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.

Wednesday, February 17, 2010

Exam 1 Comment 2: Is Growth Just a Positive Average of Business Cycles?

I know – my title is kludgy.

One way to think about growth is to build it up from business cycles. So, you might assume that expansions and contractions/recessions are mirror images of each other. But, if expansions are longer (they are, on average, about 3 times as long) then on average the economy will grow.

This is not correct. And, it can lead to the presumption that the way to get an economy to grow is to encourage expansions and discourage contractions – that’s the Keynesian idea.

Instead, we need to recognize that the baseline is growth. The business cycles are then the deviations from that baseline.

This view is consistent with how the math of compounding works – and thus the use of natural logs and differences to help visualize the data. It also leads us to trying to explain the baseline first, and the fluctuations second.

When was the last time you heard a politician or pundit argue that we need to increase baseline growth, even by a tenth of a percentage point? You don’t hear that, but you should: it would make our children richer.

Exam 1 Comment 1: Do Countries “Compete” with Each Other?

I mean “compete” in the economic sense here.

The answer to the question in the title is no.

It’s common to claim that the answer to this question is yes, and I suggest that a lot of policy mistakes are made because of that.

What governments actually do is keep score – usually with GDP, but also with stuff like trade deficits/surpluses, and balance of payments. They also judge winners and losers (both countries and policies) based on those scores.

Firms clearly compete with each other, even across borders. People do to, but perhaps not as seriously.

But, countries are not single entities for the purposes of most economic decisions. Instead they are collections of things we count together as a group.

When we talk about a country competing with another country, what we are really talking about is a multitude of individual competitions that probably are not managed by “the country”.

This is akin to claiming that a country won the Olympics. People do this, but we all know it’s kind of child-like to believe this claim.

Unfortunately, when it comes to macroeconomics, many people don’t think twice about this mistake. This is why trade protectionism is an easy sell to voters: “our team” is going to (actively) do something to “their team”. This is in spite of the fact that trade protections are largely transfers from our consumers to our producers.

Monday, February 15, 2010

Quality of Life: North Korean Edition

This article is mostly not about macroeconomics, and is therefore not testable.

Having said that, it is a good introduction to how you should measure quality of life.

This is a squishy subject, about which many people BS.

They shouldn’t. It’s easy.

You just have to ask easy questions. Did you have children that should still be alive? Didyou have parents that should still be children alive? Did you have brother, sisters and spouses who should still be alive? Are you in physical pain? Do you have any unhealed injuries? Do you have all your teeth (or even better, did you have to have your wisdom teeth removed because the others didn’t rot as fast as Mother Nature intended)? Are you hungry? Do you have enough shelter? Are you warm enough in the winter? Can you avoid the heat in the summer? Can you move to improve your condition? Do you know where your friends are? Are you afraid? Of the night? Of the day? How much complete nonsense are you required to profess a belief in by people who are supposed to look out for you?

So … check out this piece in Slate by Christopher Hitchens about North Korea. In particular, the bit about height on the second page, and the link to the photo.

N.B. the photo link was bad on Monday. You can use this one of the lights of civilization at night – in particular, zoom in on North Korea and/or Cuba. These are places with 10 times as many people as Utah crammed into a smaller area.

Sunday, February 14, 2010

Blaming Bush (When We Should)

To some extent, if we don’t like the Obama administrations fiscal policies, we should look at Bush – who partly laid the groundwork for the Democratic rise.

Paul Kedrosky of Infectious Greed did this, and shows that if the Bush administration and the Republican controlled Congress had held spending to 4% (a little tighter than inflation plus population growth – so approximately what a fiscal conservative would have done) Bush would have achieved Clinton-sized surpluses in 2006 and 2007, and the federal budget would have still been in surplus in 2008.

Nothing like a counterfactual to focus thinking.

Friday, February 12, 2010

How Do We Measure the Uncertainty of Government Finance?

Greece is in trouble, and there’s been a bit of a run on Portugal.

Both of these reflect the doubts of private investors internationally about the national public management in these countries.

Governments are financed with bonds, which are owned by private investors. When those investors get nervous, they sell those bonds, driving down the price, and driving their interest rate up.

