## Friday, January 27, 2012

### 4th Quarter Real GDP Growth

The advance announcement (the rough draft) of the real GDP growth rate for the 4th quarter of 2011 came out this morning, at an annualized rate of 2.8%.

How should we interpret this number?

If we assign letter grades “on a curve” this means assuming that they follow a normal distribution. When doing this, above the mean is a “B” in the 50th through 83rd percentiles, and below the mean in the 17th through 49th percentiles is a “C”, with other letter grades further out in the tails. Done this way, the range for a “C” is 1.6% to 3.5%, putting 4th quarter growth in the top half of the “C’s”.

But … you may have noticed that school is not like that in real life: grade inflation has made the idea that a “C” is “average” quaint at best, and as near as I can figure offensive to students with more self-esteem than ability.

Anyway, several years ago I obtained the grade distribution for all grades assigned at SUU for an entire semester. On this scale, the A’s extend much lower than the 84th percentile, and the B’s much lower than the 50th percentile. In fact, the range for a “B” for real GDP growth, if they are assigned in the same proportion as grades at SUU is 1.6% to 3.2%, making 4th quarter growth a high “B”.

## Wednesday, January 25, 2012

### What Did the Top 1% Major In?

Via Newmark’s Door:

According to the Census Bureau’s 2010 American Community Survey, the majors that give you the best chance of reaching the 1 percent are pre-med, economics, biochemistry, zoology and, yes, biology, in that order.

Not bad: I teach economics, and the vXwife teaches biology (and specializes in anatomy and physiology required for pre-meds).

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## Tuesday, January 24, 2012

### The MIT Family Tree

Learning some macroeconomics means learning some names, and how they are connected together. Here’s a chart from Bloomberg Businessweek showing some of the famous macroeconomists associated with MIT and how they are connected:

I have no connections to any of these people (although I did to a senior paper on some of Modigliani’s research).

## Monday, January 23, 2012

### Wow

The New Yorker has obtained a 57 page “memo” written by Larry Summers in December 2008.

Summers, a very well-known Harvard economist, former Clinton administration Secretary of the Treasury, and President of Harvard University, was part of Obama’s transition team before becoming the White House’s most trusted economic advisor.

And the memo says …

Mr Summers told the president that it would be hard to spend more than \$300bn on government investment and anything above that would have to come from transfers to the states and tax cuts. He also said that a giant stimulus of more than \$1,000bn aimed at rapidly reducing the unemployment rate “would likely not accomplish the goal because of the impact it would have on markets”.

… It suggests that Mr Obama’s economic advisers recognised that the economy needed a bigger boost, but did not think they could design one and feared a backlash from bond markets.

“While the most effective stimulus is government investment, it is difficult to identify feasible spending projects on the scale that is needed to stabilise the macroeconomy,” Mr Summers wrote. “To get the package to the requisite size, and also to address other problems, we recommend combining it with substantial state fiscal relief and tax cuts for individuals and businesses.”

This is confirmation of what has been broadly suspected: that the final \$800 billion stimulus package was mostly political pork barrel to reward loyal constituents.

That supposition has been a topic of discussion in ECON 3020 every spring semester since the Obama administration took office.

### Best Performing Cities

Logan brought this to my attention because of my post last week on city performance. Three Utah cities are in Forbes list of 25 best-performing cities. The link is to Ogden; you’ll have to click through to higher rankings to see Provo and Salt Lake.

## Sunday, January 22, 2012

### Double Taxation (and More)

Floyd Norris’ column in Friday’s issue of The New York Times, entitled“Unearned, and Taxed Unequally”, covers a lot of interesting topics … and leaves out one glaring detail.

The interesting stuff is about forms of investment income, past tax policies, problems with having different items taxed at different rates, and so on. There is even some discussion of double taxation.

The glaring omission is that the entire piece discusses income various investment sources, and whether it should be taxed … and misses that all investments, by definition, were taxed before they were invested.

