Monday, March 26, 2012

Long Term Joblessness

We’ve already talked this semester about how the recent recession was characterized by a lot of long-term unemployed, and how that does not bode well for the future evolution of the job market.

There’s more evidence to support this:

Note that the unemployment rate of the short-term jobless has dropped quite a bit more than the rate of the long-term jobless.

It isn't clear why, exactly, the U.S. economy is behaving differently this time. The severity of the recession is certainly part of the explanation. So, most likely, is the boom and bust of the construction industry, which left millions of workers, mostly men, without the skills they need to find new jobs.

There may also be longer-term trends at work. Steve Davis, an economist at the University of Chicago's Booth School of Business, notes that the employment-population ratio had been trending downward even before the recession, as had the rate at which workers change jobs. …

The downward demographic trends are something we’ve already discussed. But the decreased mobility between jobs is probably a result of “credentialism”.

What to do?

There is little agreement on the solution. Traditional economics suggests that structural unemployment doesn't respond to the kind of stimulus measures—government spending, tax cuts, reduced interest rates—that are the standard approach to high cyclical unemployment. But some economists, including Mr. Bernanke, have argued that policy makers should try to jump-start the economy so that the unemployed find jobs before structural problems take root. Others argue that extended unemployment benefits have contributed to the problem by encouraging workers to delay looking for work, raising the risk that they will fall victim to structural unemployment.

So, blaming the 99 weeks of unemployment insurance is probably correct. Not extending it that far in the future is probably a good idea. But, now that we’ve opened that Pandora’s Jar, I can’t recommend cutting those benefits.

Read the whole thing entitled “Time Not On Side of Jobless” in the March 26 issue of The Wall Street Journal.

Tax Breaks

Here’s more bad news that macroeconomists have to be realistic about.

Lots of people think if only we eliminated tax breaks, we could solve all our problems. Not so. Here’s the list:

Do note that these are only the tax breaks from the federal personal income tax. The federal government also gets a lot of money from FICA (which supports social security and Medicare) which has few “breakable” taxes, and from corporate income taxes (which, in total, aren’t much bigger than these breaks, and so probably can’t yield too much money).

Anyway, this is a laundry list of stuff the middle class feels entitled to. Only 2 items can reasonably be associated with “the rich”: capital gains taxes and estate taxes.

In sum, it probably isn’t very politically feasible to think seriously about cutting any of these, no matter how laudable such a move would be.

The data is is from the Congressional Research Service report entitled “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening”. Read the whole thing, entitled “Tax Breaks Exceed $1 Trillion” in the March 24 issue of The Wall Street Journal.

Wednesday, March 21, 2012

Asking the Unasked Question About Oil Spill Prosecution

Oil spills happen, and they do environmental damage. Punishing these is a form of internalizing externalities.

But, at what point do we cross a line from regulation to extortion? This is an important macroeconomic question if the way we treat certain industries affects the potential well-being of citizens.

So, here’s the question: how much damage can something cause, as a proportion of its value?

Perhaps the worst case answer for this is a used car. A human life is (variously) valued at $2-10 million. So, a used car may cause perhaps 1000 times its value in damages, perhaps a bit more in a multiple fatality accident.

But, we don’t think most things are in that thousand-fold range, and when they are, as in cars, we don’t expect people to cover all the damages on their own.

Except with oil. When we start talking about oil companies, people get deeply irrational and very greedy. This is because oil companies have had a bad reputation since Rockefeller, and many people view them as licenses to print money. Investors who care about returns know that the returns of oil companies are good but not great … so that view that they are licenses to print money is misguided at best, and childish and nasty at the worst.

So, here’s a thought question: how much damage can be caused by an $84 barrel of oil?

Be careful. A barrel is 42 gallons, so we’re talking about $2 per gallon of crude.

You might reasonably think that you could cause $2 worth of damage with $2 worth of oil. You might even think you could cause quite a bit more: perhaps $200 worth of damage with a $2 gallon of oil. But, this is why I told you to be careful: how much oil is on the floor of your garage? A quart? If so, then you personally have done $50 of environmental damage to your garage. To most people this seems implausible, and so the 100:1 ratio is probably about as high as we can go.

