Wednesday, January 30, 2013

The Obama Recession ???

Here’s the news this morning: the advance estimate (the first draft) of real GDP growth for 2012 IV came out this morning, and it shows the growth rate of real GDP as –0.1%.

It is exceptionally rare for real GDP growth to be this low without a full-blown recession. The last time we had a single quarter of negative growth without a multi-quarter recession was in the mid 1980’s. That quarter’s data was later revised to show very low, but still positive, growth.

Wednesday, January 23, 2013

What Were They Thinking?

The Federal Reserve is the main macroeconomic policymaking unit in the country.

But, their meetings are kept secret for 5 years — because releasing the minutes is thought to be able to give a financial edge to some.

Anyway, the minutes of the FOMC meetings from 2007 were just released. This is interesting because this is when the housing crisis started, which led to the financial crisis, which may have caused, or at least occurred at the same time as the wider recession.

The big winner is Janet Yellen. She’s a macroeconomist from Berkeley, and has worked in the Clinton White House, has been a Federal Reserve Governor, and is now President of the Federal Reserve Bank of San Francisco. She’s the short list to follow Bernanke if he is not asked by Obama to serve a third term.

"I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said in June 2007. "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst."

By December, she was pushing the Fed to respond aggressively. She noted that the financial system's problems were happening in the "shadow banking system"—that is, not in traditional banks but rather in bond markets and derivatives markets where hedge funds, investment banks and others traded mortgages and other financial instruments. "This sector is all but shut for new business," she warned.

Keep in mind that macroeconomics is sufficiently hard to forecast that the fact she did well 6 years ago isn’t a guarantee that she’ll do well in the future.

Read the whole thing, entitled “Records Show Fed Wavering in 2007 ” in the January 19 issue of The Wall Street Journal.

Why Is Macro So Hard? Suppression of Data

A recurring theme on vX is that governments often don’t collect, or actively suppress, data they don’t want the world to see.

The worst example is North Korea:

"Trying to describe North Korea statistically for a statistician is like [climbing] Mount Everest," said Nicholas Eberstadt, a demographer at the American Enterprise Institute, a conservative Washington, D.C., think tank. "It's the last place on earth where one can't find regular, reliable data on a national scale."

Other countries have statistical data that are incomplete, but "normally they fall into the category of extremely poor or failed states," Dr. Noland said. "Our statistical understanding of North Korea is very poor as a matter of state policy."

The country ceased publishing statistical yearbooks a half century ago, said Daniel J. Schwekendiek, an economist at Sungkyunkwan University in Seoul. Dr. Schwekendiek said he generally finds what sparse North Korean data exist to be of good quality. …

Read the whole thing, entitled “Putting Statistics to Work in a Land of Illusions” in the January 19 issue of The Wall Street Journal.

Monday, January 21, 2013

You Heard It Here First, Part II

Last year I wrote about how screwed up California is (yeah … I know … we all know that). But, it’s worse than you think.
California’s legislator has started to rely increasingly on capital gains revenue coming in from initial public offerings. These are one-time events where a privately held company decides to start selling stock publicly for the first time. Insiders are usually given a bunch of stock, and after trading opens they typically start selling it off, incurring capital gains.
Why is this a problem? No new tech companies means no new money. Unsuccessful IPOs means less money. That’s the general issue. The specific one is that California planned on spending the windfall from Facebook’s IPO last year … and Facebook hasn’t maintained its price, so capital gains tax revenue is coming in too low.
Aides to Democratic Gov. Jerry Brown last week lowered their estimate of how much revenue the state will get from Facebook's initial public offering by nearly one-third, to $1.3 billion in the three years ending in June 2014, down from $1.9 billion.
That’s actually a markdown from the markdown. Initially they expected $2.5 billion. But … the last paragraph says not to worry:
Still, the Facebook IPO is expected to have a relatively small impact on the budget as a whole. In the three fiscal years ending in June 2014, the state expects revenue of $281 billion.
Don’t believe it. I’ll give you an example. The shortfall is 1.2 out of 281, or about 0.4%. How would you feel if you lost that much out of your income? SUU Professors’ salaries are public information, so using mine (about $80K) that’s like losing $350 in cash. Do ya’ think I’d notice that sort of thing? You’d better believe it.
Read the whole thing, entitled “California Budget Hurt by Facebook's Stock-Price Slump” in the January 17 issue of The Wall Street Journal.

