a change in government policy. …

Friday, December 24, 2010

Hayek Poster

Don Boudreaux is (reasonably) worried about whether it’s legal to use the photo … but the whole mash-up by Peter Barber it is too good to pass up:


Wednesday, December 15, 2010

200 Years of Health and Wealth

Hans Rosling:

People don’t dislike economic growth because it doesn’t work.

They dislike it because they’re twisted.

Kids Prefer Cheese: Hans Rosling's Chart is SERIOUSLY MISLEADING

I noticed this too Angus ...

But I didn't post about it ... and there's a decent reason (actually two - perhaps not good, but merely decent).

1) Income inequality really wasn't the point of the chart. Health outcomes equality is. I see this chart like a comparison of per capita income to per capita consumption: we really shouldn't be worried as much about inequality in the former as in the latter.

2) I think the vertical axis is far more likely to have an upper bound, and therefore a declining growth rate, than the horizontal axis. In our lingo, longevity is unlikely to be I(1), while per capital income is likely to be I(1). And, if it's I(1) in a log-linear form, then we'd probably do a log transform first. The base 10 log isn't what we'd normally use in macro, but it still works. Now, it would also be pretty standard to difference the logged I(1) variable when plotting two series like that: it's why we plot inflation - instead of the price level - against interest rates. In this case, Rosling might have done per capita real income growth rates against longevity, and I don't think he would have ended up with just-so story that he did. If he did though, I think many people would have walked away with the impression that low growth rates are a good thing. Too many people make that assumption casually for me to advocate encouraging it.

Sunday, December 12, 2010

Another Unemployment Rate by County Video

Three years of county by county unemployment:

Unemployment 2007-2010

The impression is not like some monolithic discrete change as presented in the legacy media, but more like a piece of fruit going bad on the table … it starts with a little brown spot or two that slowly takes over.

Saturday, December 11, 2010

The Uneven Recovery

Recessions and expansions are always uneven, so this shouldn’t be a surprise.

And, keep in mind that this is just showing above and below average, so every metropolitan area has to be either yellow or red.

But, how many people do you know from yellow areas that are complaining about the recession (that officially ended 15 months ago), or the weak job market?

Saturday, November 27, 2010

Colonial Institutions Might Have Been Worse that We Thought

It’s a 30 year old position in economics: former British colonies have done better because British colonial institutions were better than those of other imperialists.

Except that there’s new evidence from India.

India has areas that were under direct British rule, and areas that were … hmmm … paying tribute to avoid direct British rule.

The areas of India that were directly ruled by Britain have turned out worse.

Wednesday, November 17, 2010

Trade Imbalance Nonsense

John Cochrane is talking about Treasury Secretary Geithner at the G-20 meetings in fall 2010, but he may as well be talking about just about any government official:

Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper.

This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find "imbalances," properly diagnose "overvalued" exchange rates, then "coordinate" structural, fiscal and exchange rate policies to "facilitate an orderly rebalancing of global demand," especially using "medium-term targets" rather than concrete actions. The German economics minister, Rainer BrĂ¼derle, called this "planned economy thinking." He was being generous. Planners have a clearer idea of what they are doing.

Via Greg Mankiw.

Tuesday, November 16, 2010

Lies, Damned Lies, and Statistics from the Obama Administration

Keith Hennesey deconstructs Austan Goolsbee’s defense of Obama’s economic performance:

Austan Goolsbee deconstructed

If You’re So Smart, You Fix It

A game you get to play where you choose the policies to cut the deficit, from The New York Times.

Good luck … you’ll need it.

Via Greg Mankiw.

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It’s not as bad as portrayed here, but if you can’t figure out why people object to textbook monetary policy, view this:

If the video isn’t showing up, click here.

Sunday, October 24, 2010

Asymmetry As a Sign of Bias: Paul Krugman Edition

Chris Fawson of Utah State got me noticing asymmetrical thinking 6 years ago.

Now Cafe Hayek has caught Paul Krugman deep in it: Krugman asserts drastic results from the planned budget cut of 6% of GDP in the UK, and meagre results to the 6% budget increase called “the stimulus” in the US.

You can only have it both ways if you’re appealing to people who don’t check the numbers.

Monday, October 11, 2010

A Nobel Prize for Explaining JOLTS Data

JOLTS – the Job Openings and Labor Turnover Survey – gathers data that most novice macroeconomists find surprising: that there are huge numbers of people hired during recessions, and huge numbers fired in expansions (see this earlier SUU Macroblog post).

How is that possible? The answer is costly search and matching.

This year’s Nobel Prize in economics went to Diamond, Mortensen and Pissarides. Diamond did older work on search, and Tyler Cowen of Marginal Revolution calls the award to Mortensen and Pissarides the closest thing the Nobel committee has ever done to making an award based on one paper.

The policy implications are unusual:

  • Unemployment insurance is a huge disincentive to finding work, but the gross costs of reducing it come mostly from workers rather than employers, and the net benefits to society aren’t large.
  • Discouraging employers from firing  increases the unemployment rate a little, but hits output really hard because inefficient jobs get retained.
  • Paying a subside to employers to hire workers has huge benefits, most of which accrue to workers. In particular, the gross benefits to workers are large enough that you could tax some of them away to completely pay for the subsidy and still have workers’ net benefit stay positive.

A funny thing happens when you actually work out the economics: otherwise “conservative” economists often come up with policy implications that sound “liberal”.

Marginal Revolution has an excellent summary of these guys contributions to economics (here, here, here, here, here, and here).

Saturday, October 9, 2010

MSNBC’s Adversity Index: The Movie

This is useful, but not great.

The data is OK - employment, industrial production, housing starts and home prices. I’m not sure why housing starts are this important – they’re just a nasty indicator for the current crisis. And I’m not sure about home prices: part of why we feel bad is that we feel that we’ve gone down unnaturally – but that also mean that we were unnaturally well-off (green in the movie) in earlier years.

It also bugs me that you can’t figure out much about how it is combined together.

But, the movie of the adversity condition of the states, running from 1995 to the present, is cool.

Monday, September 20, 2010

Trough Dated

Unlike most other countries, in the U.S., business cycle peaks and troughs are “officially” dated by a committee.

This was a big topic of discussion in the Spring 2010 class, because there wasn’t an official date for the trough yet, but we discussed how it was likely to be in summer of 2009 (I think I was leaning towards August).

As of September 20, 2010, it’s official: the recession ended in June of 2009.

The graph in the article is instructive because it shows that the trough is not when the economy has recovered, or when everyone starts to feel like things have returned to normal, but rather when we stop declining.


This also shows that the rate of recovery (the slope) is about the same as in the last two recessions. The lends credence to the idea that the Obama administration is doing a normal job. However, comparison with the “Reagan recovery” lends credence to the idea that Reagan did something that others didn’t. And of course, it could all be luck.

Saturday, September 4, 2010

Where Were Jobs Lost?