Except if you’re in the government, media, legal advocacy, or environmental movements. Chevron currently faces these groups in Brazil, over a deep ocean spill of 3,000 barrels. For this, Brazil is suing for $11,000,000,000. A little division shows that this is a cost/penalty of a nearly $4,000,000 per barrel. This is something like 50,000 times the value of the oil. Remember the used car case: we let people off on damages of 1,000 times value.

Yes, we can make arguments about indirect, downstream, and unknown future damages. Yes, there should be penalties beyond recurring damages. And yes, treble damages to dissuade future problems are standard. Lastly, hyperbolic claims are common in court, and are often toned down at settlement. But, I suggest it is impossible to argue that 50,000 times value is ever justified. If my assertion is correct, then this is extortion.

This is important from a macroeconomic perspective because industries that produce value-added are a key to growth. Under what grounds is it justified to go after a firm that might make $5 profit on each barrel of oil, while contributing almost $80 to the local economy, for something on the order of $4,000,000? I claim that this is a policy action that is immoral.

And yet this sort of policy action is quite common. And we tend to view it as a moral problem that some people are rich and some are poor. If you believe this, at a minimum you should make sure that extortion like this, that might discourage future growth opportunities, is curtailed.

Skim the whole thing, entitled “Chevron Hits Troubled Waters” in the March 20 issue of The Wall Street Journal.

Realism On Greece

Politicians and the legacy media are crowing about the plan to address Greece’s persistent problems (even though much of the plan amounts to making official the write-downs of Greek bonds that private investors have already booked).

Here’s Luigi Zingales, a big-time international finance researcher from the University of Chicago (he’s one of those MIT graduates from my January post that’s networked at the top levels):

On the face of it, the "voluntary" arrangement with creditors might appear to have been a big success. …

But, despite these trumpeted results, the reality is much harsher. Even with the latest deal … the debt ratio would exceed 130% before stabilizing at 120% in 2020.

But even this reduced level is not sustainable. … the government would need to run an annual 2.6%-of-GDP primary budget surplus (the fiscal balance minus debt-service costs) for the next 30 years just to keep the debt burden stable.

To put that task in perspective … To reduce the debt-to-GDP ratio to 70%, Greece would have to maintain an average primary surplus of 4% for the next 30 years, a level that it has temporarily achieved in only four of the last 25 years.

I’m a bit harsher on Greece, but it’s consistent with the view I’ve given in class that anyone in their right mind should expect Greece to be a recurring problem.

Read the whole thing in the “Notable and Quotable” section of The Wall Street Journal’s March 19 op-ed page.

Sunday, March 18, 2012

Speculation Is What Other People Do

It’s a lot easier to understand the world once you recognize that:

  1. Most people first divide up the world into good guys and bad guys, and then
  2. Declare themselves to be one of the good guys.

Don Boudreaux explains:

During this morning’s 8 o’clock hour I heard one of the most ironic lines that I’ve heard in some time. That this irony was unintentional makes it all the more telling.

Asked by your “pump patrol” reporter about rising gasoline prices, a motorist at a gasoline station noted that “My tank is actually way more than half full now. I’m topping it off because I’m sure the price will be even higher this weekend.” When your reporter then asked her “What do you think explains these rising prices?” she replied “Speculators.” Your reporter followed up with “Do you think they should be stopped?” The motorist responded immediately: “Of course! They’re criminal.”

Speculating that the price of gasoline will rise, this motorist took action today – buying gasoline that she otherwise wouldn’t have bought today – that puts upward pressure on the price of gasoline today.

Had your reporter pointed out that this motorist herself is speculating in gasoline, I wonder if this motorist would have persisted in regarding speculation as being criminal.  I wonder, too, how she would react if government – heeding her advice to stop speculation – were to forcibly prevent motorists from topping off their tanks.