P.S. Why didn't anyone tell me I wrote "hear" instead of "here" in the title? That mistakes was up there for over 3 weeks.

Why Is There No Inflation?

The short answer to this is that … macroeconomists aren’t really sure.

Clearly, the Federal Reserve has been trying to pursue expansionary monetary policy for a few years. That should lead to inflation. It really hasn’t. Why is that so? David Wessel’s “Capital” column goes over 3 reasons you should be aware of.

Also, we’ll be discussing inflation this week, and you need to be aware of the pattern in this chart from that article:


Read the whole thing, entitled “Will Fed's 'Easy Money' Push Up Prices?” in the January 17 issue of The Wall Street Journal.

Hate to Say We Told You So

Here in America, we worry about manufacturing jobs moving on to China because of low wages. Economists (including, but not at all limited to me) have said for a long time that this isn’t a patter than will persist.

In China they worry about manufacturing jobs moving on from China because of low wages.

You can see this in the panel on the left below. This shows foreign direct investment — essentially foreign money being used to actually build productive capital (rather than just buy stock). This chart is not logged. If this series was growing at a constant rate it would be getting steeper, and that doesn’t seem to be the case.


Read the whole thing, entitled “China Begins to Lose Edge as World's Factory Floor” in the January 17 issue of The Wall Street Journal.

Sunday, January 20, 2013

Disability Claim Nonsense from Not Logging Data

I posted last month about how the position that disability claims are up is 1) correct only in that it states the obvious, and 2) incorrect if it suggests there is a problem.
Here we go again (from a site that advertises itself as “the right news”):
During President Barack Obama’s first term, the number of Americans collecting federal disability insurance increased by 1,385,418 to a record 8,827,795.

In the comparable period of George W. Bush’s first term—January 2001 through December 2004—the number of people taking disability went from 5,052,895 to 6,197,664, an increase: 1,144,769.
In the comparable period of George W. Bush's second term--January 2005 through December 2008--the number of people taking disability went from 6,219,666 to 7,427,203, an increase of 1,207,537.

This is exactly what you’d expect if the number of people claiming disability was experiencing compound growth. But … since we think the whole population experiences compound growth, this is exactly what we’d expect a subset of population to do too.
It gets worse. What we should be concerned about is (actual percentage) growth rates or approximate growth rates (formed by differencing logs). If we look at those, disability is up:
  • 15.7% in Obama’s first term
  • 19.4% in Bush’s second term
  • 22.7% in Bush’s first term
If you’re a conservative and/or Republican, these numbers mean this site is just pushing your buttons.
It gets even worse. The article goes on with this:
By December 2012, the latest month reported, there were 8,827,795 collecting disability, an increase of 1,385,418. With 115,868,000 people working full-time in December, according the Bureau of Labor Statistics, there was 1 person collecting disability for every 13 people working full-time.

Forty-two years ago, in December 1968, 1,295,428 Americans collected disability and 65,630,000 worked full-time. Thus, at that time, there were about 51 Americans working full-time for each person collecting disability.

I was unable to find or duplicate most of these numbers. But I did get close. There are two problems with them.
First, disability was a new form of benefit in 1968. Almost all of the growth in disability occurred after this initial year. In short: 1968 is cherry-picked.
Second, most of the decline in the ratio noted in the article is not from increases in disability payments. Instead, it’s because of the decline of full-time workers. But, as explained in this post, this is due to the demographics of the last 15 years … rather than the Obama administration. In short: using full-time workers is cherry-picking too.
Here’s a chart I produced that’s a little more grounded in reality:


Now … this looks at employment … so it isn’t making any great claims about whether people have the job and hours they want, only that they have a job. The big dip in employment growth that occurred recently is the combination of the Great Recession, and the ongoing long-term demographic swing away from having a job at all.