Initially, all saving must come out of income. But that income was taxed (at least if it was earned within the last century or so). So, the saving was taxed. Then it was invested. If it earns income, there is an ethical issue about whether taxing it a second time should even be on the table. Norris ignores this point.

### Unemployment

New claims for unemployment have been trending down for 4 months now. These numbers are still high, but this trend is a big improvement over the previous 3 years.

### A Critical Factoid for Comparing Well-Being and Household Cash Flow in America

Many people say that incomes are stagnating. They are partially right. Take-home pay is stagnating.

But, compensation is not stagnating. Here’s where all the money is going:

Had health care costs tracked the rise in the Consumer Price Index, rather than outpacing it, an average American family would have had an additional \$450 per month—more than \$5,000 per year—to spend on other priorities.

That’s a payment on an additional, fairly nice, new car for every family in America.

This does not cover a huge amount of time … only 1999 to 2009. The amount lost over the last several decades would be several times this (most people don’t know that the worst decade for healthcare price inflation was … the 80s).

Even worse, in our system, while much of the money for this extravagance comes from the middle-aged and seniors, almost all of it is spent on seniors.

### Why Is Macro So Hard: What Passes for Expertise

One reason that macroeconomics is hard is because everyone has an opinion (which is OK), but sometimes those opinions are supported by credentials which encourage people to stop asking tough questions.

Dave Spence is a Republican running for governor in Missouri.  He has gone around the state for weeks on end, talking about his economics degree and how he’s a perfect fit as governor because he’ll know how to tackle the state’s budget woes.  He’s Dave Spence, economics degree holder, and he’ll fix your fiscal insolvency!

Oops.

Poor Dave, he’s not an economics degree holder, he’s a degree holder in HOME economics.

To be even-handed, the Democrats got away with appointing Jared Bernstein as Chief Economist and Economic Policy Adviser to Vice President Biden. Bernstein’s qualifications were his degrees in Fine Arts, Social Work, and Social Policy.

To be fair, Bernstein has some interesting ideas, and his stuff is worth reading. I can’t speak for Spence.

P.S. I am not advocating credentialism here, but rather better investigative work on all sides.

## Thursday, January 19, 2012

### Labor Market Recovery, City by City

Here’s an interesting graphic showing when cities are expected to recover from the 2007-9 recession.

The legend didn’t come through in the graphic: the 4 degrees of shading correspond to 2010-11, 2012, 2013-5, and 2016 or later (the lightest).

So, Texas is clearly doing very well, and really so are all the Plains states. Also, while the contraction hit hard along a diagonal from Wisconsin to Florida, there also seems to be some reasonable recovery in that region.

I also thought this was interesting because it included St. George as a major city worth plotting. That’s the first time I’ve ever seen that other than on the weather map in USA Today.

Having said that, one problem with this map is that it doesn’t seem to make any allowances for whether the job market was lousy in a location before the recession started. I mean, it’s grand that, say, Syracuse has already recovered, but how far could they have fallen in the first place*? So, to say that St. George won’t recover until 2016 is also saying that it won’t recover to the amazingly, smokin’ hot, labor market that it had in 2006-7. Well … is it reasonable to expect it to? Especially if other places aren’t like that?

This came from the piece entitled ”Few Cities Have Regained Jobs They Lost, Report Finds” in the January 18 issue of The New York Times.

* I grew up in the suburbs of Buffalo. I’m not an expert on Syracuse, but I can tell you that it hasn’t had a hoppin’ job market in my lifetime.

## Tuesday, January 17, 2012

### Is the Recovery Jobless?

Well … it’s not literally jobless … but job growth is pretty low.

Having said that, the narrative you hear commonly amounts to nothing deeper than “corporations are big meanies who are doing this … on purpose”.

Here’s one take on that story from the January 17 issue of The Wall Street Journal entitled “Man vs. Machine, a Jobless Recovery”. Here’s the chart (the right 6 panels are just the 2 panels on the left enlarged):

There are 3 things to think about: 1) the surface impression we get from the chart, 2) why business would behave that way, and 3) whether or not it’s a good comparison at all.

