Tuesday, July 31, 2012

Federal Budget Infographic

Here’s a tremendous infographic from The New York Times. It shows the 2011 (and 2010) federal budgets.

The entire set of budget outlays is laid out in blocks. The cabinet level spending amounts are in big rectangles, and the subdivisions of those are the smaller rectangles on the inside.

What I don’t like about this graph is the emphasis. To me, the primary factor is which spending accounts can actually be cut. It is secondary whether programs have gotten bigger or smaller; what good is it to know that something has gotten bigger when you can’t cut it if you want to.

So, for me, the primary thing to look at is found by clicking on the “Hide Mandatory Spending” button. Click that, and most of the chart goes white. This shows that most of the budget is actually untouchable. Click it again, and it all comes back.

Personally, I don’t like the default coloring. It shows which programs are growing (greener) and which are getting smaller (pinker or even marooner). When you click on the button to show the 2010 budget, the shading goes away. Click back on the 2011 budget button, and the shading does accentuate the blocks that have changed. Cool, but this is of secondary importance.

Self-Selection Bias, Residual Puritanism, and Macroeconomic Policies

A perceptive principles of macro student (DN) wondered why so much policy discussion has so little to do with what’s in texts:

It doesn't have a lot to do with macro … People say we should give up things we like in order to live better, or do things in a harder way, but they mean for other people, or people in general, not necessarily themselves.

This is very common. It is a combination of two things: self-selection bias, and what I call "residual puritanism".

Self-selection is the idea that we select which groups we want to join. Self-selection bias is that we tend to see the groups that we join as a moral improvement over the ones we didn't join. Many people interpret membership in the right group as a sufficient reason to claim the moral high ground: the "right" choice is what's important, not the actions you take. Once you make this distinction, it's easy to require a higher level of moral action on the part of people who "failed the first test" by not making the same choice that you did.

Residual puritanism is related to the idea that America's self-image sees us as primarily descendants of the Pilgrims who settled New England, rather than any of the other colonies (English or not). The Puritan movement that birthed those colonies was composed of people who thought the medieval Catholic Church — which featured fun stuff like Inquisitions and the burning of heretics — wasn't eschatologically serious enough. In short ... all the really crazy types emigrated from England to eastern New England, and from there to inland New England and upstate New York. Two parts that this group retained from Catholicism are the middle-eastern belief that asceticism will make you more worthy, and the Benedictine idea that labor is inherently virtuous (which many people extend to viewing toil as inherently virtuous). For people who have been raised in an environment where this is part of family and societal values, it is an easy step to see something bad happen, and to lay blame on someone who hasn't given up enough stuff, or who has too much free time on their hands.

This actually has a huge amount to do with macro, but it isn't politically correct to talk about in class.

Democrats and liberals tend to think "the rich" ought to live more ascetically so that the rest of us can live better. But this tends to apply to people who get rich only through certain avenues — like business — rather than more noble pursuits ... like, say, being a Hollywood star. So, if you're in the right group, the moral problem of being rich is not quite so serious (this is how Bernie Madoff got away with so much ... he was viewed as a "good" person who didn't require monitoring). This is not that much different than the late medieval idea that the newly wealthy craftsmen and merchants simply could not be part of the pre-existing nobility. Today, only some of the rich get a pass from the Democrats.

On the other hand, Republicans and conservatives tend to think that the "less fortunate" get that way by succumbing to vices. If they only gave up more of the things they actually enjoy, they'd have a better life. But again, those things that people are supposed to give up don't include certain things that conservatives self-select for — like riding motorcycles without helmets. And ... since we're talking about morals here ... this is why Republicans and conservatives tend to be caught more often intentionally hiding their vices from others. Contemporary Republicans tend to self-select into groups with 1) tight moral codes, but 2) not necessarily a huge amount of help for people who succumb to life's moral hazards.

When you put this together, you get Democrats being in favor of taxation as a form of punishment, and government spending as a reward for good behavior, while you get Republicans opposing spending that encourages vices and/or the taxation that supports them. Neither of those visions is coming from macroeconomics, but they both end up leading to macroeconomic effects through policy choices.

Saturday, July 28, 2012

Math Atheism

The number of business majors who are math agnostics and atheists never ceases to stun me:

When it comes to macroeconomic policy choices, math atheism is a dangerous thing.

For example, the whole idea that we are running short of “resources” falls apart if you write out the math of growth and compare it to the data about growth. The math says that growth will drop to zero within 2-3 generations if it depends on resources. But the data says we are now 10-15 generations into growth in developed countries. Avoiding the math makes it easy for some people to cling to a Malthusian worldview that fits their personal biases better than it fits the data.

Via applied mathemagics.

Wednesday, July 18, 2012

Chinese Exceptionalism and American Defeatism

National GDP in developed countries is largely a function of population. GDP per capita is similar across developed countries, so the largest developed economies are those with the biggest populations.

If China develops, it will be the biggest economy in the world. If India develops too, China will fall to # 2.

China is developing, so it’s very likely that it will overtake the U.S. economy in size because it’s population is 4 times larger. This will happen in the next few decades.