The growth rates are high for disability claims in the early 1970’s – under Republican presidents Nixon and Ford. They also climbed steeply under Republican president GHW Bush, and during Clinton’s first term. Claims fell under Carter, and during Reagan’s first term. Any evidence that claims have gone up drastically under Obama is … a stretch.

Saturday, January 19, 2013

John Cochrane On the Debt Ceiling

John Cochrane is a big name academic, who works on the borderline between finance and macroeconomics. Here are some of this thoughts on current debates over the debt ceiling. He makes 4 major points:

I. Why the limit binds

Why can't the government just pay its bills by printing money, i.e. creating reserves? Sure, you might worry about inflation sooner or later, but this is a legal question. The government can print money to pay its bills, no?

Well, no, which is really interesting.

For the Fed to "print money," meaning to create reserves, it has to buy some other asset. Though the Fed can manufacture money costlessly, it legally can only do so by buying assets. The Fed cannot engage in fiscal policy, and printing up checks and sending them to taxpayers -- or even dropping cash from helicopters -- is fiscal, not monetary policy.

And the debt limit applies to all Federal debt outstanding, including debt held by the Fed. So, as long as the Fed buys only Treasury bills, the debt limit does, in fact, stop the government as a whole from "printing money" (creating reserves) to pay bills. …

Well, the Treasury has the actual printing presses that make good old fashioned cash. Why can't the Treasury  just print up money and use it to pay bills? (Or, deposit the cash at the Fed, thereby get reserves, and transfer the reserves by writing checks.) No, that's illegal too. The Treasury prints the bills, but they can only be issued by the Fed, and in return for already-created reserves.

So the architects of our monetary system and debt limit weren't so dumb after all. …

II. Clever solutions

So, our army of clever lawyers and policy wonks is hard at work finding loopholes, either ways to create "debt" that doesn't count as debt, or ways to print money to pay bills anyway.

Here's where the trillion dollar coin idea came up. James Pethokoukis at the AEI covers a few more clever ideas. There are various ways that the  US government could essentially send tradeable IOUs in place of checks, as California did, avoiding its "balanced budget" rules and the prohibition on states issuing currency.  Cash is, in the end, no more or less than a tradeable IOU of the US government.

A less obvious and more realistic option strikes me as important going forward. I assumed above that the Fed only buys Treasury bills when it creates reserves out of thin air. But that's no longer true. During the financial crisis, the Fed bought commercial paper, and lent directly to various financial institutions. (It called the loan an "asset" on its balance sheet, so it seems like the Fed is buying something of value.) Now it is buying and holding mortgage-backed securities.

This is fiscal policy. When the Fed lends directly or buys assets other than Treasuries, the total debt + money increases. The traditional restriction that the Fed should only buy Treasuries separates it from fiscal policy.

III. Default

One of the silliest constantly-repeated red herrings is that running in to the debt limit will force the US to default on its debts and cause a global financial disaster. …

…If a $100 bond comes due, the Treasury can sell a new $100 bond to pay off the principal without increasing the total amount of debt.  And there's still $2.5 trillion of tax revenue coming in. That's plenty to cover interest payments. If anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first.

This is simply a red herring. Social security checks might stop, farm price support payments might stop, they might have to send the TSA home from airports and let the NRA take care of security (joke here, please don't go nuts). All this might cause a lot of hardship, but there is nothing forcing the government to default. Default would be a choice.
Update: In an official statement, the White House chimes in

“There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default. When Congressional Republicans played politics with this issue last time, putting us at the edge of default, it was a blow to our economic recovery, causing our nation’s credit rating to be downgraded. The President and the American people won’t tolerate Congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job.”

My [Cochrane’s] emphasis.