First, clearly businesses are investing more than in past recessions. That’s good. But, they’re not hiring as fast either. That’s bad. Having said that, they have to have priorities, they can’t do both, and so there must be some shifting going on from investments in labor to investments in capital.

Second, taken at face value, is that such a bad thing? The thing is, investments in capital makes labor more productive. Opposed to that is that if the objective was to make capital more productive you’d add more labor to use it.So, firms are not trying to get more out of the capital they have; rather they are trying to get more out of the labor they have. If all they were concerned about was their machines and how to make them as productive as they could, they’d be hiring like crazy to keep the machines running 24 hours a day. They’re not, so they must be concerned with something else.

Given that firms are not hiring much, they are clearly choosing to improve the workers they have, rather than bring in new people to train. This is a fairly clear statement that, in large, they are happy and supportive of the workers they have, and happy to leave alone the workers they don’t have or want.

So, there’s a very strong statement in this data about people who have jobs versus people that don’t. This isn’t a story you hear much in the legacy media.

But third, to what extent are we being gamed by the reporting in this article? I think we are, but given the data, I don’t have a really good substitute, so it’s possible the reporters are just using the best thing they have.

So, what’s the problem with this data?

Consider the blue line first. To get this, you have to go to your real GDP data.

Remember GDP comes in 3 flavors: expenditures (spending), income, and value-added (in production). The blue line is part of expenditures.

But, it’s not the whole thing. Remember that expenditures come in 4 flavors: private consumption expenditures (household spending, broadly called consumption), gross private domestic investment (firm spending, broadly called investment), government consumption expenditures and gross investment (government spending), and net exports of goods and services. The blue line is part of investment.

But again, it’s not the whole thing. This is divided into fixed investment (buying new stuff) and changes in private inventories (“buying” your own stuff on your books because you haven’t sold it yet). The blue line part of fixed investment.

But, for a third time, it’s not the whole thing. Fixed investment gets split into nonresidental and residential spending. The blue line is part of nonresidential investment.

But, for a 4th time, it’s not the whole thing. Nonresidential fixed investment gets divided into spending on structures and spending on equipment and software.

What the blue line is showing is just growth in the flow of spending on equipment and software.

Nothing I’ve said about the blue line makes it wrong. I’m just emphasizing that they’re tunneling down quite a bit, so we’re definitely skipping past a lot of other stories that the data might tell us to get to a very specific story that the author of the article wants to tell us. If you’re curious, you can find (easier to interpret) indexes that correspond to what’s in the graph by going to the Bureau of Economic Analysis and going to Table 1.1.3, or you can go and see the real/chained dollar values in Table 1.1.6. The latter emphasizes that they’ve tunneled down to focus on growth in about 7% of the economy.

And all this work is then compared to the orange line. This is private-sector jobs. Not jobs in any way related to nonresidential fixed investment in equipment and structures … just … jobs. If you’re curious, you can find this data by going to the Bureau of Labor Statistics page for employment statistics, clicking the green button for “One-Screen Data Search”, and choosing “All Employees”, then “Total Private”, and then clicking “Get Data”. This data isn’t even a flow — it’s a stock variable.

Comparing these is a bit of a stretch. Not a bad one necessarily — it’s just something worth pointing out.

As business students, you should be able to recognize at least part of the problem though. The sort of capital purchase they’re talking about here is something that would be reported as part of cost of goods sold on a firm’s income statement. You would certainly be able to compare this at the firm level to the portion of cost of goods sold that goes to workers; it would be even better to break it down into continuing versus new workers. But, we don’t have that sort of data at the aggregate level. Even so, there isn’t any anecdotal information around about specific firms that are diverting outflows from payroll to equipment purchases.