Note that it isn’t the action of speculation that is the defining feature of this motorists world view; rather, it is that their actions are good and the actions of others are bad.

Specifically, this isn’t an important topic for macroeconomics.

More generally, it’s hugely important for macroeconomists and policy-makers to be able to correctly spot this irony and not act upon it.

Friday, March 16, 2012

What I Said About Japan

Last year at this time, everyone was concerned about the aftermath of the tsunami in Japan.

In particular, the damage to a nuclear reactor was a big deal.

I was exceptionally harsh on this view:

Unlike most other colleges, business schools actually make a point of talking about ethics and morals, rather than just baldly assuming that students understand them.

It isn’t often that I get to talk about them in macroeconomics, but here is a golden opportunity.

The distinction between ethics and morals is often lost on students (and it isn’t like philosophers make a tight distinction anyway). Some argue that morals are what individuals believe, and ethics is the study of that set of beliefs. Some argue that morals are personal, and ethics are cultural or societal. Let’s make it simple: morals are micro, and ethics are macro.

Which leads me to legacy media coverage of the ongoing nuclear crisis in Japan. I assert that it may be moral to be concerned about this, but it is unethical for the legacy media to make it even a secondary focus of their concern. This suggests that it may be immoral to be personally swayed by their coverage.

The issue here is that the legacy media coverage is tantamount to equating a potential disaster with an actual one.

A real disaster had happened. Excessive focus on a potential disaster at that time is ethically wrong.

Obviously, I was really “sticking my head through the noose” on this one.

A year later, here’s what we know.

One government survey of 10,468 people from three towns at high risk—Namie, Iitate and Kawamata—was released in late February. Among them, 58% are estimated to have received less than one millisievert of exposure, and 95% less than five millisieverts. Just 23 people, including 13 nuclear workers, were assumed to have been subjected to more than 15 millisieverts.

By comparison, the U.S. Environmental Protection Agency estimates that Americans are exposed, on average, to three millisieverts of radiation per year from natural and man-made sources. Japanese safety rules allow a nuclear worker up to 100 millisieverts a year …

Last time I checked, the 20K people who died in the tsunami are still dead.

Something to Pay Attention to In the Medium-Run

One of the goofed up parts of our government accounting system is that our announced deficits include interest payments to citizens. This is weird because we borrow most of the money from citizens, we repay most of it back to them, and we tax them in order to do so. It’s a wash, but counting makes the deficit seem bigger than it is.

So, I don’t think this is a huge deal, but because we count this way this could be a big deal when interest rates go up in a few years. It also is a big reason for policy pressure to keep interest rates abnormally low:

What we pay is the green line. We pay that for two reasons. One is the red line, and the other is the interest rate paid on each individual government bond.

The red line is going up because of Obama’s budget policies. The green line is holding steady because interest rates are abnormally low.

When interest rates go up in the future, and they probably must because we do believe there is mean reversion in interest rates, that green line is going to go through the roof.

When that happens, politicians will panic: everything will be on the chopping block, and they will be looking to increase every tax. It won’t be pretty.

Read the whole editorial, entitled “Uncle Sam’s Teaser Rate” in the March 12 issue of The Wall Street Journal.

Something’s (Still Up) with the Unemployment Numbers

About a month ago I posted that something was goofy with the latest employment numbers. Others have caught on.

Using Okun’s Law, here’s what The Wall Street Journal came up with:

The top left shows the plain scatterplot, the top right adds a regression line capturing Okun’s Law, and the bottom panel shows the size of the residual (the vertical distance to the line, not the whole red dashed line).

The conclusion; somehow we’ve gotten too much decline in the unemployment rate to be plausibly explained by the real GDP growth we’ve experienced.

I’ve never liked Okun’s Law much: it’s too flexible to be a “law”.

Anyway, what we’re seeing here isn’t impossible … just worthy of attention.

Okun’s Law also got goofy on the way up:

Christina Romer, President Barack Obama's former chief economic adviser, is watching this very closely. That is because Okun's Law also broke down in the other direction a few years ago when she was head of Mr. Obama's Council of Economic Advisers. She predicted the unemployment rate would rise to a little less than 8%, but instead it went to 10%. Some of the miss was because the downturn turned out worse than expected and much of it was because unemployment rose more than Okun's Law predicted.