From The Wall Street Journal, an interactive chart of what fields had job losses during the recent recession.


Treasury Secretary Geithner gets blasted a lot – especially in Utah.

Here’s the take of someone I trust who’s met with him in person:

Geithner is smart and deep. Geithner took questions on any topic. Bear in mind that taking questions from … [big name economics bloggers] …is not like taking questions from the press. Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact. We went way over scheduled time. He seemed to be having fun.

Evidence-Based Study Tips

Nine tips from The Psychologist. In short:

  • Believe you can improve
  • Sleep for long stretches every day
  • Don’t kvetch over past procrastination
  • Practice tests
  • Review periodically rather than cram
  • Abstract definitions beat real-life examples
  • Nap when tired
  • Get and read the powerpoints before class
  • Believe in yourself

Via BPS Research Digest.

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Sunday, August 29, 2010

Our Stationary Population

It’s an urban myth that Americans move more than ever.

In 2004 less than 14 percent of U.S. residents moved--the lowest figure since the Census Bureau began collecting the data in 1948 …

I seem to recall that getting people to settle down in stable neighborhoods was part of the reason our government pushed for more homeownership.

Wednesday, August 18, 2010

Why Didn’t Anyone Predict the Great Recession: Are Economists Dummies?

These are big (but not huge) name economists. Writing a paper as part of the NBER series confirms their elite status. Here’s what they did:

We …  search for simple quantitative models of macroeconomic and financial indicators of the “Great Recession” of 2008-09.

They were thorough:

We use a cross-country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars. We check a number of different indicators of crisis intensity, and a variety of different country samples.

Here’s what they found:

… We find few clear reliable indicators in the pre-crisis data of the incidence of the Great Recession.

If it was easy figuring these things out, we wouldn’t need a college major to learn about it.

Wyclef Jean and Haiti

I bash Haiti a lot in this blog: it’s the closest example to SUU of how to do everything wrong with your country.

Now Wyclef Jean is running for president of Haiti.

The pros for this seem to be that he lived in Haiti until he was 9, that he speaks Haitian creole, and he’s famous.

The cons are best expressed by this quote from the comments to the linked article: “No experience. No plan. No education. Can’t speak the language let alone proper English plus a history of not being able manage his own personal affairs based on foreclosures, IRS tax liens and his nonprofit scandal.”

Via Marginal Revolution.

A History of Real GDP Around the World

There is always a lot of talk about “how this generation is different.” An extension of that is how “this new economy is different.” That’s all crap.

Being able to see similarities is a standard part of any IQ test – that’s why they give you so many analogy questions. Being unable to see similarities seems to me to be a hallmark of journalists. But, I digress.

Here. we do have a huge dissimilarity. China and India have always had the biggest economies. They stopped having the biggest economies because they fell behind in the well-being revolution of the 19th century. There is no reason to expect current economies to behave differently: so if we look at this diagram in 100 years (some of you will still be here), it will look like the left hand side, not the right hand side.

Saturday, August 14, 2010

Treasury Yields: The Movie

This video shows in detail what happened in the 2008 financial crisis.

What is show is the yield on different maturities of U.S. Treasury debt, against their maturity length.

A couple of points stand out:

  • Policy effects are mostly on short-term rates (the left side of the graph).
  • The long-run yield is fairly constant at just over 4% (the right side of the graph)
  • What happened with Bernanke-Paulson policy in 2008 was that they were pulling down short-term rates so hard and so fast that their link to medium-term rates was broken.
  • There never is much of a link of short-term rates to long-term ones, so there way nothing there to break.
  • Given the dependence of most firms on medium-term debt, it should be no surprise to anyone that when the benchmark of medium-term government debt lost its anchor, that commercial markets went nippy.

Via James Hamilton at Econbrowser who notes that the source authors (Gurkaynak and Wright) notice a breakdown in arbitrage: dots on the graph should not separate vertically. This is what is going on in my last bullet point.

Thursday, August 12, 2010

Canada: The Anti-Keynesian Case

Any Keynesian must be able to explain the case of Canada – where the fraction of GDP spent by the government has gone down by over 10% over the last generation … and the country has done better.

I would love to see a small-country Keynesian macroeconomic model explain that.

Tuesday, August 10, 2010

Where Does the Laffer Curve Bend? Survey Results

The lefties say 60-70%, and I think they’re right.

I also think Mankiw adds an important point: those numbers are based on elasticities, and in the long-run the behavior of elasticities is going to push that value downward. Since almost all taxes that we really care about are enacted with a view towards permanence, this is a huge point. Unfortunately, he doesn’t give a lower bound.

Tyler Cowen thinks that Mankiw’s response is the best, but I’ll go with Feldstein’s: this question isn’t really relevant. What we ought to be plotting is tax rates against some measure of well-being, like per capita real GDP (or even better, it’s growth rate).

Read Ezra Klein’s whole piece.

Sunday, August 8, 2010

Urban Myth: There Are No Job Openings


Complaints about there being no job openings are just whining.

Now, there are some caveats to that blue curve.

  • We’re only up to the level of Fall 2008, and the economy wasn’t great then.
  • The graph doesn’t go far enough back to show that we’re still off from, say, 2006.

But, if someone you know can’t pick up a job, chances are that they are sending out bad signals (or no signals at all) to potential employers.

Read the whole thing – in it, Casey Mulligan argues that this is because of the promotion of disincentives to work in public policy.

I prefer to think that what we’ve got here is a tailor-made excuse for collective laziness: I think there’s too many people complaining about the lack of programs to help them out … so they’re not even active enough to recognize the disincentive.

Thursday, August 5, 2010

A Challenge for Those Who Want More Government

Don Boudreaux wonders why those who want more government don’t point to the successes of the U.S. economy with the government programs we already have:

But if I were a pro-regulation and high-tax kinda guy, why would I dispute the claim that America’s economy has performed remarkably well for everyone even since 1973?  Why would I not say “See, the government programs enacted from the New Deal forward are working!”  At no time during the past 35 years has Uncle Sam’s budget been severely reduced.  During those years, some welfare programs have been scaled back, while others have been expanded and even newly created.  Trade is freer today, but the post-WWII trend toward freer trade began in the 1940s, long before those allegedly blissful years of the early 1970s.  Since the early 1970s, some regulations have been repealed, while others have been created at both the state and national levels.

In short, despite what some pundits mysteriously assert, America during the past twenty-five to thirty-five years has emphatically not been a laissez-faire society.  Not even close.  So why do so many persons on the political left see in the economic data of the past three decades a compelling case for even greater government control over our lives and pocketbooks?  And why don’t more of these same persons on the left respond to those of us who advocate less government by pointing to the evidence of continued and widespread growth in prosperity by saying proudly “See!  We’re right and you’re wrong: government intervention does work well!”

We have a lot of government programs already – either times were good and we need more of them, or they weren’t and we need less. Which is it?