However, this might point us in a better direction. We could go back to the BEA site, and take a look at Table 1.12 instead. Then we could look at the part of compensation to employees, and then to the portion that is wage and salary accruals (which would miss quite a bit), and then focus on the quaintly named “other”. In this case, “other” is pretty much everything you’d normally think of when envisioning paychecks going out the door of private firms. And here, you see something interesting: “other” is up 6.9%, while government is up by 1.1%. That’s right, all that investment, while not putting wages and salaries through the roof, is pushing them up 6 times faster in the private sector than the public sector. It’s even better if you go down just a bit to Proprietor’s Income, which is up about 20% over this period.

Both of these occurred with very little job growth, so we now get a much better picture that firms are spending a lot on providing their existing employees with a lot of capital to help them do their jobs better, and blowing off hiring from the pool of the unemployed. The big policy question then is, why are those people so unemployable?

N.B. Table 1.12 is not in real terms, so all of what I’ve said above is making the not unreasonable assumption that inflation was pretty close to zero over the period in question.

## Monday, January 16, 2012

### I Love This Idea

This isn’t required, but it is food for thought in how we think about macroeconomic policy.

Don Boudreaux of Cafe Hayek points out that generally, influence on policy is not distributed equitably, and specifically that Paul Krugman is a one-percenter in the distribution of influence. Thus, if some are worried about redistributing income and wealth from the top 1%, why not redistribute influence from the top 1% too?

This is really a rather amazing way of looking at things, because we clearly have groups whose influence is out of proportion to their numbers; farmers, for one; ivy league college graduates for another;  bankers for a third.

Further, the fact that so many people are interested in redistributing income or wealth, and so few are interested in redistributing influence, really makes me think that all of the redistributive arguments are really driven by the fact that cash is fungible and easy to transfer.

## Sunday, January 15, 2012

### Interest Rates as the Cause of the House Price Bubble? Not So Much

Ken Kuttner survey the old evidence, adds some new evidence, and concludes that home prices are fairly inelastic with respect to interest rates. Because the effect is weak:

… Making the case that low interest rates cause bubbles would require showing that house prices
tend to overreact to rate reductions. Although the previous decade’s house price boom was out of
proportion to the interest rate decline, there is no evidence that this happens systematically. The
puzzle is why house prices are less sensitive to interest rates than theory says they should be, not
more so.

This suggests that while low interest rates may have been part of the problem with the run-up in house prices from 1995-2007, they were not the major part. This is the position of people (on the left and right) who say the housing bubble was all the fault of Greenspan’s monetary policy when he was in charge of the Fed.

Like most things in macro, my guess is that 10 years from now we’re going to be pointing out that the housing and financial crisis was the result of a lot of little things, not one big thing.

Not terribly surprising news on Friday evening: S&P downgraded the credit rating of 9 European countries.

This is a prediction of increased future risk, but it is based on negative behavior in the recent past. It’s analogous to admitting your probably going to throw more interceptions because you’ve gotten down by a couple of touchdowns and need to adjust your gameplan to pass the ball more.

I’ll return to the news itself further down, but for right now there are a bunch of details and definitions you’re not likely to pick up all in one place, so here goes. Note that this post is important, but that you shouldn’t judge the importance of my posts by their length. This one just has a lot of details.

The typical exchange in a loan is to give up something of (known present) value today in exchange for a stream of future payments with a larger present value. The big risk in doing this is default: that the borrower will stop paying before the stream of payments is finished.

As a lender, what you’d like to to know is what the chance of that default is before it happens. Estimating such a thing before it has happened is called ex ante. Going back and looking at past data to figure out how often defaults occur is called ex post. Using the football analogy, a coach chooses plays for which the quarterback has  a low ex ante  probability of throwing an interception, while critics of teams are looking at ex post results to determine which passes should have been thrown. S&P’s ratings are an ex ante measure of default risk.