But, we have a lot of nonsense floating around the legacy media that this is going to happen in the next few years, or may have happened already. Don’t believe it.

There are a number of problems with this sort of analysis.

Lastly, a lot of people worry about economic size because of military concerns: bigger economies win wars, and a bigger China might beat America in a war. Here, it’s instructive to study the economics of World War I. In that case, Germany (and its allies) came close to defeating the smaller economies of the U.K., France, Russia, Italy. But, part of the problem with Germany was that it wasn’t as developed top-to-bottom as the British economy was. And, the large subsistence portions of the German economy, which added up to quite a it in the GDP calculations, were not as readily mobilized for war.

China’s Data Problems

China’s real GDP growth has been a hot topic for the last 20 years.

Take China seriously: they are going to be the biggest economy in the world in your lifetime, and probably will fall to second place by the time you retire.

Having said that, it’s macroeconomically prudent to not take their growth numbers very seriously, and to push that forecast of being #1 off a few decades.

Most developed economies are relatively open. Measuring GDP in them is difficult, but fairly accurate. This is not the case in more secretive or disorganized economies. China is both.

Historical perspective is useful here. The Soviet Union claimed high growth rates as well. These were taken at face value by both Soviet leaders and western analysts: the top selling textbook in economics through the 20th century (Samuelson’s) repeatedly predicted the Soviet Union would overtake the U.S. in GDP. This was a mistake. When the Soviet Union collapsed it became apparent that the size of their economy was perhaps one fifth of what they claimed.

Unlike the Soviets, the Chinese have a pattern of learning from the mistakes of others, and they are aware that they have a data measurement problem. Here’s the guy who is likely to be leading China until 2022:

The figures that go into China’s gross domestic product are “man-made” and “for reference only,” warned Chinese politician Li Keqiang back in 2007. The comments by the then-regional party head, who is expected to become premier next spring, were revealed in a diplomatic cable published by WikiLeaks in late 2010.

Here’s an example of a discrepancy:

Growth in electricity consumption has slowed much faster than growth in official GDP (dropping to about 4 percent growth in June, according to Chinese media) when usually they move more in tandem.

The fibbing is a systemic problem:

One legacy of the planned economy is that bureaucrats are given targets by the central government for everything from steel production to harvests and local GDP. These same officials traditionally have been promoted on their success in making their numbers. “We have a saying in China: The cadres produce the data, and data produces the cadres,” says Jin Yongjin, a professor of statistics at Renmin University.

What other data could we look to for clues:

Investment banks have searched for the indicator that will predict an economic turning point. Standard Chartered looked at sales of earth-moving equipment before deciding it was a lagging rather than a leading indicator. Bank loans, as well as electricity consumption and rail cargo volume, all cited by Li Keqiang as more reliable than GDP, are still a good proxy for economic activity, says Green. UBS Securities has informally surveyed local developers to get a handle on real estate trends. Perhaps the most ambitious effort is the recently launched China Beige Book, a quarterly survey of some 2,000 bankers and company executives, modeled on the U.S. Federal Reserve’s Beige Book. It measures growth in eight key industries across China’s major regions, says Leland Miller, president of CBB International, which publishes the book.

But, we still have the problem of all secretive societies:

China still tends to treat its data gathering as a national secret, says Anne Stevenson-Yang, co-founder of Beijing-based equities analysis firm J Capital Research. She cites the government’s refusal to release the weighting of goods tracked to compile its consumer price inflation index. “Why would you ever lift the hood and show people how you do it? That only reduces your ability to change numbers if you need to,” she says

Read the whole article, entitled “China Seeks Better Data” in the July 16-22, 2012 print edition of Bloomberg Businessweek.

Wednesday, July 11, 2012

Spain’s Failed Infrastructure “Investments”

Like China, Spain took the Keynesian policy prescription to heart over the last couple of decades: increase government spending, but follow Keynes by making expenditures on items that are autonomous of income.

In China, this has taken the form of building cities whether there is anyone to live in them or not.

In Spain, it was grandiose public works. Here’s Alex Tabarrok of Marginal Revolution with a review of some of these.

I tend to agree with this comment that Alex makes towards the end:

My view is that rather than causing a crisis, bad investments are mostly masked by a boom and revealed by a crisis. Still, “infrastructure spending” doesn’t always create jobs …

In this sense, I view government boondoggles as similar to corporate fraud: no one notices it during the boom periods, but it becomes very obvious when cash flows get tighter around recessions.

The message here is not that Keynes was wrong.* There’s nothing wrong with expenditures that are autonomous of income to boost the economy. But, we’re now at the stage where politicians are confusing “spending that is unrelated to income because no one would be dumb enough to spend their income on that” with “spending that is unrelated to income because it’s necessary and we should find some way to do it”. The latter was Keynes vision.

* Remember that my takeaway for all students is not that Keynes was wrong, but that he was right about a much smaller portion of the economy than anyone imagined.

Saturday, July 7, 2012

Where the Unemployed Are

This is not a rate or a percentage, so that patterns you see tell you more about where total population is, rather than where unemployment is bad. Nonetheless, it’s pretty cool:

Via I Love Charts.