Now it's not so clear. … our government might in fact be tempted to default. Not in a big way, but in the usual muddle that governments do. …

These are far-off low-probability scenarios. Still, the possibility of explicit default -- not now, not next year, but once things get really bad -- is not as remote as I had thought.

Which, by the way, is not necessarily a bad thing. [Tufte’s emphasis] Governments who really cannot monetize their debts but must repay them or face the horrible costs of default tend to figure out how to balance their budgets, and they get better interest rates.

IV A better ceiling? 

These occasional battles over the debt ceiling are pretty obviously not an ideal way to run fiscal policy. But they do have an important function in the political battle to limit spending.
Such devices are important. …

… Budget numbers are so full of accounting tricks and gimmicks, that even passing a budget can fail to have the strong force limiting spending that one would hope. It was budget rules that gave us "temporary" Bush tax rate changes in the first place.  

By contrast, the actual amount that the government has to go out and borrow is a hard number, and it seems to pose a stronger constraint than the budget act. That makes it a blunt instrument, but a more useful instrument than the fine instrument that seems not to work.
But occasional crises are obviously not a good way to impose a bit of discipline. So, herewith a modest proposal in two parts:

First, fix the remaining loopholes. No platinum coins.  Federal "debt" should include Federal Reserve liabilities (cash and reserves) net of Treasury debt held by the Fed. Harvest the creative work of the blogosphere from the past few months, and reinforce the ceiling.

Second, in place of a single ceiling, that is then periodically raised by a few trillion after a big fight, put in a ceiling path. If $1 trillion deficits ($80 billion per month) seem like a lot, renew the debt ceiling at $50 billion per month this year …

Read the whole thing. Cochrane blogs at The Grumpy Economist.

Friday, January 18, 2013

Spurious Detrending, and How We Describe Our Recessions


Consider this image:*†

Capture of Spuriously Detrended Real GDP from the 12-10-15-21 Businessweek

Graphs with a trend line like this are fairly common. They are used to present the view that 1) things used to be better, and 2) current conditions are worse.

This chart is deceptive.

It does one good thing: note that at the top it notes that a logarithmic scale is used. Using that scale — which is the mathematically correct thing to do — will tend to keep us from exaggerating our current state relative to the past.

And yet there’s the Great Recession, highlighted in pink, and circled three times (like it’s throbbing). Why is it so exaggerated if they did what they were supposed to do?

You see, this chart is also doing a bad thing: it fits a (single linear) trend through the data. Now, as explained in the handbook you may be correctly estimating the trend with your software, but if you are misapplying the idea in the first place, those nice looking estimates are junk. This is called spurious detrending, and this is an example. In this case, the spurious detrending accentuates the Great Recession.‡

Who would have an interest in making a misspecification like this? Mostly Democrats. Notice how the pink starts right after Bush takes office, and gets worse until Obama takes office. Also, note that the black shading corresponds mostly to the 1964-1981 period – with the Democratic presidents Johnson and Carter the bookends for that period (and economically liberal Republicans Nixon and Ford in the middle). It also shows the late Clinton years in black.

But Republicans might like this shading too: it makes the Reagan years look good.

The bottom line is that the shading just isn’t truly representing anything well. To see this, think about recessions. Every recession is lousy at the time, and should show up in pink when we look at the data retrospectively. But, they don’t. The postwar recessions are all there as dips in the jagged line: 1948-9, 1953-4, 1957-8, 1960-1, and 1981-2 (all correctly shown in pink), but what about 1969-70, 1973-5, 1980, 1990-1, and 2000-1 which are all shown in black! Would you be willing to go and tell all the people who were out of work in those periods … that those were the good times? And yet, that is exactly what this magazine is doing implicitly (note that the 1973-5 recession was every bit as bad as the Great Recession of 2007-9). They can get away with this because most people haven’t taken a class (like this one) where this sort of thing would be brought to their attention.