Ratings can be done by anyone; the question is whether anyone would pay attention to them. Many ratings are done internationally, but in America there are three firms (two big and one small) that do almost all the ratings. Because America is the largest investment market, our rating agencies get a lot more attention than those of other countries. The two big agencies are Standard and Poor’s (aka S&P) and Moody’s, while Fitch is the smaller one.

In America, the ratings agencies are private firms. But, there isn’t really free entry, since the Federal government stipulates that most investors need to be able to show that their investment was rated by one of those three firms. This is a good point to recall that micro theory suggests that 1) limits on free entry lead to products that are sold at a price above marginal cost, and 2) quality of that product is likely to decline through time because there isn’t enough incentive to keep average costs low if you’re making incremental profit on each sale. This is known as the “lazy monopolist” problem, but it applies anywhere incremental margins are positive.

The quality of the product sold by a ratings agency is assessed by examining whether the ratings made ex ante match up with the default rates observed ex post. In the long-run, these will have to match up or the rating agency’s business will go to one of the other raters. But, in the short-run, there can be substantial deviations between the two, which was a major source of criticism in the wake of the breakdown of the market for CDO’s (i.e., bundled mortgages) in the recent financial crisis.

The rating agencies all have different scales for their ratings. Roughly, they follow a few simple rules. First, they’re like letter grades: A is better than B. Second, plus is better than minus. Third, as in baseball leagues, more letters is better than fewer (e.i., AAA beats AA).

To allow some comparison between firms, ratings are described as “notches”. For example, to go down two notches is to go down two ratings in a particular agency’s scale.

Issues of debt are not always required to get a rating from more than one firm, but they often do. A problem in the acute part of the financial crisis in 2008-9 was evidence that the agencies were using each other’s ratings as the basis for their own rating (as a cost saving measure) rather than doing their own due diligence.

A debt issue is called “junk” if it earns a rating that is very low on a firm’s scale. It does not indicate that default is probable, only that it is more likely.

Ratings agencies are not in the business of surprising the borrowers they are rating, or their potential lenders. Borrowers are informed frequently of how their actions are likely to affect their ratings, and when a revision is likely to occur. In addition, when things start to point in one direction, they usually make a press release indicating to investors that a rating change is more likely although not yet probable.

Sovereign debt is the name given to debt issued by the central government of a country. Historically, this is a political distinction: the central government has the ultimate command over the resources used to repay the debt. For trivia, we call it sovereign debt because it used to be debt that was personally owed by the absolute monarch of a country.

We need a new term for what is going on in Europe. Economists like to note that the economics of a situation trumps the politics (even if politicians don’t like to admit this). In practice, when a government is unable or unwilling to marshal the resources to repay debt, it prints currency (which devalues it). The countries of the Euro-zone have given up that ability when they deprecated their local currency in favor of the Euro. But they are acting as if nothing has changed. Journalists and politicians need to stop calling issues within the Euro-zone sovereign debt; “pseudo-sovereign debt” would be better.

Additionally, European governments have spotted a bad thing, and decided it would be cool to copy it. A big problem in the corporate and government world is the creation of financial entities that are off the books. In short, someone has a problem, so they create a second entity, move all the problems over there, shovel some money at it, and then claim they are clean. It’s not a good idea, but it’s very human: parents do this all the time when they stop supporting kids with substance abuse problems. Anyway, European countries have created something called the EFSF (European Financial Stability Facility): the countries that are doing well pour money in, and the EFSF helps manage a turnaround in problem countries. On paper this sounds good, and it avoids national chauvinism. The problem is, can it really have any less chance of default itself than some chance of default that is representative of where its funds are coming from? This was the problem with CDOs (bundled mortgage) in the recent financial crisis: they would bundle two B’s together and call it an A because now it was diversified. Maybe so, but clearly not enough. We have the same problem in Europe now: the EFSF has a separate and better rating than most of its contributors. It’s not an absolute guarantee of a problem, but it sure looks like more smoke and mirrors.

Now that you have some tools, let’s go look at the news.