I find her explanation plausible:

Ms. Romer has a theory for why the jobless rate rose more than Okun's Law predicted during the recession and why it has fallen more than the law predicted since the recession: She believes that company managers were so shocked by the financial crisis in 2008 and 2009 that they fired workers more aggressively than they would in a conventional downturn.

"Firms were terrified," she says. "We had just had the first financial crisis in 70 years. The world looked like it was falling apart …

But there’s a possible downside:

A less sanguine explanation could be a dangerous productivity slowdown. It might be the case that the workers being hired aren't improving their productivity as much as workers had before. If they aren't as productive, companies need more of them.

The hiring sounds nice, but a productivity slowdown would be bad in the long run for everyone. Less productivity means slower growth in the long run, an economy more susceptible to inflation shocks, slower growth in inflation-adjusted incomes and less government revenue to work down big deficits.

Robert Gordon, a Northwestern University professor who tracks productivity closely, says he sees "clear signs everywhere" that a productivity slowdown is happening. …

Pay attention to Gordon; he’s one of those scary-good people on understanding business cycles.

Read the whole thing, entitled “Piecing Together the Job-Picture Puzzle” in the March 12 issue of The Wall Street Journal.

Job Growth Is Still Solid

February was another good month for employment growth:

Read the whole thing, and check out the interactive graphics, in the piece entitled “Jobs Recovery Gains Momentum” in the March 9 issue of The Wall Street Journal.

Recovery Is Ongoing

You guys already know this, but here are some interactive graphics to prove it.

Read the whole thing by clicking the “Article” tab on the site.

Don’t “Help” Manufacturing! Please!

For decades we’ve wanted the manufacturing sector to be leaner and more efficient, to better compete against foreigners.

This means that manufacturing employment will go down as manufacturing employees become more productive. Just so:

This is a good thing. It’s what we wanted. It’s also a symptom of our past decisions, not a cause for current decisions.

Unless politicians get stupid (or is it stupider ??).

"The trend is increasingly that factories are not assembly lines with lots of people standing around. It's increasingly a lot of machines with fewer workers," said Susan Lund, director of research at the McKinsey Global Institute, the research arm of the consulting firm. "If job creation is your goal, manufacturing is probably not the sector you'd look to."

Multinational companies are increasingly moving production to the U.S., but "the problem is that there are few jobs created by insourcing activity," Wells Fargo Securities Economics Group wrote in an analysis Tuesday.

Manufacturing employment also declined from 2000 through 2009 in Germany by 9% and by more in South Korea, the United Kingdom and Japan, according to McKinsey.

… In the U.S., despite the loss of millions of jobs,factories' output—the value of goods produced, adjusted for inflation—was almost the same in 2011 and 2000.

This is all good news, and both Obama and some Republicans (e.g.,  Rick Santorum) want to do something, anything, to change it.

Read the whole thing in the piece entitled “Economists Assail Campaign Proposals to Help Factories” in the March 2 issue of The Wall Street Journal.

Seasonal Variation In Gas Prices

Inflation is high this month.

Most of that comes from gasoline price inflation.

Gas prices inflate every spring. This gives alarmist reporters something to talk about once a year.

There are three reasons for this.

First, gas is refined from crude oil. Refineries are big places with huge economies of scale. Shutting them down is expensive.

Second, governments across much of the country mandate different blends of gas for different times of the year. The whole country changes from a winter to a summer blend twice a year. But, every time they do this, the refineries have to shut down to do the changeover. This always creates price volatility. Further, the summer blend is more expensive.* So, every spring gas prices get pushed up.

