Friday, December 30, 2011

Quote On How Economists Measure and Compare

Don Boudreaux quotes David Friedman’s 1996 book Hidden Order:

Economists are often accused of believing that everything  – health, happiness, life itself – can be measured in money.  What we actually believe is even odder.  We believe that everything can be measured in anything.

There you have it: it isn’t about how we measure, it’s about the fact that we measure comparatively: everything is relative.

That actually might be a test for whether someone you’re arguing with is open to the economic way of thinking, or whether that mental door is already closed: do they object to making certain relative valuations?

In a nutshell, that’s the problem with our two measures of poverty: absolute poverty is measured by comparing to a standard of what someone had, while “relative” poverty is measured by comparing only to those we can see right now.

In a nutshell, it also addresses the political problem about how to interpret the scale of Obama’s stimulus package. Is it large relative to some standard stimulus package. Yes, so the Republicans are pushing something analogous to absolute poverty. But, Is the Obama stimulus large relative to recently observed stimulus packages (like Bush’s). Not so much. Thus, the Democrats position is more akin to relative poverty measurement.

Wednesday, December 28, 2011

Does America Tax the Poor Too Much?

Relative to other rich countries, the answer is no.

Not surprisingly, America taxes both the rich and poor less than other countries.*


The green panel on the left shows that America takes less from someone making $25K than any other G-8 country except Japan, and the difference there is $50 per year.

The panel on the right shows that America does not tax the rich as much as other countries.

You can also get some interesting information about progressivity from the two charts. A rough measure of that is the difference in the (average) tax rate shown on the two charts. A bigger difference shows a more progressive tax system:

  • U.K.: 22.3%
  • Italy: 21.1%
  • America: 20.7%
  • Canada: 20.1%
  • Japan: 18.8%
  • Germany: 16.6%
  • France: 16.2%
  • Russia: 0%

Not surprisingly, England tops the list: that’s why all their rock, movie, and sports stars live in other countries.

The original source data is here, and here’s the table of all 19 countries surveyed:

* This chart shows strictly income taxes. In Europe, the wide use of VATs changes the picture, while the wide use of sales taxes in the U.S. will do the same. Also, international comparisons like this are always fraught with problems because of the relatively larger burden placed by states in America, which if often not included in international comparisons.

Do the Rich Pay More Taxes?*

In America, yes they do.

And compared to other developed countries, the rich pay a bigger share here.

The chart on the left shows the proportions of taxes paid by each quintile of the income distribution: the share paid by the rich has always been big, and is getting bigger. This is mostly by reducing the share of taxes paid by those in the 20th to 60th percentiles: the lower middle-class.

The chart in the middle shows the share of pretax income by quintile. Yes, there is a moderate trend of the rich getting richer, but it is not as big a trend as that of “the taxed getting taxer” or … um … something catchier than that. There aren’t any big losers in income, but the biggest is the middle fifth of the population.

Those two charts establish my first statement. The chart on the right addresses the second statement. When we divide the share of taxes paid by a quintile by the share of income that it brings home, we see that the taxes are more disproportionately paid be the rich in America.

* There are a couple of caveats to this. First off, this is only income taxes. The rich pay a lot of other taxes too, but they also get their cash flow from a lot of other sources that aren’t taxed as income. Even so, most of our discussions about “making the rich pay their fair share” focus on income rather than cash flow. Second, this ignores that most of what makes the tax burden in America heavier on the poor is that our FICA is taken out of (primarily paycheck) income and has a cutoff in the low 6 figures.

Why Is Macro So Hard: The Bait and Switch About What Government Does

One of the big problems in 1) understanding macroeconomics, and 2) understanding politics, is getting a handle on the magnitude of the bait and switch going on.

More than ever government claims that it is “doing something”. But, more than ever that claim is just a fib: most of what our government does is send out checks to people.

This is drawn from David Wessel’s column in The Wall Street Journal entitled “Two GOP Leaders Differ on Spending to Fund Research”, but you shouldn’t regard the whole article as required reading.

Friday, December 23, 2011

Why Is Macro So Hard: Do Policymakers Care That They May Not Know What They’re Doing?

Karl Smith, writing at Modeled Behavior:

… Because, I am a soulless technician who will faithfully advise anyone and everyone who asks I see the back rooms of opposing lobbyists all the time.

Here at the state level I can safely say that virtually no one has any idea what they are doing. That is, for the most part the lobbyist do not know and indeed are not particularly interested in what is in the best interest of their clients.

Further, this seems to stem from the fact that the clients are not particularly interested in what is in their best interests.

What they are very interested in is whether legislation is pro them or anti them. However, if you begin to talk about the economy as a complex system full of unintended consequences where anti legislation could be in their best interests their eyes glaze over.

Moreover, a very large number of business lobbyists are not even that interested in efforts that are pro or anti their business. They are more interested in legislation that is pro-business in general and that they perceive as being fair.

There are some notable exceptions but I will not name names.

My sense is that there is a huge but odd policy lesson here. I am still working to untangle what it is.

I like to think of this as the favorite team effect. For many people, correct and incorrect are not important when it comes to their favorite team: think about how Americans feel about their own Olympic sports teams.

In policymaking, what be most important to the positions people hold is whether they are perceived as being pro or con. Once the evidence, as perceived, starts to tilt towards the pro side, the task becomes to accentuate the pros and diminish the cons.

Thus, Republicans come to be in favor of essentially all tax cuts. And Democrats come to be in favor of essentially all social programs.

Thursday, December 22, 2011

Why Is Macro So Hard: What Passes for Expert Advice

I am not making this up.

After a marathon session of decorating cutouts for Christmas, my family — covered with specks of frosting and and stray jimmies — went to McDonald’s to scarf dinner. Because we were exhausted and surly we were blankly watching the TV news programs.*

Anderson Cooper 360 was on. This is, allegedly, a serious cable news magazine.

They were discussing the troubles Republicans and Democrats are having over extending the payroll tax holiday.†

So, they turned for expert advice to … wait for it … John Paul DeJoria … the man most people think of as “Paul Mitchell” after his haircare products.‡

And my wife blurts out … in McDonald’s … in front of the kids … “Are you f***ing sh***ing me!”

She has never taken a macroeconomics class, but is certainly aware that if you want expert advice on macroeconomic policy, you should probably talk to a macroeconomist or policy advisor first.

* I can see why the news is always on in airport concourses, but of all places, why is the news always on in McDonald’s?

† Macroeconomically, the payroll tax holiday is … kind of stupid. What are we most worried about: people who don’t have jobs or people who do? Most people say the former. And what do we think is the cause of people being without jobs: because no one is hiring, or because most people don’t want to work? Again, it’s the former. The payroll tax holiday addresses neither of those problems. It is a holiday on the collection of some taxes that are withdrawn from paychecks. So, it is only available to people who work, and then helps most the people who get their income primarily from salary and wages (which are the only kinds of income from which these taxes are collected) rather than net business income. So, it’s a tax that is labeled as helping everyone, when in fact it is a tax targeted to help people who already have jobs but who’s primary focus is not employing others. In sum, it’s a double fail. Having said that, like most tax cuts, I think the money is probably better spent by households than by government, so there are some positives to it. Interestingly, when the payroll tax holiday was originally proposed by macroeconomists, it was a tax break on the contributions that employers make on behalf of their workers, and it would have helped the two groups in trouble from the top of this paragraph. But, the idea has been perverted.