I think that’s a fair question.

Quote About Economic Eschatologism*

Via Don Boudreaux:

I pose today …  the same question that Thomas Babington Macaulay posed in 1830 to the irrational pessimist Robert Southey:
On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?

I think this is a worthwhile question for all economics students.

* Eschatologism is the belief that the study of the “end of days” of a particular religion is important for day to day decision-making in the here and now.

How’s Cuba Actually Done?

Matched pairs is a standard technique in statistics to reveal whether there are differences in behavior.

The key is, who to match. We probably shouldn’t match Cuba with Spain because the latter was its imperial owner for so long. So how about Cuba and Portugal – the latter was clearly worse off than Cuba when Castro took over, and had its own problems with dictators over the last 50 years.

Here’s a video  – move the slider to 1950 and click play.

It shows how life expectancy has gone up in both countries at about the same rate – that’s the vertical axis.

But, real GDP per capita – the variable most closely associated with quality of life – does not change at the same rate.

Via Cafe Hayek.

Wednesday, August 4, 2010

Evidence Against Price Stickiness

Alex Tabarrok points out that the there are far more unemployed houses than people, and that prices – while sticky for both – are less sticky for houses.

That’s an interesting idea to carry around for the next time sticky prices comes up in class.

Monday, August 2, 2010

There Are People Who Argue that Well-Being In the U.S. Has Not Improved In Their Lifetime

Take a look at this photo set from the early 1940’s – when the U.S. was by far the richest country in the world.

Respectfully, I think large fractions of people who voice the opinion in the title are either lying or mentally ill.

Video Showing the Unemployment Rate by County

A couple of years of monthly unemployment rate data, by county, shaded, and set to video.

What I really like is the way the recession starts out spotty, but then coalescences into two waves converging inwards from the coasts.

Sunday, July 25, 2010

Sunday, July 18, 2010

OECD Factbook Is Online

A totally cool tool for students who need to run out and do exploratory data analysis on a set of countries.

Can’t wait to use this in class in 2010-11: the visualization tools are a treat.

Via Econbrowser.

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Monday, July 5, 2010

Economics Is Hard

A link to the soon-to-be classic essay (free registration required). this sentence is a manifesto for working macroeconomists:

I have contributed no earth-shaking ideas to Economics and work fundamentally as a worker bee chipping away with known tools at portions of larger problems.  It is precisely from this low-level vantage point that I am totally puzzled by the willingness of many who fearlessly and breathlessly opine about economics, especially macro-economic policy.

The Lucas’ Critique makes everything hard:

What makes macroeconomics very complicated is that economic actors...  act.

And … what can you get from, say, Glenn Beck or Keith Olbermann?

Can they [non-economist pundits] provide you, the reader, with an internally consistent analysis of a dynamic system subject to random shocks populated by thoughtful actors whose collective actions must be rendered feasible? For many questions, I and my colleagues can, and for those that the profession cannot, the blogging crowd probably can’t either.

Perhaps Obama could learn a thing or two from economists:

I live in a world where people are not falling over themselves to believe my assertions …

Of course, vX readers have seen my related “Why Macro Is So Hard”.

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Monday, June 21, 2010

Mankiw – On Democrats, Economists and Policy

Mankiw’s “Crisis Economics” from the Summer 2010 issue of National Affairs touches on a bunch of issues that come up in this class:

  • What theory is correct?
  • What policy is correct?
  • How do we judge policy if it doesn’t work?
  • What do Democrats believe?
  • What do economists who work for Democrats believe?

Keep in mind while reading this, that Mankiw is known as a new-Keyesian, but directed Bush’s Council of Economic Advisors for a while, and almost got fired for saying publicly that his administration’s policies didn’t make sense.

Friday, June 11, 2010

Technology that Augments Labor with More Labor (Instead of Capital)

We usually think of technology as labor-augmenting: it allows a unit of labor to control more units of capital.

In class, I use the dashboard of a car as my metaphor to motivate thinking about this.

Here’s Robin Hanson, an economics professor from George Mason University. Robin is “way out there” as far as thinking about what the future will look like, from a foundation of science.

Robin Hanson: "Economics of Nanotech and AI" at Foresight 2010 Conference from Foresight Institute on Vimeo.

In particular, he envisions astronomical growth in the next century or so. He does this not just by envisioning the effects of cloning – the creation of a physical duplicate of a person, but by personal digitization. That’s the virtualization of a person’s intellect and abilities into the internet.

In short, what would growth look like if you could control/be more than one of you? In more than one place? Each of you using labor-augmenting technology? And, what if some of those “yous” were digital, and didn’t require much in the way of resources?

This seems far-fetched, but it’s not really much more than a big macro in a program. Recall that a macro in Word or Excel is just a sequence of memorized keystrokes that do a bunch of things when you hit a single key. Of course, people already do much more complex things than that: like use their iPhone to turn on the lights in their house and adjust the temperature before they get home.

How much more productive would you be if a digital version of yourself could do the grocery shopping? How about if it could get your car inspected? What if it could go to a lecture you’re not sure is worthwhile, evaluate it as you would, and report back on it?

Tuesday, May 25, 2010

Ideas Having Sex (Lots of It, with Multiple Partners)

The legacy media is catching the idea from new growth theory that the key to civilization is the creation of enough ideas, and the recombination of existing ideas.

If your society isn’t big enough to create enough new ideas, it won’t flourish.

If your society doesn’t encourage the synthesis of new ideas from old ones, your society won’t flourish.

The author of the piece — Matt Ridley — has a passable metaphor for this: ideas having sex.

Better ones are “ideas hooking up” or “ideas getting promiscuous”. The key is that there needs to be a lot of this going on, and it has to have some random aspect to it.

Read the whole thing in the May 22 issue of The Wall Street Journal entitled “Humans: Why They Triumphed”.

Thursday, May 6, 2010

The Web of PIIGS Debt

A fascinating, but largely useless, PIIGS debt graphic from The New York Times:

The big problem with this graphic is that it goofs in a serious way. The focus of this graphic is how much the PIIGS owe to each other (the pentagon and its interior), when in fact the real problem is how much they owe – and might not repay – to the more stable economies (these are the arrows going to the outside).

A secondary problem is that those outgoing arrows are gross totals – there’s nothing here that shows, say, that France probably owes something to Italy – and that this should be netted out.

A third problem is the lack of scaling. These debt figures are stocks, and are not due all at once. For scale, these should be compared to some measure of national assets. Unfortunately, they’re usually compared to GDP – although not at all in this diagram. That’s a bad move because it compares stocks to flows. If they really wanted to solve this problem, they’d compare debt payments to GDP.

To draw an analogy, the circles are college students, the pentagon and its interior lines are how much you owe to each other, and the outgoing arrows are how much you owe to your parents, banks, and Sallie Mae. The big questions for a college student are not how much they owe to other students, but rather how much they owe to non-students, what is their ability to pay depending on their future prospects, and how much inflow can they expect to get from their parents (say through a will or trust). This graphic focuses on how much college students owe each other.