Third, we’ve Balkanized our gas production (remember: go to Google and enter “define balkanize). Here’s a map:

This is done by local governments deciding that winter and summer blends aren’t enough for them, and that they need a special blend that no one else has. Each of these colored spots requires its own dedicated refineries. Most refineries only produce one of these colors at a time. This is a big deal because refineries are expensive to switch because of the economies of scale they get only when they’re up and running. In operations research, it’s standard to study how adding constraints to decision-making reduces options and increases prices. Politicians prefer you don’t know this.

* Yes, Obama will be able to deliver declining gas prices just in time for the election: every President is this “lucky”.

Local Variation In Gas Prices

Gas prices contribute a lot to inflation. But, they change a lot from place to place.

It is true that average gas prices contribute to inflation.

But, high gas prices do not. The reason for this is that there’s about a ± 20% difference in gas prices based on county. Most of this is a result of county and state taxes. To see this, go to GasBuddy and look at their “gas price heat map”. When you see color changes like this that occur at state borders you know the reason for it is policy differences across states. Within states, there are certainly county level differences in price, and some of these are caused by policy and some by local conditions.*

* I can’t say why right now Iron and Washington counties have high prices. Typically Utah is pretty uniform.

(Newish) Alternative Inflation Rate

The American Institute for Economic Research (a right-leaning think tank) made news about 2 weeks ago with their measure of inflation: much higher than the announced ones.

Their alternative is called the Everyday Price Index. Here’s why they get a higher rate:

There are several possible reasons for the divergence of the two indices that came about in the early 2000s. Rapid technological change restrained prices of products, especially those related to information technology. Quality-adjusted prices for mobile phones, personal computers, and televisions fell or increased much more slowly than prices of other consumer goods and services. The same was true for household appliances and even cars. At the same time, increasing globalization and reduction in trade restrictions drove down prices of apparel and other imported goods.

These prices, which are included in the CPI, helped restrain growth in the overall cost of living. But the prices are for products AIER deliberately excludes from the EPI. The price-reducing force of technological improvements and globalization does not restrain prices of everyday purchases quite as much as it does for less frequently purchased items. Toothpaste ain’t so high-tech.

I’m not a big fan of this sort of thing, but it does capture the sense that many people have that there is higher inflation for a lot of stuff.


The headline for today is that inflation just posted its biggest rise in 10 months. The gains is 0.4% for the month (that’s 4.9% if you annualize it).

I wouldn’t worry about this too much. Most of this is coming from gas price increases.

The problem is that gas goes up and down a lot, and there’s an asymmetry in that people only talk about it going up.

Typically, news organization try to get around this by publishing core inflation too. This is inflation with gas and food excluded, because they’re volatile. This has always seemed like a kludge to me: most of what people care about is gas and food.

Instead, I recommend you pay attention to inflation over the last calendar year. If you go to the CPI home page at the Bureau of Labor Statistics, it prints this number in the upper right. The scary thing is that it prints the NSA monthly change (short for not seasonally adjusted), under that the SA monthly change (seasonally adjusted), and third down the NSA change over the last 12 months.* That last one is what you should use; currently it’s at 2.9%. It’s scary because reporters typically choose the one right above that to be “current” but they end up just being alarmist.

The value of looking over the last year is that the frequent ups and downs in those volatile gas and food prices will tend to average out.

* You probably want to avoid data that isn’t seasonally adjusted … unless it is taken over 12 months, in which case you’re OK because that’s counted all the seasons equally.

Tuesday, March 13, 2012

North Dakota

The flood of good news coming out of North Dakota was a running joke in this class last year.

I even asked a question about the top oil producing states because North Dakota has moved up the list to # 4.

This year, it’s up to # 3, having just surpassed California (Texas and Alaska are still at the top).

Read all about it in Stephen Moore’s op-ed piece in the March 10 issue of The Wall Street Journal entitled “What North Dakota Could Teach California”.

P.S. Promise I won’t ask about this topic this year!

Monday, March 12, 2012

Abuse of One-Time Revenue Sources

This is a general interest topic for macroeconomists trying to understand how politicians get themselves into budget trouble.

In this case, it’s California and Facebook. The piece is an editorial, so don’t expect it to be neutral.