‡ In his defense, Mr. DeJoria is an extremely successful businessman, who has been trying to garner media attention as someone whose life experiences are indicative of someone whose perspectives and opinions should be taken seriously. Fair enough. I think he should be trying to get on Anderson Cooper 360. I just wish the show’s producers took their jobs more seriously.

European Debt and GDP Infographic

This graphic is easy to figure out, but the colors bug me (click it to enlarge).

Countries are ordered from smallest to largest, with the blue square indicating the size of the countries GDP.

The countries debt/GDP ratio* is then plotted as a red square, who’s area is the country’s ratio times its GDP. Orange blocks indicate countries who’s debt/GDP ratio exceeds 100%.

This does a good job of highlighting why Greece and Italy are problems. Portugal too. It’s not so good on Ireland (which has gotten better), Spain (which has also gotten better, but not that much), and Belgium (which isn’t really on anyone’s radar screen yet).

Belgium is an interesting story. Maybe they should be a problem that people talk about. But they’ve had an interesting problem: they have a parliamentary government, had an election, no one could form a majority coalition, and they went without a ruling party for almost 2 years. This makes me wonder if no one is worried about Belgium because there was no Belgian government to whine about how awful things were. That’s a scary thought.

* The debt/GDP ratio is a popular, but problematic, measure. National debt is like the balance on your credit card or mortgage. GDP is like the size of your paycheck. You’d never compare the two for a household because the one is a stock variable and the other is a flow variable. For example, my debt/GDP ratio is much higher than the typical student’s because I have a mortgage on a house big enough for a family. It’s better to do a stock to a stock comparison (like debt to assets on a balance sheet) or a flow to a flow as on income statements (like debt payments to GDP). If you dig through the news, the details are always about Greece’s or Italy’s debt payments that are coming due.

By Severino, via Information Is Beautiful.

The Eurozone Bubble

This tool is more fun than informative. It shows every country in the Eurozone as a “water balloon”, and the Eurozone itself as a box. Bigger bubbles indicate countries with more debt for their size.

When you push the small water balloons with your mouse, not much happens. Now try pushing Greece.

Via Information Is Beautiful.

Slide Show Explaining the Ongoing European Crisis

This is from The Financial Times: it’s a brief slide show explaining why we’re so worried about Greece.

Wednesday, December 21, 2011

Interactive Debt Crisis Chart

You have to click through to play with this one from Krist at the University of Maryland.

Krist is a computer science major, so this is heavy on programming difficulty, but a bit lighter on economics.

The chart shows three variables: debt/GDP on the horizontal axis, deficit/GDP on the vertical axis, and real per capita GDP by the size of the bubble. All of those are explained below the chart, but not too clearly.

If you click on either a flag or a bubble, the chart maps out the movement of the country through the years.

Alternatively, you can use the slider at the top to play a movie.

This year’s problem countries are Greece and Italy, and it’s pretty easy to see that they are away from the pack of other countries. The problem countries of previous years: Spain, Portugal, and Ireland have at least toyed with being part of the pack.

In a nutshell, the current problems in Europe is that the countries in the pack are having enough trouble managing their own fiscal problems, but they are tied to countries that are trying to play by different rules, and this isn’t helping.

Economically, I think the vertical axis variable is fine.

The horizontal axis variable is popular, but not one of my favorites. It actually shows something like a household’s credit card balance divided by paycheck size. That’s interesting, but not as useful as credit card payment divided by paycheck size. For Greece, the problem since summer has been the size of their payments, not the size of their debt (even though the latter isn’t good).

The bubble size is also somewhat misleading in that Luxembourg has the highest value (the biggest bubble). Technically, this is true, but that is mostly because of rich French and German citizens parking their money just over the border.

Via Information Is Beautiful.

Sunday, December 18, 2011

PIGS Corruption

The PIGS are Portugal, Italy, Greece, and Spain.*

You can spot the PIGS on this map of corruption perceptions.

* If you see a second i as in PIIGS, they are including Ireland. This was in vogue in 2008-9 when Ireland was in the same sort of trouble, but is out of vogue now that Ireland seems to have made good choices which have led to good results.

“Economics Is Organized Common Sense”

That’s a quote from Jerry Kenley, the TA who inspired this year’s Nobel Prize co-recipient Tom Sargent as an undergraduate at Berkeley.

Saturday, December 17, 2011

Scott Sumner Uses the Asymmetry Argument

Chris Fawson at Utah State convinced me several years ago that taking two sides of an argument that are symmetric, and claiming they are asymmetric is both a common failure and a common justification for bad policy analysis.

Scott Sumner makes precisely this point about the (largely private)financial crisis in America and the (largely public) sovereign debt crisis in Europe.

Banks pour huge amounts of money into one particular asset class.  They are encouraged to do this by public policymakers, although there is some dispute about whether that was the main reason for their decisions.  These assets have a long tradition of doing well, although a close look at the evidence would have raised red flags.  The asset market in question suddenly takes a big dive as default risk increases sharply.  This drags down many large banks, forcing policymakers to provide assistance.

What have I just described?  The sub-prime fiasco or the PIGS sovereign debt fiasco?  I’d say both.  I’d say these two crises are essentially identical.  (I should clarify that by “essentially identical” I mean in essence, not in every detail.)

Of course the sub-prime crisis came first, so let’s consider the dominant (progressive) narrative of the sub-prime crisis.  If you read the mainstream media you will see it described as a sort of morality play; the evils of deregulation, which allowed the greedy big banks to take highly leveraged gambles with other people’s money, and then off-load the risk on to both taxpayers and unsuspecting buyers of MBSs.  Or something like that.

Obviously it would be impossible to tell a similar story for the sovereign debt crisis.  No regulator in his right mind would ever contemplate telling big banks not to buy European sovereign debt because it’s too risky.  Indeed the previous attempt at regulation (Basel II) encouraged banks to put funds into those “safe investments.”  Blaming the euro crisis on deregulation doesn’t even pass the laugh test.  The criminals were the regulators themselves.  Is the term ‘criminal’ hyperbole on my part?  Not at all.  Suppose Enron executives had used the same accounting techniques as the Greek government.  They’d all be in jail.  And as for Berlusconi, what can one say about a leader who continually passes laws exempting the Prime Minister from the very crimes he was accused of having committed?  As Keynes said:

Words ought to be a little wild, for they are the assaults of thoughts on the unthinking.

So here’s what I wonder.  Assume the eurozone crisis was obviously not caused by deregulation and greedy bankers.  Then if the sub-prime crisis was basically identical, at least in its essence, how can deregulation be the root cause of the former crisis?  I’m not saying it’s logically impossible, but doesn’t it seem much more likely that there’s a deeper systemic problem, which transcends this glib cliche?