Via Marginal Revolution.

PIIGS and Sovereign Debt Crises

Ken Rogoff is the expert on this, and here’s what he thinks about Greece (right now) and other countries more generally.

Economists have only a limited understanding of why sovereign nations ever repay their external debt, given the lack of any supranational legal authority that might force them to do so. It is very rare for a country to default because it literally cannot pay. In most cases, and certainly in southern Europe today, the issue is willingness to pay.

Via Marginal Revolution.

Monday, May 3, 2010

AP Economic Stress Index

A cool graphic from the Associated Press that shades counties by various economic criteria.

It will shade states too. You can also “play” the data as a movie through 2007-9. Unfortunately, it doesn’t seem to be updated for 2010.

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Friday, April 30, 2010

Blue States and Low Income Growth

Craig Depken at Heavy Lifting has noticed a correlation between income growth by county, and voting for McCain over Obama.

Which is the cause and which is the effect?

I left a comment on the original post that you could also interpret this as convergence as predicted by the Solow growth model. If so, then Democrats seem to be against it.

Technorati Tags: ,,,,,

Wednesday, April 28, 2010

Data Dashboard

Econtracker from The Wall Street Journal.


I need to have students take this quiz for credit at the beginning of the semester.

Insuring the PIIGS Debt

In case you’re keeping up with this blog after class is over – the rate charged on insuring government debt in Europe has spiked so much that Spain is now paying about the same rate that Greece was paying in 11 weeks ago.

Wednesday, April 21, 2010

Buy or Rent

There was a post and comments on the student blog about it making sense to buy a home rather than rent. I trashed this fairly roughly because this amounts to a financial myth.

A piece from The New York Times this week notes that it may finally make financial sense to buy. Many places where you should have rented in 2005 — Washington D.C., Boston, Sacramento, Chicago, Miami, Palm Beach and Fort Lauderdale, Los Angeles and Riverside, Las Vegas and Phoenix — have now turned into locations where it might make sense to buy.

Most of the Pacific coast, the New York suburbs, Honolulu, and North Carolina were and remain places where it makes sense to rent.

More rust-belty places — like Philadelphia, New York, St. Louis, Indianapolis, Cleveland, Detroit and Pittsburgh — were and still remain places where you should buy. Having grown up in Buffalo, unless you don’t have a life, I don’t recommend getting tied down to those places.

Homeless In North Dakota

Earlier in the semester we talked about the unevenness of recessions, and how some states have skipped the Great Recession entirely.

The New York Times ran a front page article this week about how North Dakota is booming so strongly that they’ve run out of temporary housing for people: new residents with high-paying jobs are sleeping in their cars.

Monday, April 19, 2010

For Graham

Graham raised the point in class a few weeks ago that it’s goofy that poor Brazilians have cellphones when they don’t have so many other things.

I tried to steer in the opposite direction: perhaps it’s our value systems are goofy if so many people are buying and using these things instead of other things.

David Gardner sent me an e-mail about a video he saw in another class about social media  (sorry, this video is not embeddable). It reminded me of Graham’s point.

I’m not thrilled with the video — it focuses too much on cute examples and trite observations — which I think leads it to missing the big picture.

This is not that people do social networking, but that they value it.

Why is that so? Network externalities is part of it.

Does it matter to macroeconomics? I think it does. Our conception of macroeconomics is based on pink dashed lines drawn in atlases – essentially networks established by physical proximity. If our identity becomes more tied up with our social networks than our proximity networks, then the policies of governments and the scores we keep about countries (like GDP) become less relevant too. I don’t expect governments to take that threat lightly — there’s a reason that computer programmers tend to be libertarian.

Which brings us full circle back to Graham. Does a kid with a cellphone and a social network in Brazil feel Brazilian? For now, I think the answer is yes. What will the world look like when the answer is no?

FWIW: as a non-Mormon, who relocated to Utah from out of state, who spends a lot of time on the internet, and who teaches at a university that is somewhat separated from the local community, I can tell you that I’m already losing a sense of identification with my local community. Most of me is still “Utahn”, but a bigger chunk of me is floating separately from Utah than most of you. It’s an interesting feeling … and a positive one.

Sunday, April 18, 2010

Confidence Intervals for for Changes In the Number Unemployed

Carl Bialik’s column in The Wall Street Journal this past week pointed out that what is normally announced about government data is a point estimate.

Of course, the probability that any point estimate is exactly correct is generally zero.

It would be better to use a confidence interval instead.

If you do though, you find that it isn’t clear if the number of unemployed has gone up or down over the course of the last year or so.

That ought to be the point though. If you’re worried about the unemployed, we’re not seeing evidence that the situation is getting better. Alternatively, if you think activist policy is a problem, we’re not seeing any evidence that it is working.

Conservative Economists and Democratic Politics

The Wall Street Journal had an editorial about Larry Summers the other day. Summers wrote a letter to the editor that was published the same day.

He is currently director of Obama’s National Economic Council. Previously he was one of Clinton’s Treasury Secretaries, President of Harvard University, a well-known macroeconomist — for which he won the John Bates Clark medal in 1993 — and wonderkid going back to the early 80’s, as well as son of two famous economists and nephew of two Nobel Prize winners.

Summers is not regarded as a conservative.

But, over the last 40 years, a preponderance theory and evidence in economics has supported conservative political positions. This has moved the profession to the political right. Summers was pushed out at Harvard largely because he was seen as too conservative by its faculty.

The WSJ dug up this quote from Summers arguing against unemployment insurance:

"First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. …

"The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer."

Summers’ reply argued that he was taken out of context, and offered this quote from the same article:

It is "a great mistake," I wrote in the article cited by the Journal, "to attribute most unemployment to government interventions in the economy or to any lack of desire to work on the part of the unemployed."

I have no doubt that Summers is correct. Having said that, it is not normal or typical for a White House economics advisor to have to claim that readers of their scholarly oeuvre are prevaricating. I’d go so far as to call it unheard of.

BTW: Krugman has also been getting “hoist by his own petard” about contradictions between his more serious scholarly work, and his current opinions.

Friday, April 16, 2010

Wednesday, April 14, 2010

Stealing Is So Much Better than Thinking

Brian Gongol on central planning:

Food for thought: Decades after the college students and hackers of free countries built their own software (and some massive fortunes from doing so), Communists are still just copying and stealing free people's work.

The context of this is that 1) the North Koreans are using open source software to build their own operating system Red Star, and, of course, 2) the Chinese government has hit the news a bunch of times this year by ignoring the vast ability of their population to contribute to the positive-sum-game that is modern civilization in favor of the zero-sum-game of building malware to invade the servers of private companies in developed countries.

The Recession Is Not Over Officially

Both The Wall Street Journal and The New York Times have run pieces this week about next Monday’s official announcement from the NBER Business Cycle Dating committee.