The problem is a pretty basic one that households with poor financial management have quite a bit, and that politicians seem to actually pursue with a vengeance. It is the use of one-time funds to finance ongoing spending.

California is again in fiscal trouble—when isn't it?—and this time it's betting on a new savior—the Facebook IPO. The state Legislative Analyst's Office reports that the $5 billion stock offering expected this year could yield $2.5 billion over the next five years in extra revenue due to "extraordinary one-time" events.

… A single business success could cover a multitude of spending sins. Isn't capitalism grand?

On the other hand, we've seen this windfall before. Recall the "Google surplus." In 2004 Google's IPO contributed to a one-time $7 billion revenue gusher that included a 49% leap in capital-gains receipts. The state was instantly flush with cash and Arnold Schwarzenegger and Democrats blew through the cash like they were Google partners—which, in a sense, they were.

It didn't last. When the temporary revenue bonanza ended, the state couldn't sustain what had become a new higher plateau of spending. The boom turned into a revenue drought that continues.

Now with Facebook and other California Internet sensations looking to go public, legislators are again counting on big paydays to finance another spending binge while avoiding the reforms imperative for long-term solvency. According to a fiscal analysis by state Assembly Republicans, Governor Jerry Brown's budget calls for a $6 billion or 7% increase in spending this year, and a 30% increase over four years.

Read the whole thing entitled “Facebook to the Non-Rescue” in the March 8 editorial page of The Wall Street Journal.

The 1%

This is the buzzword of the year, eh?

Most Americans tend to view their personal issues with the top 1% as a peculiarly American problem: you know, America’s 1% is a problem for America’s 99% because America’s 1% has rigged the system in their favor.

When people make sweeping generalizations like that, facts tend to be a problem.

Allan Meltzer, a once top-flight macroeconomist, who is now merely a quite old and still active economist puts things in perspective.*

First, the data. America isn’t alone:

A wide variety of developed countries have seen the share of income earned by the to 1% increase over the last generation. What’s interesting, is note that this effect has occurred even in countries regarded in the U.S. as the model for the direction in which Democrats would like us to shift: Sweden, the Netherlands, and France. It’s also worth noting the anecdotal evidence that very rich Swedes, Dutch and French like to emmigrate to California, which probably exaggerates the upward slope for the U.S.

Meltzer’s point is that if we see a wide variety of countries experiencing the same thing, at the same time, then we should look to a global issue that occurred at just about the same time.

The main reasons for these increases are not hard to find. Adding a few hundred million Chinese and Indians to the world's productive labor force after 1980 slowed the rise in income for workers all over the developed world. That's the most important factor at work. The top 1% gain relatively because they are less affected by the hordes of newly productive workers.

The other thing to keep in mind is that the typical “solution” to the increasing share of the top 1% is an increase in redistributive policies. But, the evidence doesn’t support this: in the heyday of redistributive social programs of the 1960s and 1970s, the decline in the share of the top 1% was modest.

Read the whole thing, entitled “A Look at the Global One Percent” in the March 9 issue of The Wall Street Journal.

* Note that liberals and Democrats could, with some support, argue that Meltzer is not politically neutral.

Friday, March 9, 2012

The Untold Global Poverty Story

There is exceptionally good news on the economic growth front.

The report shows that for the first time the proportion of people living in extreme poverty — on less than $1.25 a day — fell in every developing region from 2005 to 2008. And the biggest recession since the Great Depression seems not to have thrown that trend off course, preliminary data from 2010 indicate.

The progress is so drastic that the world has met the United Nations’ Millennium Development Goals to cut extreme poverty in half five years before its 2015 deadline.

But perhaps the most surprising success story is sub-Saharan Africa, where the proportion of people living in extreme poverty actually increased through the 1990s, before declining in the 2000s.

“People used to worry, ‘Is Africa going to be poor forever?’ ” said Mr. Kenny of the Center for Global Development. “Well, it doesn’t really look like it, does it?”

Read the whole thing, entitled “Dire Poverty Falls Despite Global Slump” in the March 7th issue of The New York Times.