To return to Fawson, it’s very unlikely that the solvency problems that are so nearly symmetrical in the two financial situations can be attributed so asymmetrically.

Unless, of course, the morality play is really important to your ulterior motives. Gee … ya’ don’t think.

Hat tip to Café Hayek for publicizing this point.

P.S. Love the Keynes’ quote.

Thursday, December 15, 2011

New Unemployment Claims

As recently as early fall we were hearing a lot of nonsense about a double-dip recession.*

Now, new unemployment claims have started dropping fairly consistently. I know enough not to immediately claim that the job market is going to improve substantially and soon. But, I also know enough to point out that we are in the right range of time since the run-up in claims for there to be substantial and sustained improvement. Check it out:

  Hat tip to Angus for the chart.

What I want you to look at is not the height or steepness of the peaks … that’s when we were in panic mode.

Instead, look at the width of the bases of the “mountains”. Here, the most recent recession matches up nicely with the last four recessions, and also with the regional quasi-recession of the mid/late 80’s (not everyone remembers that one, but it was pretty rough from Louisiana up through Idaho for a couple of years there).

I am not a charter! I do not look for patterns and then create explanations. Having said that, there is an explanation laying around that will produce that pattern. There’s good psychological reasons to think that any business fluctuation induced unemployment, by either nominal wage rigidity or zero marginal product, might take a few years to start clearing out as individuals’ self-image adjusts to reality.

* Duh … it can’t be a double-dip if the recession is already over. It might be a second recession close on the heels of the first one … but that’s a lot harder for clueless journalists to state.

Economics (from Despair Inc.)

And the really good economists gets bitched out for making those explanations even earlier (e.g., Milton Friedman).

Buy the poster and other goodies at Despair Inc.

Monday, December 12, 2011

Do You Get the Metaphor?

Does this help you understand the events of the last few months?

You meet an employed professional with a $300,000 house, $100,000 in the bank, a nice car, a few (illiquid) Renaissance paintings, and very nice shoes.  His name is Fabio.

He is $60,000 in debt, which is about equal to his yearly income.  An unanticipated ARM reset requires him to pay off that debt at a faster pace than expected, which means he must restrict his consumption.

He threatens to mistreat his longstanding girlfriend Angela, unless she works harder to maintain his previous level of consumption.  Angela refuses to help much, citing a false economic theory in defense of her position.

Fabio’s brother relentlessly attacks Angela’s false theory.  His cousin in Naples claims that Angela is obliged to help because she has benefited from being in the relationship.

Via Marginal Revolution.

How Arnold Kling Became an Austrian*


… I did not study the sacred texts [me neither]. I spent the prime of my career outside of the academy, experiencing the behavior of organizations. I saw first-hand the challenge that large organizations have in dealing with innovation. I saw the tenuous grasp that bosses have over their organizations. Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.

I came to Austrian economics because that is how business in the real world felt to me.

I’m not Austrian (yet), but I’d admit to moving in that direction because of – what I view as – an increasingly realistic view of human failings: I like people more, but I trust their decision-making less. That may be why I like them more: they know not what they do.

* Arnold Kling has a Ph.D. in economics from MIT, but didn’t go into academia. He worked on housing research for Freddie Mac before founding an early internet firm.

Saturday, November 19, 2011

North Dakota Oil Boom Immigration

There’s a big oil boom in western North Dakota. Using this interactive map from, I charted immigration into Williston, North Dakota for 2009 (the latest year available).

With it, you can start to see the boom starting to reach out across the country.


I can only imagine what this looks like with 2011 data … considering I have an MBA student blogging about his experiences as a wage migrant to Williston.

Immigration and Emmigration

Here’s a very cool interactive map at that shows, by county, where immigrants came from (in blue), and where emmigrants went to (in red).

Here’s Iron County in 2005.


You can clearly see the inflows following I-15.

But, here’s 2009 (the latest year available):


What I find interesting is that the only place consistently drawing people from Cedar City is the Wasatch Front.

N.B. Also note the number of people moving to Vernal for the gas boom.

Sunday, November 13, 2011

Bad, and Stupid, News

The European Financial Stability Facility — the organization that is supposed to bail out Greece and others — can’t sell enough bonds on the open market, and has had to buy them itself.

This is a tragedy waiting to happen. You are being warned.

If a private firm was doing this, there would be panic inside that firm, and investors would be bailing out of its equity. Underwriters and investment banks earn their keep, in large, by making sure that this almost never happens.

By contrast, the EFSF — which is only 18 months old, and was created in response to the previous cycle of predatory borrowing in Europe — is an organization that is supposed to prevent this happening for whole countries.

This is analogous to:

  • Having a friend with an addiction problem,
  • Getting a group of friends together to help your addicted friend out,
  • And being so codependent yourselves, that no one will help you,
  • And then having covered your a**es so well in the first place, that it isn’t news to most people that you’re in trouble too.

Talk about rationalization crossing over from neurosis to psychosis.

Tuesday, November 1, 2011

Kauffman Report

Word clouds from the Kaufmman Foundation’s quarterly survey of macroeconomics bloggers, reposted almost completely from Tim Kane’s Growthology.

These are drawn from (open) responses to the same question, asked each of the last six quarters.


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Monday, October 31, 2011


Political Calculations provides this chart:

It shows inequality as measured by the Gini coefficient for the U.S. Higher is more unequal.

Individuals tend to have far more unequal income than families or households. This is just measuring the obvious truth that one of the reasons for forming families or households is so that individual income can be more unequal: this is what it means to care for someone young, old, or disabled. So, the red line should be at the top. By the same token, households should be more unequal than families because families tend to be more likely to be caring for the young, old, and disabled.

Now, look at the trends. Individual income inequality is improving, family and household inequality is getting worse. How can that be so?

What you’re seeing here is that inequality is about how people form households and families. The people getting paid are more equal than before, but the households and families they live in are more unequal. The reason for this is the agglomeration of richer people together and poorer people together … not the winner-take-all society.

Saturday, October 29, 2011

The Romance with Small Business

Matt Yglesias riffing on Jared Bernstein I think, to me the fact that if small firms were so fantastic Italy and Greece would be the economic superstars of the western world:

The Republicans have had a crush on small business for about 20 years (yes, they always did, but it’s gotten to be an unhealthy crush).

They need to start thinking about this more like the income distribution: there’s probably something wrong with a small business that isn’t a medium-sized business the next time you check up on it.

Thursday, October 27, 2011

How Much Is Income Inequality and How Much Is Effort Inequality?

Mark Perry point out that the rich* bring in 15 times as much income as the poor. But, the rich also have 5 times as many jobs, making the extent to which their income is unequal 3:1 instead of 15:1.

Note that students want a premium for effort included in their grade when it might help them, but that the tax code doesn’t allow households to discount for effort when it might help them.

* The rich are defined by the average household income of the top income quintile, and the poor by the average household income of the bottom income quintile.

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How Fundamentally Human Are Property Rights?

How about this: 3 year olds understand property rights.