Unlike most countries, the U.S. has a non-partisan, non-government committee of macroeconomists that calls turning points.

They do not make timely announcements, and they do not meet that often.

The rumor is that they are going to announce that the are still not sure when the economy troughed.

The reasoning is twofold: 1) the data that is old enough to be solid — 6-12 months — doesn’t show a distinct trough, and 2) the newer data, which looks like a recovery, isn’t solid yet.

My guess is that they will meet in the summer, or over Christmas vacation, and declare a trough late last summer. My money is on August.

The Recession Is Over, Officially or Not

Carpe Diem, which always posts a lot of data charts, has been showing many lately that clearly show a recovery.

Part of the “Bailout” Was Cheap

Macroeconomists have always said that a bailout of the financial system should not be expensive if the problem was a loss of liquidity and not a loss of solvency.

It was unclear in 2008 which situation we were in when TARP was enacted.

It’s now pretty clear that as far as the private sector goes, TARP solved a liquidity problem. Estimates of the final cost of TARP have been declining for about a year, and are now down to $90 Billion (see the article entitled “Light at the End of Bailout Tunnel” in The Wall Street Journal).

However, Kids Prefer Cheese points out that this does not count the money that went into Fannie Mae and other GSEs. This is still forecast to go higher – indicating a solvency problem.

Not Testable: Your Professor Is Not Crazy

I asked my kids where that line came from, and they said it’s from the Horton Hears a Who movie:

In my world everyone is a pony, and they all eat rainbows, and poop butterflies.

Feel free to use this in polite conversation – it’s a good one to use when talking to people who believe in nonsense, like, say, price controls can make healthcare better.

Thursday, April 8, 2010

The CBO’s Obamacare Numbers

We’ve talked a bit in class about the CBO’s numbers not being very good.

Here’s some viewpoints from Mike Munger of Kids Prefer Cheese – a poli sci prof at Duke, from Greg Mankiw – a macroeconomist at Harvard and former White House advisor – based on a letter sent from the CBO to Congress, and another one from Mankiw about the process.

Munger is admittedly anti-government. Mankiw, on the other hand, is tarred as a conservative, but to call him anything other than a liberal who has hit middle-age is disingenuous (and, of course, the professional liars out there have readily forgotten that Mankiw was almost fired by the Bush administration for telling the truth about their policies).

Wednesday, April 7, 2010

Economic Growth Implications

The specifics of this post are not testable, but you had better have command of the general idea by the end of the course:


Via Carpe Diem and 4-Block World.

Has Employment Troughed?

Employment lags the business cycle.

Of course, this was a very severe recession. Also, the employment picture in recessions appears to be stretching out. Economists are not quite sure why, but we think it’s because of 1) fixed costs that slow down layoffs but also rehires, and 2) less dependence of the economy on cyclical industries (where layoffs and overtime are part of the job).

Via Paul Kedrosky’s Infectious Greed via Calculated Risk.

Sunday, March 21, 2010

Sweden Unwinds Its Welfare State

How can I not post a video that says that devaluing your currency is like peeing in your pants:

Via Cafe Hayek.

The Most Interesting Argument I’ve Heard Against Obamacare

It uses the commerce clause of the Constitution (Article 1, Section 8, Clause 3) – which governs activities – to make inactivity an offense.

… The individual mandate extends the commerce clause's power beyond economic activity, to economic inactivity. That is unprecedented. While Congress has used its taxing power to fund Social Security and Medicare, never before has it used its commerce power to mandate that an individual person engage in an economic transaction with a private company. Regulating the auto industry or paying "cash for clunkers" is one thing; making everyone buy a Chevy is quite another. Even during World War II, the federal government did not mandate that individual citizens purchase war bonds.

This was written by a law professor, at Georgetown University, and published in The Washington Post. None of those are regarded as conservative institutions.

Via Cafe Hayek.

The Most Interesting Argument I’ve Heard Against Obamacare

It uses the commerce clause of the Constitution – which governs activities – to make inactivity an offense.

… The individual mandate extends the commerce clause's power beyond economic activity, to economic inactivity. That is unprecedented. While Congress has used its taxing power to fund Social Security and Medicare, never before has it used its commerce power to mandate that an individual person engage in an economic transaction with a private company. Regulating the auto industry or paying "cash for clunkers" is one thing; making everyone buy a Chevy is quite another. Even during World War II, the federal government did not mandate that individual citizens purchase war bonds.

This was written by a law professor, at Georgetown University, and published in The Washington Post. None of those are regarded as conservative institutions.

Via Cafe Hayek.

Institutions that Matter

One of the things that macroeconomists have learned since retooling to focus on growth models over the last 15 years is that the institutions that make up a society and culture matter to the long-run well-being of its people.

One of those institutions is trusting strangers: every developed country requires people to rely on strangers for fulfillment of some needs … and it works. There are very few developing countries that have cultures with any degree of trust in strangers.

Sciences rely somewhat on confirmation from other fields, and here’s what an anthropologist has found:

… Big step toward resolving this question is being published today in the journal Science [subscription required]. The researchers find strong evidence that market institutions cause people to treat each other, especially, strangers more fairly.

More boldly, their results suggest that this isn’t just about the golden rule:

… Our results contradict previous theories that humans learned to treat strangers fairly by transferring behaviour and norms developed in their actions and attitudes toward family and kin …

Sleeping Through a Recession

How would you know if a recession is just collective laziness?

Our results suggest that in a recession Canadians sleep an average of 2 hours and 34 minutes more per week, or 22 minutes more per day.

Well … yeah … obviously.

The researchers who did this report are not looking at the collective laziness question. They’re just interested in the sociological aspects of a recession: sleep is related to performance and mortality.

But, let me stretch your brains a bit. I’m not claiming that recessions are collective laziness. But, this is a claim I would have laughed at 20 years ago, and now I’m not so sure.

The trick is to convert per capitas to other aggregates. Let’s do the math. They find that the average person sleeps 22 more minutes per day during a recession. That’s an average over a week, so 154 minutes per week. If you work a 40 hour work week, that is 2,400 minutes. Now, if the 154 minutes of sleep come out of what would otherwise be worktime, that’s like you being unemployed for about 6.4% of your time that you weren’t unemployed for before. That 6.4% is in the range of the increase in unemployment in Canada (where the study was done) during this recession – it’s actually quite a bit on the high side since Canadian unemployment only went up by about 2.5%, indicating that increased sleep more than accounts for the increased unemployment.

This is what in econometrics would be called a reduced form explanation. It tells us about associations, but it isn’t a theory of why this happens. That would be called a structural explanation. The problem is that reduced form explanations are usually consistent with more than one structural explanation. Here’s two: 1) a collapse in confidence causes a recession which gives people more time to sleep, or 2) people are tired and need more sleep, so they do less work, and we measure that as a recession. Separating out those structural explanations requires a deeper model, along with all the inherent biases that the researcher builds into it.