There are two ways to measure this risk. The direct way is to look for prices for “bond insurance”. A lot of this data is proprietary (i.e., hard to come by at SUU). The indirect way is to look at interest rate spreads between similar bonds issued by two different countries.

The New York Times piece entitled “Fraying at the Edges” showed a plot of those spreads.

Greece is so bad (the top one) that it’s label is off the chart.

The Times doesn’t make it easy to steal their chart to put in this post. For perspective, the peak to the left of the chart is from last summer. So, Greece hasn’t been in good shape the whole time, but it’s gotten a lot worse over the last 3-4 months. Portugal’s problems are much more recent. The dashed horizontal lines indicate spreads of 1% over German bonds — so you get about 1.5% more by investing in Ireland and Portugal. Greece’s spread is around 4% right now.

One example of the direct method is to find an article that looks at the price of credit default swaps (CDS’s). Here’s one about Greece from Business Week.

A credit default swap is a derivative you buy that pays you the full value of a bond if the government defaults on it. If the government doesn’t default, you get nothing. Currently, to insure a Greek bond for 5 years, you need to shell out about 3% of its face value.

Unmeasured GDP

GDP doesn’t measure what people don’t want measured: typically illegal, or at least underground, activity. We used to call this the black market, but that’s not politically correct. Now we call it the shadow economy.

In the U.S. it can be hard to visualize how big the shadow economy is in other countries; relatively speaking, we’re girl scouts when it comes to hiding our affairs from the tax man.

The Wall Street Journal piece entitled “Tax Evasion Dogs Greece” has a table showing the size of the shadow economy in various developed countries.

Not surprisingly, it’s large in the PIGS or the PIIGS, and much smaller in G-7 countries (for example, it’s 22.3% of GDP in Italy, but only 10.6% in the U.K.). Part of this is certainly cultural in these countries, and part of it has to do with institutions that are not as well developed.

One important consideration for these countries currently, is how they are going to service their national debts. Tax revenues are the main source, but how do you tax the shadow economy.

There is way … but it’s a politically uncomfortable way: inflation.

Since shadow economies run largely on cash, and since inflation reduces the value of cash, it is in some sense a tax on the use of cash, and therefore an effective tax on the shadow economy.

The intellectual hurdle you have to leap to understand this is figuring out where the money goes. Inflation takes value away from people’s wealth held in cash. But, it can’t change the overall wealth of the economy (at least if people don’t flee the country with their stuff). So, what must be going on is that inflation is a tax/transfer scheme (like social security). But … inflation takes from those who hold their wealth in cash, and transfers it to those who hold their wealth in other assets.

Often, we assert that countries are mismanaged because they have both 1) a big shadow economy, and 2) a lot of inflation. But, really these are two faces of the same issue.

Thursday, February 11, 2010

Stationary Bandits

A few weeks ago I briefly mentioned Mancur Olson’s argument that government is like a stationary bandit.

Here’s what Don Boudreaux of Cafe Hayek wrote to the Washington Post about one of the best stationary bandits - the late Representative Murtha:

Your favorable front-page remembrance of the late U.S. Rep. John Murtha inadvertently testifies to the abysmally low standards to which politicians are held (“John Murtha dies; longtime congressman was master of pork-barrel politics,” Feb. 9).  By your own account, Mr. Murtha was the “King of Pork.”  He was known for skillfully using Congressional procedures to earmark funds for his district – that is, to prompt Uncle Sam to take money from Americans at large and give it to the relatively small number of Pennsylvanians who elect Mr. Murtha to office.

His justification? “I take care of my district.”  Nothing here about spending taxpayer money wisely; nothing about the general welfare; nothing about principles or fiscal responsibility.

If Mr. Murtha on his own had traveled the country picking pockets, robbing banks, and burgling houses, only to bring the booty back to western PA and share it with his friends, he would have been rightly despised as a common criminal.  But because Mr. Murtha joined forces with persons having similarly questionable morals, who together pass off their thievery as “lawmaking,” he’s celebrated in your pages – celebrated for doing, save on a grander scale, exactly what is done by common thieves.