And not just their own property rights: they apparently understand this it is their duty to protect the property rights of others from abuse.

I argue in my macroeconomics classes that broad societal acknowledgement of this point is one of the things that caused the growth miracle of the last 3 centuries.

Dave Elsewhere 2

Got an hour? Here's a video of the presentation I did in a Pizza and Politics session for the Leavitt Center. I'm sorry that it is "sideways" ... this was an unofficial video taken by a student in the front row. The topic is the national debt.

Dave Elsewhere 1

Here’s an op-ed I wrote about the current economic situation for the school paper back in August.

I didn’t formally transfer copyright, so the can sue me (Winking smile)for reprinting it below.

I’d like to touch on three topics.

First, how is the economy doing? The answer is that it’s OK, but not good.

We had the worst recession in 25 years or more, but it’s over. We’re now into the third recovery in a row that has started out weakly.

How weak? If we grade the U.S. economy with the same grade distribution that SUU students earn, over the last eight quarters the economy’s gotten 3 A’s, 2 B’s, and 3 C’s. If you’d be happy with a 3.0, you should be happy with the economy.

Secondly, if the economy as a whole is doing OK, why is there so much unemployment? Here, we have to delve a little deeper. It turns out that hiring and layoffs were out of balance a few years ago, but are in balance again, and they have been for many months.

So how can unemployment still be high? One part of the answer is that the normal turnover of people leaving for better jobs and creating openings in their old jobs is still below normal. The second part is that the longer a person is unemployed, the harder it is to get them back into a job. Because they haven’t had a job for so long, they may look like trouble to a prospective employer.

If you’re a college student, the message is twofold. If you’re new to the job market, you’re probably in better shape than you think: the jobs are out there, and you have no history of unemployment working against you. But, if you’re not new to the job market, and have been out of work, the going gets tougher. You need to convince prospective employers that you are just as good as someone new to the market. And, your history of unemployment creates a void you have to fill with extra effort.

Finally, let’s talk about the debt scare, and our “toxic” political system.

This is an issue that is all about dealing with our spending commitments. The ugly truth is that politicians really don’t have that much control over their cash inflows from tax revenues and borrowing. There was no serious talk this summer about cash not coming in; rather, it was about knowing all too well how much cash had been promised to go out.

By and large, those commitments were not made by current politicians. They were made by people that were elected in the past, and who are often long gone. But, the key point is that they made commitments that current politicians have to try to honor.

This makes our political problems anything but toxic. These are discussions that should have taken place in the past. They didn’t. That was irresponsible, but it doesn’t make the current situation toxic. These are serious issues that our political parties should disagree about: one side wants to honor past commitments, the other side is worried about further committing future generations that can’t yet vote. Both positions are worth defending.

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Tuesday, October 25, 2011

Bailed Out by the Barbarians

Today's Frank and Ernest:

Of course, these days it’s the Greeks who are behaving barbarically.

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Monday, October 24, 2011

Sunday, October 23, 2011

9-9-9 Would be a Shift to a More Regressive Tax System

The Tax Policy Center* says that Cain’s 9-9-9 tax proposal will lead to tax increases for almost everyone in the middle and lower classes.

Via Greg Mankiw.

* The Tax Policy Center is a joint effort of the Urban Institute and the Brookings Institution, so it’s safe to say it’s left of Herman Cain.

The Real Bubble

Mark Steyn:

Whenever the economy goes south, experts talk of the housing "bubble," the tech "bubble," the credit "bubble." But the real bubble is the 1950 "American moment," and our failure to understand that moments are not permanent. The United States emerged from the Second World War as the only industrial power with its factories intact and its cities not reduced to rubble, and assumed that that unprecedented pre-eminence would last forever: We would always be so far ahead and so flush with cash that we could do anything and spend anything, and we would still be No. 1.

Via Cold Spring Shops.

Turning the Solyndra Debacle Upside Down

The end result of the Obama administration’s gamble on Solyndra, which Monday morning quarterbacks didn’t criticize until it went bad, is that it will make a conservative, reactionary bureaucracy more conservative and reactionary:

The real trouble with bureaucracies is not that they are rash, but the opposite.  … they universally show a tendency to “play safe” and become hopelessly conservative.  The great danger to be feared from a political control of economic life under ordinary conditions is not a reckless dissipation of the social resources so much as the arrest of progress and the vegetation of life.

This 90 year old quote is from Frank Knight, and I’m requoting from Don Boudreaux.

Friday, September 2, 2011

Kiva Connections

Kiva is a site for making peer-to-peer microloans. It doesn’t get more new school than that. Check out the video time-series map.

Intercontinental Ballistic Microfinance from Kiva Microfunds on Vimeo.

Economically, what gets me about this is that the funds appear to be going in the theoretically correct direction, based on marginal product: a loan can make the most difference in a place where someone is capital poor.

Yet, one of the big development problems of the last several decades has been the extent to which larger investments tend to move in the other direction: America is a sink, sucking in funds that could better be loaned elsewhere.

Via Marginal Revolution.

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Sunday, August 28, 2011

Low Technology

Growth theory teaches us a few things.

  • Growth through accumulation of capital is possible, but it has its limits.
  • Differences in per capita income across regions are too large to result from differences in capital. It must be differences in technology.
  • What people call high technology (e.g., cellphones) is transmitted easily across borders, and is unlikely to explain differences in per capita income across regions.
  • This leaves what I call “low technology” — that doesn’t transmit easily — to be the source of differences in per capita income across regions.

But what is low technology? Take a look at this video to get an idea:

This is a professional portrayal of the metaphor I use in class every semester: what would someone from a remote area of a developing region do if they were (benevolently) kidnapped, blindfolded, transported to the center of a Wal-Mart … and then told to shop? Would they even know where to begin? If the answer is no, it’s because of differences in low technology.

Via Kottke.

Saturday, August 27, 2011

Pitfall of the Invisible Balance Sheet

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

I would add that ignoring that balance sheet is also behind a lot of bad thinking about pollution. Pollution does do damage, but it’s to the balance sheet not the income statement (national income and product accounts) of a country. So, environmentalists have a legitimate claim that our economic gains are overstated, but the movement to “improve” GDP by subtracting this damage out is just bad accounting.

Pitfall of the Invisible Balance Sheet

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

I would add that ignoring that balance sheet is also behind a lot of bad thinking about pollution. Pollution does do damage, but it’s to the balance sheet not the income statement (national income and product accounts) of a country.

Sunday, August 21, 2011

Why Is Macroeconomics So Hard? The Christina Romer Quote

Stephen Moore:

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics."

Saturday, August 20, 2011

Long-Term Unemployment: A Modigliani-Miller Approach

Mark Perry of Carpe Diem (Via Don Boudreaux of Café Hayek):

The first principle of economics is that we live in a world of scarcity, and the second principle of economics is that individuals have unlimited wants and desires. 

Therefore, the second principle of economics: unlimited wants and desires, rules out any long-term problems of unemployment. [emphasis original]

I like this: stark and unrealistic.