Wednesday, March 17, 2010

Government Debt and Promises Graphic

The March 12 issue of The New York Times had an interesting graphic of current government debt and future government obligations for developed countries.

Greece is near the top in both.

Interestingly, Portugal is comparable to the U.S.

Thursday, March 11, 2010

The Richter Scale – Not Testable

This is not testable. But someone asked for this (Kyle, I think), and here it is.

There are two ways to think about the strength of an earthquake as measured by the Richter scale.

One is the amount of back and forth shaking – what you see in movies when the needle goes back and forth.

The other one is the amount of energy released by the quake.

The former is better correlated with damage, but the latter allows reporters to draw pointless analogies — like how many Hiroshima-sized bombs this quake was equivalent to.

For both measures, the Richter scale is a base 10 log, so you have to reverse that to back out the actual value. On a calculator that usually means keying in something like “2nd function”, and then “log”. In Excel, you can do this by raising 10 to the power of the Richter scale reading.

So shaking in Chile was 63-times worse than in Haiti (10^8.8 divided by 10^7.0).

Energy released is measured by taking that ratio and raising it to the 1.5 power, making the Chilean quake 501 times as strong.

This is why the number I used in class to quantify the two quakes was different from what you may have heard in the media.

Sovereign Risk Chart

The Globe and Mail1 offers a heat chart of sovereign risk2 across six categories, and ranked across their average (scroll down to find it). It is sourced to the Royal Bank of Canada.

The U.S. ranks well on government spending – which isn’t something you’ll hear pundits say. Not surprisingly, we rank poorly on fiscal and structural balance.

1 This is a nationally available newspaper published in Toronto: Canada’s equivalent to The New York Times.

2 Sovereign risk refers to default by a country. In the old days, the sovereign was the individual member of the royalty in charge, and at that time bankruptcy on their part was equivalent to bankruptcy of the entire government.

Wednesday, March 10, 2010


Here’s a new government policy!

Instead of helping new businesses start, why don’t we just create facades for imaginary businesses?

It’s hard to believe, but this is actually a municipal policy in North Tyneside – an urban area in northeastern England.


David Cutler – the Democratically-oriented expert on the healthcare bill lists the 10 ways that it can save money:

Over the past year of debate, 10 broad ideas have been offered for bending the health-care cost curve. The Democrats' proposed legislation incorporates virtually every one of them.

Why is reform viewed so negatively? In part, it may reflect the perfect being the enemy of the good. …

Reform is also viewed negatively because official scorekeepers do not believe anything on this …

Of course, no one knows precisely how much medical spending increases will moderate. But one cannot doubt the commitment to try. What is on the table is the most significant action on medical spending ever proposed in the United States. Should we really walk away from that?

David Brooks – a political columnist at The New York Times, and a conservative one at that, on all the (7 !!!)fudges that went into it.

The Democrats have not been completely irresponsible. It’s just that as the health fight has gone on, their passion for coverage has swamped their less visceral commitment to reducing debt. The result is a bill that is fundamentally imbalanced.

David Leonhardt, an economic columnist at The New York Times, and of a liberal disposition, opines that we may as well run with this because the alternative is worse.

I see only two good options for anyone who wants to be fiscally conservative.

The first is to say we cannot afford to cover the uninsured. …

The second option is to say that expanding insurance would bring enormous benefits.

Megan McArdle, a sometimes progressive, always libertarian columnist at The Atlantic thinks the whole issue has too much levity:

… Why can't fiscal conservatives say that if we want to have the entitlement, we should first make sure the cuts we're proposing work?  Why can't they say that we can't afford this particular expansion, and that it's time to go back to the drawing board?  "The fierce urgency of now" is obviously totally compelling to those who think nothing can go wrong, but for the rest of us, it's not a good reason to commit ourselves to a very risky course of action.

The Production Function for Ideas

After class last week, Ammon and a few others were talking about whether idea creation – which we haven’t included in our growth models yet – might have increasing returns to scale.

Think for a little bit now about how quickly ideas evolve once we figure out an algorithm to digitize them …

What was the latest thing to completely blow your mind? For me, it was getting lost in a small city in Iowa this past summer, and not being able to get directions from my cellphone without having an accident. So, I tossed the phone on the floor to concentrate on the street signs, and a few seconds later my phone told me to turn left in 3 blocks. It wasn’t so much that it could give me directions that surprised me, it was this it troubleshot its user.

So consider this from Kottke:

One afternoon … Cope clicked a button and went out for a sandwich, and [his program] spit out 5,000 beautiful, artificial Bach chorales, work that would've taken him several lifetimes to produce by hand.

What will happen to growth rates if the creation of ideas does in fact have increasing-returns-to-scale?

Matched Pairs, Financial Crises, Housing Bubbles, and the Great Recession

Dean Baker* points out that Spain did not have a financial crisis, but it had a housing crisis and a recession arguably worse than most developed countries.

Food for thought: from this he concludes that housing, not finance, is the source of the trouble.

This is consistent with the post by Krugman from a month or so ago – he asserted that Canada got off mildly because it did not have a financial crisis, but interestingly, it didn’t have much of a housing boom either.

But, this is inconsistent with what I pointed out in class that there are lots of states that have floated through this recession, most of which did not have a housing crisis.

*Newspapers in Europe are far more politically biased than those in the U.S. The Guardian is known as a left-center newspaper.

Measuring the Effects of the Stimulus Package

I fall on the Econobrowser side of this debate, but as I’ve said in class, I’ve been moving towards the Cafe Hayek view for about 20 years.

Anyway, Menzie Chinn (a big name macroeconometrician) of Econobrowser says that the CBO estimates of the effects of the stimulus package are believable.

Russ Roberts, a non-macroeconomist and non-econometrician of Cafe Hayek fires back:

I’m skeptical on logical grounds but I confess that I do not have strong empirical evidence on my side.

… The CBO “estimates” are not an analysis of what the stimulus actually did but rather what some predicted it would do. [emphasis added]

Chinn responds:

Yesterday, I had a headache. I took a couple tablets of aspirin. (Actually, it was ibuprofen, but the point remains.) My headache subsequently disappeared. I have no direct empirical evidence that the headache disappeared as a consequence of the aspirin, but I have a plethora of studies that suggest that aspirin (or ibuprofen in this case) can relieve headaches.

As the foregoing example suggests, it does seem to me there is empirical evidence. It's just not the direct sort Professor Roberts desires.

Roberts comes back with another analogy:

That brings me to my second point that seems to be difficult to make clear. The CBO estimates are not estimates. They are forecasts based on previous estimates. They are akin to a golfer who is 150 yards from the flag and asks his caddy for advice on what club to use. The caddy knows that in the past, the golfer has averaged about 150 yards with a 7-iron, so he takes one out of the bag and hands it to the golfer. The golfer swings. He can’t see the green—it’s obscured by trees. The golfer asks the caddy to estimate how far his shot landed from the hole. If the caddy replies that he estimates without looking that the ball is surely within a few feet of the hole because the average 7 iron goes 150 yards when this golfer uses a 7-iron, you don’t call that an estimate. It’s a hope. An expectation. And it might be true. But it’s not an estimate. No caddy would say such a thing. He would wait till he could see where the ball actually ended up.