He’s got another name for this sort of person: brutes in suits.

Friday, February 5, 2010

Powerpoints from Friday’s Seminar

Bill Brennan’s Powerpoint presentation file – on the value of personal branding - is on the G drive.

Unemployment Rate Way Down

It dropped to 9.7% in January.

It’s not unusual for it to bounce around a bit, and we can’t guarantee that it won’t get worse again.

But, it’s also distinctly possible that we are seeing the first of several big drop that this rate will take as it falls off it’s peak value.

Remember in class I remarked that it wouldn’t be unusual for the unemployment rate to come down a third half-way towards the natural rate of unemployment (say to 7 or 8%) before the labor market tightens up, and the rate of decrease drops.

Portugal, Greece and Contagion

Last week it was Greece.

This week it’s Portugal.

Portuguese bonds and shares came under fire for the second day running as concerns over sovereign debt spread from Greece to other high-deficit countries in the eurozone.

The Lisbon stock market fell almost 5 per cent on Thursday, the biggest daily fall since November 2008, and bond yields rose to new highs amid doubts over the ability of Portugal to consolidate its public accounts.

The cost of insuring Portuguese debt against default also rose to a record high.

In international finance this phenomenon is called contagion: one country gets into trouble, spooks its debtholders, and they start bailing out of other countries they view as poor credit risks.

Also, bear in mind that when I mentioned the PIGS, I wasn’t picking on those countries. PIGS is a cute and easy to remember acronym, but no one would use it at all if Portugal, Italy, Greece, and Spain weren’t all in the same sort of financial positions.

Wednesday, February 3, 2010

Country and State Bond Ratings

Cute piece entitled “U.S.A.A.A.” by Ben Schott (author of much bathroom reading) in the February 3 issue of The New York Times on the bond ratings of countries and states.

In the top category: both the U.S. and the state of Utah.

In the bottom category of states: California. Interestingly, California is rated one level above Greece, which is trying to fend off a sovereign default.

Outlawing Macroeconomic Models

Arnold Kling of EconLib:

…The scientific basis for the sort of macroeconometric models that I learned to work with early in my career has been in doubt for thirty years. In that time, I cannot recall seeing a single peer-reviewed journal article that uses such models. And yet, those are the models that the Fed, the CBO, and private consulting firms use to make forecasts and assess the impact of stimulus measures.

The text for our class does a better job of this than many, but a lot of the models that have been pushed to later chapters fall under this criticism.

Tuesday, February 2, 2010

Obama Is NOT Turning Populist

Read the whole Greg Mankiw post with the inside scoop.

I’m not claiming that this letter came from a big and powerful person in the Obama White House. But, it is worth pointing out that Mankiw is probably on a first name basis with every single one of them.

Monday, February 1, 2010

Krugman Does a Matched Pair for Banking

Paul Krugman’s February 1 column in The New York Times entitled “Good and Boring” compares Canada and the U.S. to get a sense of what might be the cause of the financial crisis.

The point is that when Canadian and U.S. experience diverge, it’s a very good bet that policy differences, rather than differences in culture or economic structure, are responsible for that divergence.

First, the similarities:

Both were confronted with the same flood of cheap goods and cheap money from Asia.

But the outcomes were different:

In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened.

What’s unimportant?

  • Interest rates – both countries kept them low
  • Big banks – relatively speaking, Canada’s banks are bigger

What’s important?

  • Lending practices – Canada has more protections for borrowers
  • Leverage – Canada allows banks a lot less
  • Diversification – Krugman doesn’t mention this, but the flip side of Canada’s large banks is that they are better diversified across that nation

There’s a great deal of similarity here to the arguments that I’ve made in class that national features – like low interest rates – don’t do much to explain why Nebraska isn’t having much of a recession at all.

Forgiving Haitian Debt

One of the ideas being floated around is that Haiti’s problem is how much debt they owe, and how big their payments are.

Except that all of Haiti’s debt was cancelled a few years ago.

The upshot of this is that if “the poor’s” problems aren’t caused by the rich, then perhaps the poor’s problems are that the rich merely exist.

Hat tip to Tim Worstall.