Stark is a good way to move the discussion forward, particularly if it yields something unrealistic: because this means that what is included in the stark viewpoint must be relaxed to get something realistic. And the points that are relaxed tell us something about the real world.

The academic finance version of this is the Modigliani-Miller theorem. In short, it states that under certain conditions, the value of a firm is indifferent to the way it is financed. This is unrealistic, so it must be a relaxation of those conditions that leads to finance creating value.

I view Perry’s point in the same way: if long-term unemployment is a problem, it must be because either the problem of scarcity has been mitigated, or the problem of wants has been mitigated.

But … the latter is precisely what governments strive to do. They don’t really get rid of wants, but they clearly spend a lot of time trying to suppress them.

Think about this in terms of something like broadening the taxation of  internet transactions. This won’t actually reduce wants, but it will keep people from expressing them quite as freely … you know … by buying stuff. And that will certainly reduce the propensity of employers to hire additional workers, and perhaps lead to more long-term unemployment.

How Does a Collateralized Debt Obligation (CDO)Work?

CDO’s were blamed for a lot of the financial crisis in 2008, and the global recession that followed.

At SUU, our finance people don’t do a good job of explaining these instruments.

Here’s a good primer that serves two purposes: 1) it predates the crisis, and yet points out that even then people who should know better were pretending these things were snake oil when their investments didn’t work as planned, and 2) it has a short explanation of how they’re put together.

Tuesday, August 16, 2011

The Downgrade … A Week Later

So Fitch is not going to follow suit. There are 3 rating agencies, and institutional investors usually follow the majority. Since Moody’s is not going to downgrade at this juncture, S&P’s move … doesn’t count.

Greg Guttfield nailed it last week:

So, it's hard to judge this downgrade, because it's like getting a report card from a drunk teacher.

I mean - If these agencies were so smart, why didn't they do it sooner?

As Dana Vachon tweeted to me, Where were these "credit agencies" during the housing bubble?

My guess is, hot tubbing.

Can't blame them. Hot tubbing is fun.

Which means the downgrade was not a logical reaction, but a scolding meant to make everyone feel bad. [emphasis added]

Now, irrelevent ninnies like John Kerry are blaming the Tea Party.

But how can you blame them- when they got nothing they wanted?

The debt ceiling debate culminated in the highest debt ceiling bump ever. The spending cuts were like a fat guy forgoing the sprinkles on his half gallon of Chunky Monkey - and calling it a diet.

But I can see why the Tea Party is getting hammered on this.

No one represents them - for they are them.

Let me put it this way: the tea party is a principle, without a person.

Friday, August 12, 2011

What Republicans Want

Garett Jones:

… The modern GOP is all about preventing current tax increases, not future tax increases. As long as the GOP isn’t in charge the day the tax increase occurs, GOP voters won’t blame Republicans. That means we’ll just have to wait for Democrats to get elected so they can raise taxes to pay for all of the spending programs Republicans (and Democrats) voted for.

Wednesday, August 10, 2011

I’m Officially the Biggest Producer of Web Content at My School

According to a report from our university webmaster, I have more files in my website than any other faculty member: 9,822.*

That probably would not surprise a lot of my students.

It probably would surprise a lot of faculty and administration … who don’t seem to believe anything exists that isn’t a hard copy.

* For the most part, all neatly linked and organized too, going back through 21 semesters now, plus stuff from my years at UNO and Tulane.

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Sunday, August 7, 2011

Interest Rates Around the World

An interactive chloropleth of central bank (short-term) interest rates by country:


Federal Non-Defense Spending

Federal non-defense spending as a percentage of GDP:

Via Greg Mankiw.

Friday, August 5, 2011

Clear Thinking On Peak Oil and Macroeconomics

John Quiggin of Crooked Timber points out that oil per capita peaked out a long time ago, and at current prices at a yearly expenditure of under $500. How then can people decide this is something to worry about?

Via Marginal Revolution.

Thursday, August 4, 2011

Subsidizing Seniors

All of our government’s financing problems (heck — most government financing problems everywhere) are a result of voting for heavier subsidization of senior citizens.

In the U.S., the average payment to a senior is about $14K from social security, and $12K from Medicare.

That’s the equivalent of earning $13 per hour. That’s a decent paying full-time job in many locales … and easily beats what teachers start at around here.

Plus, it’s tax-free. The effective tax rate on someone with that much income would be on the high side of 5%, so roughly $14 per hour is the equivalent for a worker.

Something like 40% of the U.S. population survives on that amount or less. This means that a sizable chunk of the population actually gets richer when they stop working for good.

How’s the Recovery Going?

Excellent post from Calculated Risk, showing graphs of 4 series as percentages off their historic peak values. The 4 series are the ones the NBER focuses on when dating business cycle peaks and troughs. All show improvement since the trough, and all show that we haven’t returned to pre-recession peaks yet.

Wednesday, August 3, 2011

What a Difference

Yes, the budget deal of July 2011 is a step.

Yes, it probably is a step in the right direction.

Is it a big step? It depends on the scale:


I am not a believer that the target should be zero debt, so I am not advocating a policy that takes us to the bar on the right.

But, this does seem to be the desire of many people, so it’s useful to get a sense of scale: clearly the “huge” budget deal is not nearly huge enough.

Via Alex Tabarrok at Marginal Revolution.

Hayek Quote About Economics

Via Don Boudreaux at Café Hayek:

… It is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals – if by “Utopian” we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.

The cite is also quoted from Boudreaux’s post:

From page 19 of Hayek’s 1933 essay “The Trend of Economic Thinking,” reprinted in F.A. Hayek, The Trend of Economic Thinking: Essays on Political Economists and Economic History (Chicago: University of Chicago Press, 1991), pp. 17-34.

Note that this quote is now nearly 80 years old. That’s how long ago people recognized that the sort of economic nonsense that politicians use to appeal to voters was a problem.

Tuesday, August 2, 2011

How the Budget Deal Is Like TARP’s Successes and Failures

Keith Hennessey raises an interesting point: Obama wants liquidity, and fiscal conservatives want solvency.

The Tuesday deadline for budget negotiations is about liquidity (aka funding risk) – will the government have enough cash to pay its bills on time?

The government also faces solvency risk – will policymakers close the large and growing gap between spending and revenues? Will they cut spending and/or raise taxes enough to make the U.S. government a financially sustainable operation?

Both types of risk result from policy decisions made by our elected representatives. The short-term liquidity risk was created by conservative Members of Congress who refused to raise the debt limit without cutting spending. The solvency risk accumulated gradually as officials from both parties promised government benefits in excess of the taxes they were willing to impose.

This is interesting. The budget deal has clearly addressed the liquidity problem, and once again done very little to address the solvency problem.

How is this (broadly) like TARP?

What we wanted in the autumn of 2008 was a program that 1) addressed the immediate liquidity issues of the whole financial system, and 2) addressed the solvency issues of the residential real estate finance subsystem.

What we got was TARP (and other associated programs).

The quick pay off of most TARP money in 2009 showed that we did a good job with # 1.