Surely where the ball goes depends on the execution of this particular swing. The wind. The humidity. How much sleep the golfer got the night before. And so on. Doesn’t the impact of ARRA depend on how it’s structured, who gets the money, the mood of the country, the expectations of increases in future taxes and so on? Yes, these things are hard to measure. So is the mood of the golfer and the angle of club as it strikes the ball. But that’s why the caddy looks and sees where the ball is. Even if the stroke appears to  be well-executed, his ex ante prediction of 150 yards can be way off. That’s why he looks.

In economics, we can’t look. We can’t say that because unemployment remains high the stimulus failed. We can’t say that because GDP grew a lot, the stimulus was a success. We understand there is other stuff going on. But if we can’t control for that stuff, then how can we know (or even estimate reliably) the effect of the stimulus?

What’s the takeaway from all this supposed to be? Reasonable economists disagree over whether the numbers produced are meaningful. You never hear this coming out of Washington – the politicians and bureaucrats use these numbers as facts, and then can’t figure out why their policies don’t do what they expect them to.

Monday, March 8, 2010

More On African Growth

Alwyn Young, another big name in the growth literature, has new estimates of economic growth for sub-Saharan Africa, and also reports that per capita real growth has been strong – 3.3% on average – since 1990. Using the Rule of 72, that implies a doubling of living standards in those 20 years.

A Great Legislative Moment

Love it or leave it, here’s the healthcare bill situation according to Megan McArdle:

… At a defining moment in American legislative history . . . the Mothra v. Godzilla, irresistable force v. immovable object, rock v. hard place of policymaking.  It can't pass and it can't fail.  Yet it must do one or the other.

All I can say is, pass the popcorn.

Are We a Minsky-Jones Economy?

The way you get famous is to make predictions about the future that people find outlandish, and then have them confirmed by reality.

In this case, Arnold Kling of Econlog asserts that if we are in a Minsky-Jones setting, that the economy is poised to add a lot of jobs soon.

Hyman Minsky was a somewhat discredited macroeconomist – I studied a little bit of his stuff in 1983. His basic idea was that bubbles in financial markets were to be expected, and that when they popped we’d have bad recessions. It sounds good in words, but it isn’t so easy to write out the math of how that works (remember, we use math to clarify whether hard ideas are good, or just confused). After the Great Recession, Minsky’s ideas are trendy again.

Garett Jones is an economist at George Mason University. His thesis is that firms increase employment because they want to be capable of increasing output along new dimensions (e.g., different goods, different markets).

Neither of these predictions are typical right now. If they’re right, Kling is on to something that we should pay attention to.

Friday, March 5, 2010

A Double-Dip?

The news hasn’t been so rosy lately. David Leonhardt’s column from The New York Times has the details, and some pessimistic opinions.

Without being pessimistic or optimistic, I’ll note that there are some statistical issues that can lead to this sort of thing in the short-run. In particular, a lot of data can be reported at the end of one calendar term, or at the start of the next one. This can generate an error pattern in the data called a moving average or MA process.

The way to get around that is to express the data as a moving average rather than a raw number. This is a simple thing to do in Excel: average 2 or more adjacent cells in a column, put the answer in one cell of an adjacent column, move down one row and repeat. Basically, this smoothes bumps.

Only time will tell, though, if we are currently experiencing bumps that need to be smoother, or a double-dip.

Wednesday, March 3, 2010

Details On Keynes vs. Hayek

Daily Kos (of all places) has a line by line explanation of everything in the Keynes vs. Hayek rap video we viewed in January.

The poll results at the bottom are surprising!

Has Government Spending Increased At All?

Food for thought from this paper:

… Aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean.

Via Marginal Revolution.

Growth and African Poverty

The conventional wisdom is that Africa is doing very poorly.

This started to change about 15 years ago. It’s now becoming clearer that the growth spurt that began in Africa then is ongoing, widespread, and robust.

Critics have said that this is because of rising resources prices. Yet, this growth has occurred in countries that have not benefitted from rising resource prices.

Additionally, large amounts of this growth have occurred to per capita incomes at the bottom of the income distribution.

Social Security Data for Developed Countries

A former Ph.D. student of mine works for the Congressional Research Office on pension issues. He sent me a link to this site with tons of data about how the financing of public and private pensions is going in various countries (with lots of downloadable spreadsheets).

Sunday, February 28, 2010

You Be the Judge

This is hard.

But caring about people means making hard, subjective judgments.

As an approximation, Haiti suffered 300 times as many deaths in its earthquake as did Chile. Why?

Factors that contributed to more Haitian deaths:

  • The quake epicenter was closer to dense population centers in Haiti,
  • The ground in Port-au-Prince isn’t too solid,
  • Unlike Chile, no one in Haiti has lived through a major quake before,
  • Per capita income in Haiti is 1/15 of that in Chile

Factors that contributed to more Chilean deaths:

  • The Richter scale is based on base 10 logs, so an 8.8 is 60 times stronger than a 7.0.

Friday, February 26, 2010

Politics and Conspiracy Theories

This is harsh. Keep in mind that it is an opinion piece by a columnist at The Wall Street Journal.

Having said that, Bret Stephens’ piece entitled “Europe’s Crisis of Ideas” gets at some of the issues we’ve talked about in class about why the “macroeconomics” portrayed by politicians and the media is so different from what is in the texts.

… Greek Prime Minister George Papandreou offered a view on the source of Europe's woes. "This is an attack on the euro zone by certain other interests, political or financial," he said, without specifying who or what those interests might be. In Madrid, the government has reportedly ordered its intelligence service to investigate "collusion" between U.S. investors and the media to bring Spain's economy low.

Maybe the paladins of Spanish and Greek politics seriously imagine that hedge-fund managers sit around dimly lit conference rooms like so many Lex Luthors and—cue the sinister cackles—decide on a whim to sink this or that economy. Or maybe they think there are political dividends to reap by playing to peanut galleries already inclined toward these kinds of fantasies.

Whichever way, the recrudescence of conspiracy-theory politics, among governments that supposedly belong to the First World, is just one symptom of Europe's intellectual malaise. On the other end of the spectrum is the view that the Greek crisis is the perfect opportunity to expand the regulatory reach and taxing authority of Brussels. …

Barro on the Stimulus Package

There was an op-ed by Barro in The Wall Street Journal this week.

I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. …

For taxes … the multiplier is around minus 1.1.