1) Big financial news is often released early on Friday evening. This is after markets in America have closed for the day, and going into the weekend for global markets. It’s also after the evening news.

In December, S&P placed the ratings of 15 euro zone countries on credit watch negative — including those of top-rated Germany and France, the region's two biggest economies — and said "systemic stresses" were building up as credit conditions tighten in the 17-nation bloc.

3) Here are the actual moves:

S&P lowered its long-term rating on Cyprus, Italy, Portugal and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia and Slovenia by one notch.

The credit-rating agency affirmed the current long-term ratings for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands.

4) This may not be the last step:

The credit-rating agency put all [sic] 14 euro-zone nations — Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain — on "negative" outlook for a possible further downgrade.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

A negative outlook indicates that S&P believes there is at least a one-in-three chance that a country's rating will be lowered in 2012 or 2013.

said it could also downgrade the euro zone's current bailout fund, the European Financial Stability Facility.

5) Here’s some qualitative comparisons:

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

French Finance Minister Francois Baroin, speaking after an emergency meeting with President Nicolas Sarkozy, played down the impact of Europe's second biggest economy being downgraded to AA+ for the first time since 1975.

"This is not a catastrophe. It's an excellent rating. But it's not good news,"…

One would think that a ratings downgrade would affect borrowers rates. But, ratings are “old school”; going back to the period before instant global communication and widespread dissemination of raw data about borrowers. To the extent that lenders are doing their own due diligence, and just attaching a rating because it makes things look official, not much may happen.

It is not clear how far the downgrade will increase France's borrowing costs, since markets have already anticipated the prospect by raising the French risk premium over German Bunds.

"One notch is priced in but not more. The Franco-German spread can widen. It is about 130 basis points for the 10-year bond. …

Unfortunately, many funds that invest on behalf of others are required to divest when ratings agencies make problems “official”:

The downgrade could automatically require some investment funds to sell bonds of affected states, making those countries' borrowing costs rise still further.

"It's been priced in for several weeks, but the market had been lulled into complacency over the holidays …

The bottom line is that this news is quasi-official confirmation that Europe has not gotten its act together, and the situation has gotten harder instead of easier.

## Friday, January 13, 2012

### The Bottom?

Via Kids Prefer Cheese.
Ya’ know … I’m wondering … all our theory says that the run-up and the run-down should not be symmetrical. The fact that it’s pretty close makes me think that maybe there wasn’t much of a bubble at all: that it was all a push up and pull down based on fundamentals.

P.S. I had two of these posted. I deleted the earlier one.

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## Thursday, January 12, 2012

### “There Is No Great Stagnation”

Measurement of real GDP per capita is not easy, but optimists tend to think growth rates have been greatly understated over the last few decades. Here’s Tim Worstall, quoted in full:

So I’m in Dresden overnight for a 6.30 am flight. No way to get from Freiberg to here by that time in the morning.

And having had a look around the area of this cheapo hotel (now’t wrong w’i't, just cheapo) nothing really appeals as a dining venue. Or even a drinking one.

However, there’s a Lidl on the corner. Rye bread, sliced sausage (hey, this is Germany), packet of crispy things and a jar of hot dip, bottle of some odd end of bin red wine.

The red is a whole two years old now, a 2010, from SE Australia. Not prize worthy, no, but entirely drinkable (the hot dip helps).

All of this for under €5.

And as I’m sipping I’ve talked to my wife in Portugal about her and my days, when I’ll arrive so she can pick me up, what we’re going to do tomorrow evening (cost of call on roaming, maybe another €5). And I’m clearly and obviously blogging on my €40 a month German Vodafone mobile access stick.

On a €300 computer.

It’s possible to take this all different ways.

I’m sitting in a foreign city, no previous knowledge of the place, eating a dinner which costs me less than 1 hour of minimum wage labour, a dinner which these days is regarded as hardship, a dinner which 200 years ago would have been exotically expensive (the wine, specifically) for the average Englishman. Bread and meat….it was around but not everyone was eating it.