The fact that Fannie Mae is still hemorrhaging left and right shows our government’s failure to adequately address # 2.

We should not be surprised that we got a lousy budget deal: it’s just more evidence that D.C. is hard-wired to be unable to separate liquidity from solvency issues, and is biased towards ignoring the latter.

Via Cold Spring Shops.

Cuts, What Cuts?

Here are the liberals:

Paul Krugman:

It will damage an already depressed economy …

Brad DeLong:

… Come Tuesday I will be forecasting a double-dip. Horrible for the economy. Horrible for America.

Both quotes were drawn from Kids Prefer Cheese. They also link to this chart of projected discretionary federal spending:

Note that this is not adjusted for inflation: it shows nominal growth averaging 1.9%, which beats just about any projection of inflation driven by actual data rather than judgment calls.

Wait a minute, those bars are rising! Spending isn’t being cut at all.  The “cuts” in the deal are only cuts from the CBO “baseline,” which is a Washington construct of ever-rising spending. And even these “cuts” from the baseline include $156 billion of interest savings, which are imaginary because the underlying cuts are imaginary.

No program or agency terminations are identified in the deal. None of the vast armada of federal subsidies are targeted for elimination. Old folks will continue to gorge themselves on inflated benefits paid for by young families and future generations …

From The Economist:

There is no balanced budget amendment, the cuts are less than the rating agencies want to ensure the continuance of AAA status and there is an element of "can-kicking" in the way the cuts are designed. Much is left to 2013, which will be a new Congress (and possibly new President); what one Congress can do, another can undo.

This is what America agonized over for the last 2 months. Spare me.

Saturday, July 30, 2011

Why It Is Not Crunch Time for the National Debt

America’s in a panic about Tuesday’s debt ceiling deadline (or maybe not).

Obama and the Democrats have once again painted the issuance of new debt as critical to keeping the sky from falling: raise the national credit card limit or else we’ll stop writing checks to grandma.

Not so.

The problem is that the national debt includes money the government owes itself and money it owes others. Only the latter puts a hard cap on spending. And all of the former can be freely spent by transferring it to the latter.

Here’s how it might work.

  • Social Security owns a Treasury bond (in the “trust fund”).
  • Social security redeems the bond, gets cash, and sends out its checks.
  • The national debt is now lower. If the Treasury needs to, they can issue another bond and sell it to the private sector to raise cash.

How big a factor is this? Check out the chart:

The data is a couple years old, but the essential point is that the government can spend the blue area (and the yellow and green too, with a little difficulty) without changing the national debt at all: that’s about 2 years worth of our national budget.

The core takeaway is that the outlays part of the government is not in any immediate trouble. Outlays are only in trouble because outlayers want them to be in trouble.

House Republicans have drawn a line in (unimportant) sand, in the hopes of a confrontation. Democrats have accepted a confrontation that is optional for them at this juncture.

What’s the strategy behind that?

Duh: you fight when you want to because you think you’re more likely to win than if you wait to fight when you have to.

You see … Democrats know their progressive spending wishes are on the way out, unless they throw a hail mary and connect with it. The debt ceiling debate is just a sideshow. The real battle is painting Republicans as the bad guys.

Redistribute Consumption Not Income

Scott Sumner makes an excellent point: progressives focus on redistributing income, when they really want to redistribute consumption:

Income really is the Achilles heel of the progressive movement.  The income statistics simply don’t mean what progressives think they mean–something like “resources available for redistribution.”  If you want something closer to resources available, you’d use consumption, or wage income.  If you combine wage and capital income in the same aggregate, you are counting the same resources twice.  This is deeply counter-intuitive …

… You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart.  But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard.  Where do people think the car factory comes from?  Or the Walmart building?  BTW, this has nothing to do with trickle-down economics, a theory I reject.  This is simple accounting.  Money put into investment projects isn’t available to boost living standards for the lower classes, unless you don’t do those investment projects.

Of course, this points to the core issue for redistributionists: they have to redistribute income rather than consumption because there just isn’t as much of the latter.

Via Arnold Kling at EconLog.

Friday, July 29, 2011

The Euro-Crisis Song

Current events, in a digestible form:

Via Kids Prefer Cheese.

Food for Thought: Why Do the Elderly Still Have Jobs?

Casey Mulligan raises two interesting points:

Here are the charts:

This shows that there are not as many people working in the summer this year as others … but there is still the same spike in employment. How are people getting all those summer jobs if there are no jobs?

This one shows that there are more seniors working now that there were during the peak of the last expansion (before you jump and say that they’re working because they have to, note that this is an index, and we’re only talking about a 2-4% increase — in line with routine population growth).

Tyler Cowen of Marginal Revolution points to the appropriate quote to explain this:

All else being the same, the market tends to create and allocate jobs for those people who are most interested in working.

Funny that.

Growth In the Low Accountability Sectors

Almost all new American jobs over the last generation have been in the nontradables sector:

The problem with that general idea is that nontradables are also immune from international competition. Tyler Cowen calls this the “low accountability sector”, while Arnold Kling calls it the “new commanding heights” of the economy.

I do have a major quibble with this though. It seems to me that the whole point of being in the tradables sector is to eliminate jobs through efficiency. Thus, the gross number of jobs created in the tradables sector might be huge, but they are constantly being churned in favor of new and different jobs. So, I’m not sure that this Schumpeterian sector is as underrepresented as it first appears.

Tuesday, July 26, 2011

Why You Need Big Piles of Newspapers You Won’t Read

Oh crap ... I'm one of those professors that requires students to read a newspaper.

Via Megan McArdle.

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UNbalanced Budget Amendment

Yes, you read that correctly.

Alex Tabarrok suggests an amendment to unbalance the budget, and I think it is a great one.

For years I’ve recommended a balanced budget amendment only if it required balance over a rolling window of no less than several years. The problem with this is that it ought to be several years — to avoid budget panic during a year in which the economy is in recession the whole time, but less than the number of years between elections — so that all elected officials would have to deal with it.

I think the problem with Alex’s suggestion is how to measure “good times”. With the NBER business cycle dates? With a real GDP growth rate rule (say 2% or above)?

How about this alternative: you can only raise taxes when the economy is improving, and you can only raise spending when it’s getting worse!

One good thing about the idea is that the predominance of positive growth periods in the U.S. would mean we’d predominantly be running surpluses.

Monday, July 25, 2011

Calling Robin Hanson

Robin Hanson is an economist who has theorized about what will happen to society if economic growth takes off because we start creating avatars that are capable of controlling and using capital the same way our physical selves do.

I wonder if last Sunday’s Doonesbury strip is hinting at this:


The response to this on the web is that it’s about the invisibility of the middle-aged in contemporary culture.

I see something deeper, with a totally different take on this one.

What if they're not invisible? Instead, what if they're in another part of the store?

Then who's doing the check out and the small talk? How about the avatars of Mike and Bernie.

How far off are we from being able to put our smartphone down on the checkout counter and have it make small talk, make minor decisions on our behalf, and pay for our groceries (and yell like crazy if someone else picks it up)? All of those things are actually possible right now.