Christina Romer, the chair of President Obama's Council of Economic Advisers, and her husband, David, have been major contributors to research on tax multipliers. Their results, which rely on the history of U.S. tax legislation since 1945, show tax multipliers of larger magnitude than the one I found. …  By contrast, I have not seen serious scientific research by Ms. Romer on spending multipliers, so I cannot understand her rationale for assuming values well above one, as she has apparently done when evaluating the fiscal stimulus plan.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

Keep in mind that this is just one expert opinion, and no one who knows Barro would be surprised with this viewpoint.

Wednesday, February 24, 2010

More On North Korea

They just released some data from a U.N. promoted census. It isn’t pretty.

… The country's population has proportionately fewer children and more middle-aged people …

It also reported that people are less healthy.

Babies are more likely to die …  though North Korea's rate is still well below the world average …

… Households, with an average of 3.9 people in each …

The typical home is 50 to 75 square meters in size (540 to 800 square feet). About 85% of homes have access to running water and about 55% have a flush toilet.

The military … mostly conscripts who are required to serve 10 years.

North Korea hasn't shared meaningful information about its economy or its financial system with the outside world since the early 1960s. [emphasis added]

Read the whole thing in The Wall Street Journal.

Monday, February 22, 2010

Horrible Sovereign Interest Graphic

This is from The Wall Street Journal piece entitled “Debt Loads Hobble Euro Zone’s Prospects”. The online version does not contain this graphic – you’ll have to go the print version.

Anyway, terrible graphic: it’s supposed to be about how paying interest on debt is such a burden, and then it doesn’t plot payments on the graph at all, but uses virtually scale-free bubbles instead.

Anyway, find it and think about the numbers in those bubbles. Greece is “in trouble” because its interest payments are 15% of its tax revenue.

This is like saying a family is in trouble because its interest payments are 15% of its paychecks. Pretty much every young family that owns a house is in worse shape than that.

This is good evidence that the Greek government – which owes the money – just wants to steal the money.

Creative Destruction and Structural Unemployment In this Recession

I would not put a lot of faith in this point estimate, but according to The Wall Street Journal piece entitled “Many Jobs Gone Forever, Economist Say” a quarter of the jobs lost in the recession are not coming back.

This is the destruction part of what Schumpeter was talking about. The creative part is putting all those people into new, different, and on average, better jobs. There’s not much confidence in that happening right now, but there never is.

Saturday, February 20, 2010

Kling on Macroeconometrics

This is perhaps not all digestible to students at this level. But, it is worth discussing a bit. Read through this entire post from EconLog on why applying econometric techniques to macroeconomic data is problematic (I’m somewhat more optimistic than Kling).

Friday, February 19, 2010

Greek Bond Vigilante Nonsense

Here’s the Business Week headline: “The Bond Vigilantes Who Left Greece In Ruins” (the online title is a little different).

Why do they publish fairy tales like this and pass it off as news?

… Investors and traders of the global bond market, who lure nations into tapping abundant credit at low rates when times are good. If a nation borrows too much, those open-handed investors abruptly turn into vigilantes who punish the country by making new loans scarce and expensive.

Instead, why don’t they offer this analogy:

Hey you! Take this big, easy-to-carry, bag of our cash. If you bring a little bit of it back to us tomorrow, we’ll give you another one.

I don’t see any vigilantes there. Instead I see people with too much money for their own good.

And frankly, they’re priggish too. Note the two parts of this that upset people: that the Greeks are not bringing back the little bit of the money, and that the Greeks are not that worried about the threat that they won’t get more. To me, this suggests that they’d be OK if this had a been a one-time charitable donation to Greece.

So … let me get this right: Europeans are upset because they made a one-time charitable donation to the Greeks, but those nasty Greeks didn’t make it clear up front that it was a one-time charitable donation?

Spare me.

N.B. I cross-posted this at my personal blog: voluntaryXchange.

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Exam 1 Comment 4: Recessions Can be Good Because They “Clean Out” the Economy

The statement in the title might be true. This viewpoint is called Schumpeterian, after the economist who conceived of the idea of creative destruction.

But it also might not, and it’s very difficult to determine the extent to which it is true or not.

This means that it amounts to a belief, rather than a fact. My own belief is that this view is partly true, but that it is less than half of what we see in recessions.

On the other hand, a great deal of what we see in recessions appears to be coordination failures: people are willing to work, firms are willing to hire, but they can’t get together and satisfy each other. It ought to happen, but it doesn’t.

I also think we tend to de-emphasize the amount of bad luck that others may have had, or good luck that we might have had.

I think those two ideas are dominant.

Having said that, I don’t think we should suppress the creative destruction aspects of recessions, by say, keeping GM in business.

I raise this point about the exam, because claiming that recessions are mostly creative destruction is getting very close to saying that the unemployed deserve their situation. I think this is true during the latter half of expansions when the economy is booming. But … I don’t think it holds during recessions or the early parts of expansions.

Exam 1 Comment 3: The World Is Not Zero-Sum

A zero-sum game is one in which there are winners and losers, but everything that is won by the winners is something that is lost by the losers.

Most games are not like that: even gambling in Las Vegas is not quite zero-sum because gamblers are walking away (often) having enjoyed what they were doing.

A game in which the sum of what the winners and losers get is positive is called positive-sum.

A lot of macroeconomic nonsense in purveyed by people who think that life is zero-sum: the poor are poor because the rich took something from them, and so on.

For most of human history, this may have been correct.

But … one of the big picture ideas that everyone needs to pick up in a college education is that economic growth is positive-sum: it is making people better off without making them worse off. Not on all counts, certainly, but on average, and very broadly.

Prices Up and Down

The CPI went up by 0.2% this past month (that’s typical) but core inflation went down by 0.1% (that the first drop since the early 1980’s).

Core inflation is what they get when they take food and energy out of the CPI and recalculate the inflation rate on the goods that are left. They take out food and energy because they are more volatile.

On the other hand, the PPI (producer price index) spiked by 1.4% in January – which is huge. But, this index is fairly volatile, so I wouldn’t read too much into that unless it does this for a few months in a row.

The PPI is capturing prices at the wholesale level that will hit consumers in the next several months. Individual months don’t matter that much – because of their volatility – but the 12 month average has jumped from about –4% to +4% over the last six months. This indicates that demand is picking up in factories.

Interest Rates Up

The Fed raised the discount rate today.

The discount rate is the one for emergency borrowing by member banks, not one that is tightly related to the rates consumers pay.

Even so, this is a sign that they think financial institutions are on the mend.

One thing to keep in mind is that the Fed tends to raise and lower interest rates in a sequence of baby steps. So we are probably in for a few years of rates being steadily bumped up.

Thursday, February 18, 2010


JOLTS is the Job Openings and Labor Turnover Survey of the Bureau of Labor Statistics.

This is where they keep track of things like hires, separations, and openings.

The picture this data paints is of a more ossified job market. Hires are down. So are job openings. But turnover is also down: layoffs are about back to normal, but quits are way down.