I’ve had an international phone call where the price, even on a mobile, makes the casual keeping in touch something that you’re weird if you don’t do. I’m old enough to recall when an international phone call was something you thought about. I still work with people of my own age for whom an international phone call was something that the government specifically forbade. And for my parent’s generation, it was something that you saved for and really, really, did not expect to do for mere trivialities like “How are you?”

And this blogging thing? Even mobile telecomms. They’re both younger than I am (as is of course true of an increasing portion of the world).

I’m afraid that, given that I can now do things for trivial cost that I did not dream would be possible in my youth. Heck, things that I did not think would be possible when I met my wife (being with someone for decades, sure, I knew that was possible, being able to chat to them while you’re away at a price you can afford I didn’t).

Given all of that….umm, what is this Great Stagnation that is being talked about?

Pessimists, on the other hand, tend to see life as not having improved much over the decades.

As an optimist, I would add that Tim is a virtual friend of mine — an idea that was unheard of before about 15 years ago, and one that makes us all richer. Tim has also parlayed a middle-class English west country upbringing, and a series of jobs typical of people in their 20s, into an upper middle-class life in Portugal where he trades in rare earth metals and writes opinion columns. This is the sort of life arc people can have in the 21st century, but we have way too many dim bulbs around who can’t see the forest for the trees. As a student, be inspired by Tim, not by the rest of the crowd.

## Tuesday, January 10, 2012

### Keynesianism Run Amuck

Beware of economic data collected by governments …

At least part of the reason for China’s spectacular growth numbers of the last 25 years can be attributed to measuring production and output rather than usefulness and well-being.

Case in point: the ghost cities that China has built, with lots of construction jobs, but with no inhabitants.

Later on in the course we’ll discuss “balanced growth” and why it is preferable to the unbalanced kind shown here.

### Demographics of Labor Force Participation

We’re hearing a lot lately about the weak job market — not just the high unemployment, but also about the declining rate of labor force participation. This was featured in a piece in Monday’s issue of The Wall Street Journal entitled “No Easy Balm for Joblessness Wounds”.

But, note how little business cycle behavior there is in this chart. The recessions before the last one: 2000-1, 1990-1, 1981-2, 1980, 1973-5 are mere hiccups on this chart.

Instead, what this looks like to me is the prime working years of the baby boomers. The oldest ones turned 18 in 1964, right where the upward trend starts. The youngest ones were 35 at the peak: just about the age where even slackers have settled into jobs, and one wouldn’t expect participation to increase further. But, that’s also where the oldest boomers started retiring in serious numbers.

P.S. Originally, I had a chart constructed from the tools available at the Bureau of Labor Statistics posted here. But, it wasn't loading properly, so I substituted the above chart from the article I cited.

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## Saturday, January 7, 2012

### Why Macro Is So Hard: The One Lever Fallacy

Macroeconomics is hard, in part, because people are always looking for the one magical thing to change to make it all better.

But this is magical thinking.

David Brooks summarizes this nicely, in a piece about our fraying international financial system, and the unwillingness of the political class to wade in to the problems:

Both orthodoxies take a constricted, mechanistic view of the situation. If we’re stuck with these two mentalities, we will be forever presented with proposals that are incommensurate with the problem at hand. Look at the recent Obama stimulus proposal. You may like it or not, but it’s trivial. It’s simply not significant enough to make a difference, given the size of the global mess.

We need an approach that is both grander and more modest. When you are confronted by a complex, emergent problem, don’t try to pick out the one lever that is the key to the whole thing. There is no one lever. You wouldn’t be smart enough to find it even if there was.

Instead, try to reform whole institutions and hope that by getting the long-term fundamentals right you’ll set off a positive cascade to reverse the negative ones. …

I emphasize in my macroeconomics classes that regional business fluctuations (like recessions and financial crises) don’t have one big cause. Instead, they have a laundry list of a few dozen smaller causes. You probably shouldn’t take anyone seriously if they can’t rattle off 10 factors that contributed to the most recent recession.