Mike and Bernie could have been just out of sight chatting, or thumbing threw magazines, while a smartphone did the work for them. Then they just pick up the bag and go.

The clincher for me is ... who'd be the first in the strip to have this kind of tech? Bernie!

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Monday, June 13, 2011

Disingenuous Business Cycle Charts

Shame on The Wall Street Journal. Justin Lahart’s second page piece features three time series graphs comparing this recovery to earlier ones.

But it cherry picks the comparison set.

I am no great bellyacher about how weak this expansion has been: we don’t have a huge sample of expansions, and amongst the small sample we have, this one looks OK. Not great mind you, but passable.

Here’s the charts in question:

Note that they just happen to miss the recent recovery that might make this one look bad: the post-1982 one.

It’s pretty easy to say this recovery looks normal when you drop out the one that would make it look abnormally weak.

Read the whole thing. It’s in the June 13 issue on page A2, and is entitled “What It Would Take to Do a Double Dip”.

Monday, May 16, 2011

Solow Taking Solow Seriously

From EconLog:

… Referenced a talk by Bob Solow in 1991. It's quintessential Solow. The talk has his trademark sense of humor and his trademark clarity.

A few of his points:

4. He thinks that population growth in poor countries is the "largest single danger to sustainability in the world economy."

Friday, April 29, 2011

OK, So I Lied

One more video (but click the link 2 paragraphs down instead):

About 15 months ago, Russ Roberts of George Mason University* and Cafe Hayek came out with a rap video about the positions of Keynes and Hayek. This is the follow-up. The original was posted here last year.

This is a serious, albeit alternative, contribution to economics education. If you go to this site, you can view the video while reading the lyrics.

I’ve known this was coming out all semester … and always meant to post it … but it just came out this morning.

Since we’re past the end of class, neither video is required. But … I know how much you all love macro ;)>

* George Mason University, in the Virginia suburbs of Washington D.C., is the “economics blogging capital”. Faculty there write Marginal Revolution, Cafe Hayek, EconLog, until recently Overcoming Bias too, and syndicated columnist Walter E. Williams.

Thursday, April 28, 2011

One Last Post About “Low” Tech

A couple of last thoughts about technology. First, a funny video from several years ago showing that technology is a lot broader and more fundamental than most of us think:

Secondly, I didn’t have a chance to talk about the longer video in the “I, Toaster” post, but it is required for the final exam (you don’t need to know the details, so you can just put it on to play while you multitask). The point of this is not that toasters are complex, but that there is a huge amount of humanity behind the stuff you buy at Wal-Mart. That humanity is technology. When we dismiss a product as cheap crap, we’ve not only missed the point, but dissed the contributions of untold numbers of people. If their lives have meaning, then its embodied in the cheap crap, and we shouldn’t insult it.

Here’s a (funny and short) classic on that note about how our expectations are inconsistent with macroeconomic reality:

The only reason for studying macroeconomics is the overriding fact that the quality of your life has more to do with location of your birth than anything you do on your own.

This is embodied in that last result we obtained from the Solow model: that per capita income depends on per capita capital and aggregate technology, and that the (empirically confirmed) exponents make the latter much more important.

But, since high technology flows so easily across borders, it must be “low” technology — like how a book works — that doesn’t cross borders easily that is important.

So, it’s easy for us sitting in Utah to bemoan the priorities of the world’s poor: why do people in Chad have cellphones but not much else (and it’s not just Chad, that was this year’s example, but last year’s class had folks who talked about the same thing in Brazil). What’s important to the future well-being of people in Chad is not the high technology cellphones, but the fact that they use them to engage in a very old, and “low”, technology: talking to each other, and in particular, talking to strangers to expand their network of ideas. Briefly consider the article “Without His Mother’s Milk, a Haitian Boy Is Lost” from the April 25 issue of The New York Times, and ask yourself whether cellphones and/or Facebook make it more or less likely that a problem like this will persist. I assert that its less likely to persist because the great cultural contribution that America can make to the world’s poor is not Facebook, but that communicating with strangers is OK.

In that vain, consider these two posts. First, one about an experience I had finding a lost kitten’s home. The second is about the “Gates controversy” that Obama got himself into 2 years ago. I hope they help convince you that well-being isn’t about government macroeconomic policy, or macroeconomic exploitation by companies, but rather about the “low” technology of how your society functions. Macroeconomics isn’t, and shouldn’t be, about what the legacy media and politicians tell us is macroeconomics.

Thursday, April 21, 2011

Skynet Self-Aware?

This post is not required; but it touches on a subject Jimmy has been bugging me about all semester.

One of the problems with being a macroeconomist is the number of people who are convinced that the future is going to be worse than the present.

You can see this in science fiction. Most science fiction movies do not present a positive future as in Star Trek, but rather a dark and terrible future as in The Terminator series (see the photo below). Fifteen years or so ago, my wife noted that all these movies seem to feature open fires burning in steel barrels … so, using the brilliant imagination of an economist, I came up with the original title of open-fire-in-steel-barrel-movies for this genre. There’s a lot of them: Blade Runner, the Road Warrior franchise, the Alien franchise,Twelve Monkeys, Back to the Future II (the one where they go to the future), Brazil, Total Recall, Soylent Green, Escape from New York, The Running Man. Is that enough to make my point? Even movies where the future has a nice, clean veneer, there’s an underlying dark side: the Star Wars saga, Avatar, Demolition Man, Silent Running, The Matrix franchise, Logan’s Run, Robocop, or Wall-E.

And yet, for the vast majority of humans who have ever lived on this planet, the human race was better off when they were older than when they were younger.

In part, this is true because the vast majority of humans who have ever lived did so within the last century or two.  

But, it’s also true that for the vast majority of years of civilized human history people’s lives were just about the same when they were older as when they were younger.

For my part, I’m a person, not a year, so that last point is inconsequential. Many people don’t seem to feel that way though.

Anyway …

According to the mythos laid out in the The Terminator series almost 30 years ago, SkyNet became self-aware last Tuesday evening.

In 1984, this was the vision of the years after 2011:

FTNItK: The Terminator features thinking machines from the future. Skynet is the first machine in the future that becomes self-aware: it knows what it is, and it knows what it wants. Specifically, that it is not a human, and that humans are a violent threat. The problem is that Skynet is a Defense Department computer system, so it uses those capabilities to attack humans in the future, and for convoluted reasons, to find a way to attack humans in the past as well.

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Wednesday, April 20, 2011

David Leonhardt Wins a Pulitzer Prize

I keep telling you to read David Leonhardt’s stuff in The New York Times, even if your politics finds it painful, because he’s bright and insightful. Well, now he has a Pulitzer Prize to prove it.

The National Debt “Downgrade”

Standard and Poor’s signaled that they might downgrade their rating of US debt.

S&P is the largest rater of government bonds in the world. They have rated the US, and about 20 other advanced economies as AAA — their highest rating.

But, about 20 years ago, they started also announcing a signal of where the rating may be going. This is what changed on Monday — the US was downgraded from “AAA Stable” to “AAA Negative”. That’s why I put "downgrade” in quotes, because we’re still AAA (sort of). Here’s a chart for comparison:

These ratings are used by buyers of government bonds (typically other countries, central banks, insurance and reinsurance companies and pension funds) to decide how much interest they need to justify the purchase. So this “downgrade” will result in our government having to pay higher rates.

This “downgrade” is purely in response to political moves; most likely Obama’s unprofessional speech last week that pilloried Republicans in Congress for supporting Representative Paul Ryan’s plan to reduce the national debt. The “downgrade” can be taken as a sign that S&P has interpreted Obama’s speech as indicating that he is unwilling to make a deal with House Republicans.

It would not be correct to interpret the “downgrade” as a response to economic fundamentals. These are not good, but they simply don’t change that rapidly. Here’s the story we already know:

This didn’t change last week. Politics did. The top chart also shows that we’re not out of the range of other countries — like Canada. The difference is that our political situation is not currently favorable to improving the numbers.

This all came from a piece in Tuesday’s issue of The Wall Street Journal called “U.S. Warned on Debt Load”.

Tuesday, April 19, 2011

Nouriel Roubini On China

Nouriel Roubini is famous for constantly saying everything (economically) is bad, and getting worse. Sometimes he’s right.

I don’t tend to find his pronouncements interesting — I think he’s selling something … mostly himself.

But, he’s a bright guy, who’s famous for a reason. This past week he’s been ranting about China, and since I’ve used China as an example of the perils of unbalanced growth, I thought I’d link to his recent piece from Project Syndicate.

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

…All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.

The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.

Traditional explanations for the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle. Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong, Singapore, and Taiwan; they all save about 30% of disposable income. The big difference is that the share of China’s GDP going to the household sector is below 50%, leaving little for consumption.

Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters’ profits.

Low interest rates on deposits and low lending rates for firms and developers mean that the household sector’s massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates.

The article refers to SOE’s: State Owned Enterprises. We’ve talked about this a bit in class, but not in several weeks. The form of capitalism practiced in China is similar to fascism: politically connected people get access to equity stakes in “private” enterprises in return for political support. This is a system that can perform well for years (if trade is discouraged, as in Latin America for most of the 20th century) or decades (if trade is encouraged, as in Japan in the postwar period). But it doesn’t end well.

Monday, April 18, 2011

Where the Money Is

Allegedly, when Willie Sutton was asked why he robbed banks, he replied “That’s where the money is.”

This is pertinent to tax policy, and public opinion. Many people believe the rich should be taxed more. Fair enough. But, some people also think this will “solve” our government’s chronic shortage of cash. This is not the case.

The problem is that the distribution of income – while positively skewed, does not have a thick tail on the positive side. Rich people are indeed very rich, and might be able to pay more, but there aren’t that many of them to make a big dent in our federal budget.

The chart below appeared in the piece entitled “Where the Tax Money Isn’t” in the April 16th issue of The Wall Street Journal.

For comparison purposes, our Federal budget is in the neighborhood of 4 trillion dollars. Looking at the chart, if we completely confiscated all income earned by people making more than $200,000 per year, it would total up to … about … half of that Federal budget. Going further, and taking the next group – the one that includes my two full-time faculty household still wouldn’t cover the Federal budget.

Now, to be fair, this is taxable personal income – so it doesn’t add up to the entire GDP of the U.S. Perhaps half of GDP is not included in this chart, so my argument isn’t as sound as one might think at first glance.

Even so, there isn’t any sense in which the Federal government gets a large share of its revenue from sources outside of personal income. Yes, businesses get taxed, but on their taxable income, and not on their value added. And that value added is the major component of the GDP that is not shown above.

Doubting Macroeconomic Statistics from Authoritarian Regimes

I’ve touched a number of times on how you shouldn’t take at face value the statistical announcements of countries without a free press or viable opposition. Currently, this means China.

Thirty years ago, this meant the Soviet Union.

The guy who started pointing this out to people passed away this month.

Birman, who died on April 6 at age 82, was a Russian economist who emigrated to the U.S. in 1974 and predicted the collapse of the Soviet economy. Perhaps because he had served as a director of planning in Soviet factories, Birman had a profound distrust of Soviet statistics and believed its economy was smaller and could support far less nonmilitary consumption than nearly all Sovietologists in the West believed at the time.

… Birman was especially critical of the CIA and most Western experts for trusting too much in Moscow's official claims. For this apostasy, these Western elites ostracized and criticized Birman, saying that his views were by definition biased because he was an emigre.

That dismissal was unfair to Birman's scholarship, but it also had profound implications for U.S. policy during the last decades of the Cold War. The flawed CIA judgment that the Soviet economy was nearly as large and as wealthy as America's supported the view that the Soviet empire could never be defeated and so some kind of detente with Communism was inevitable.

Birman's insight that the Soviet Union was far weaker than it seemed from its military prowess was implicitly adopted by Ronald Reagan when he famously predicted in 1982 that "freedom and democracy will leave Marxism and Leninism on the ash heap of history." For that, Reagan was also reviled as a Cold War simpleton.

Birman stuck to his views and drew further scorn later that decade by predicting that Mikhail Gorbachev would lack the will to make the far-reaching economic reforms that were the only way to save the Soviet political system. As the world soon learned, Gorbachev's economic reforms were too little and the Soviet Union collapsed.

In a 2003 essay, "The Failure of the American Sovietological Economics Profession," John Howard Wilhelm recounted the debate between Birman and the CIA, concluding that "Given what has happened and what we now know, Birman clearly did get it right."

That the deaths of both Birman and Rusher have been so little remarked is a reminder that the liberal establishment will forgive intellectual dissenters for being wrong, but it will never forgive them for being right.

Friday, April 15, 2011

BRIC Summit Nonsense

This week’s BRIC* summit has been in the news. Breathlessly. Because … you know … America sucks.

I’ll be the first to tell you that China is going to be the # 1 economy in your lifetime.

I’ll also be the first to tell you that it will be back to # 2 in your lifetime.

I’m about the only one that will tell you that India will be # 1 by the time you retire.

But … let’s not get premature about this: growing is not the same as big.

And Russia shouldn’t even be included in any prestigious international groups. It’s reason for being there is missiles.

Brazil is a somewhat different case … it may end up as big as the U.S., but it’s going to take centuries — they have to grow both their economy and their population to catch up.

Here’s a chloropleth of the sizes of these newcomers:


This is using World Bank data, evaluated at current exchange rates. World Bank is probably a bit biased towards the U.S. Because this uses exchange rates, it is probably an underestimate of the size of each economy.

Here’s another:


This paints a different picture. This uses IMF data (which tends to be biased against the U.S.). It also uses purchasing power parity, which tends to overstate the GDP of poorer countries. And … this isn’t even complete: each countries GDP is understated by 10-25% here (maybes I should have added some Canadian provinces or Mexican states).

The truth is probably somewhere in between these two.

* BRIC stands for Brazil, Russia, India, and China.