### Our Uneven Economy

It’s normal for recoveries to be uneven, and the current business cycle is no exception:

You can also see a bit of why people were worried about a “double-dip” recession last summer — but note that only some states fit the pattern. The full article is here.

### Increasing Economic Entropy

Hernando de Soto has made a career out researching the unclear legal systems that stifle growth in developing countries.

He claims that the ongoing financial crisis has occurred for much the same reason: we’ve allowed people with in interest in muddying the waters to make our financial facts murkier:

During the second half of the 19th century … creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account … Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded.

It’s an interesting thesis, but I’m not sure how to measure it or test it. But, de Soto is no crank, so it is worth adding to your mental toolkit.

### Increasing Economic Entropy

Hernando de Soto has made a career out researching the unclear legal systems that stifle growth in developing countries.

He claims that the ongoing financial crisis has occurred for much the same reason: we’ve allowed people with in interest in muddying the waters to make our financial facts murkier:

During the second half of the 19th century … creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account … Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded.

## Tuesday, January 3, 2012

### Judging Institutions

From bookofjoe.

The following excerpt from his 1929 book was published in this past weekend's Wall Street Journal:

There exists … a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."...

Some person had some reason for thinking [the gate or fence] would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable … The truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served.

But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion … This principle applies to a thousand things, to trifles as well as true institutions, to convention as well as to conviction.

Read the book in its entirety here.

The original quote is from G. K. Chesterton, a British essayist writing 80 years ago, and not a contemporary macroeconomist.

But, I think Chesterton has hit on one of the finer points of new growth theory: institutions matter, but we’re not quite sure how.

So, something like the Hippocratic oath needs to apply to politicians out to improve the world.

## Monday, January 2, 2012

### Intellectual Property Feudalism

This is a new idea that I picked up from Alex Tabarrok.

Intellectual property is a big deal in macroeconomics. We know that growth comes mostly from technological innovation, but we haven’t yet been able to measure the gains from innovation properly enough to figure out how to protect innovators. Obviously, if they don’t get to keep enough gains from their efforts, they won’t innovate. But the flip side is that if they keep too much of their gains, society won’t benefit as much as it might (e.g., a Hellenistic Greek “invented” the steam engine but didn’t have a society where its benefits were seen as useful).

Anyway, Alex is worried that the length of time that some works are now protected is too long: up to 70 years after your death. That’s right: your unborn great-great-great-grandchildren now have a right to earn monopoly profits of your invention.

He calls this “intellectual property feudalism”. In short, your descendents are privileged because of your current position.

## Sunday, January 1, 2012

### More On What Government Actually Does

I am not a big advocate of the dual positions that 1) our infrastructure is crumbling, and 2) we need to spend more public funds on it.

But, I am cognizant of this fact from Michael Mandel via Arnold Kling at EconLog:

Let me repeat that: Government net investment as a share of net domestic product is at a 40-year low. I had to check this last one a couple of times to make sure it was really true. This is a true failure of national economic policy. Government is punking out, just at the time when a public investment surge is needed to make up for the private investment drought. As a country, we should be investing more, not less.

I see two points here.

First, this is talking about a proportion, so it is not clear that real (gross) government net investment is anywhere near a low.

That may reflect that the government is spending too much on stupid infrastructure, that there is too much nonsense included in the budgets for “infrastructure projects”, or that we are building infrastructure that is luxurious rather than practical (e.g., SUU’s push to build an art gallery before anything else that the campus might need — and I love art galleries and support this one, I’m just grown-up enough to question its priority).

Second, Mandel is emphasizing the point I’ve made in this blog and elsewhere that government has evolved over the last 3 generations or so from an entity that does things to one that sends out checks.

Again, I’m not making a normative judgment about whether that is for better or worse, but a positive statement about the facts.