It also does a pretty bad job with the good times. Those 1950’s that people remember wistfully? They’re crap according to this chart. The boom in Clinton’s second term … is bad too. And the Bush expansion, which was rather long, and awfully good in 2005-6 … is all pink too.

* From pp. 28-29 of the October 15-21 issue of Bloomberg Business Week. Obviously, the hard copy was not interactive. You can see the interactive graphic here (although this one doesn’t do anything that you’re required to check out). What I pasted above is a screenshot of the interactive graphic.

† I could not get the interactive graphic to load in Firefox, but Chrome worked fine.

‡ I wonder whether this chart is even worse: they may not have estimated a trend at all … maybe they just drew the trend to make their point.

Thursday, January 17, 2013

Prioritizing Government Bill Paying

The next stage in the ongoing political conflict over federal spending will be about the debt ceiling.

It is estimated that the Treasury will run out of money to spend unless the debt ceiling is raised within about a month.

One scare tactic being used is that the government will default on its debt.

This is just not going to happen. Default requires a failure to pay interest, which currently is around 10% of tax revenue. The only way you end up not making payments that small is because you choose not to. No one will let that happen. But they can threaten! The White House has made clear (in the fine print) that they regard it as a default if the government misses or delays any payment. By that definition, many households default every month. But they’re not advertising this fine point.

Alternatively, some Republicans are proposing that refusing to raise the debt ceiling would force the executive branch to prioritize its spending:


Read the whole article, entitled “Some in GOP: Don't Pay All Bills Now” in the January 16 issue of The Wall Street Journal.

N.B. The Republicans tried something similar to this once before in 1995-6. Politically, it didn’t go well.

Unemployment Rates by Metropolitan Area

Business fluctuations can vary across regions. That’s probably obvious.

And the legacy media likes to accentuate the bad news. That’s probably obvious too.

Combine those, and with business conditions, you tend to get emphasis on the worst outcomes, not the variety of outcomes.

So I really liked this graphic:

Capture of California Unemployment Rates from the 12-11-27 NYT

This shows unemployment rates, by metropolitan area, in California over the last 4 years.

What you can see is that California is definitely on the mend. You can also see that the coast is doing better than other parts of the state. But you can also see that there’s a high degree of correlation between the unemployment rates.

Yet, my guess is that on the news, you’d hear a lot of reports about Yuba City and Merced, and not too many about San Bernadino or Salinas.

I mostly liked the graphic; you can just skim the original article, entitled “California Finds Economic Gloom Starting to Lift” in the November 28 issue of The New York Times.

N.B. Sorry about the shading … The Times website is getting persnickety about how many articles I’ve looked at this month.

Tuesday, January 15, 2013

Inequality–Before and After Taxes

Here’s some food for thought about how we help the poor in this country.

First off, no matter what Obama says:

Many Americans may find this hard to believe, but the United States already has one of the most progressive tax systems in the developed world, according to several studies

But, Europeans are right that we don’t actually do that much for our poor:

… According to a study of public finances across the industrial countries in the Organization for Economic Cooperation and Development, we also have one of the least effective governments at combating income inequality. There is one main reason: our tax code does not raise enough money.

That’s weird at first glance, but it does make sense:

This paradox underscores two crucial lessons we could learn from the experience of our peers around the globe. The first is that the government’s success at combating income inequality is determined less by the progressivity of either the tax code or the benefits than by the amount of tax revenue that the government can spend on programs that benefit the middle class and the poor.

The second is that very progressive tax codes are not very effective at raising money. The corollary — suggested by Peter Lindert of the University of California, Davis in his 2004 book “Growing Public” — is that insisting on highly progressive taxes that draw most revenue from the rich may result in more inequality than if we relied on a flatter, more “regressive” tax schedule

Here’s an example:

Consider government aid for families. According to the O.E.C.D. study, our Temporary Assistance for Needy Families is the most progressive program of cash benefits for families among 22 advanced countries, accurately targeted to serve the poor.

But American family cash benefits are the least effective at reducing inequality. The reason is that they are so meager. The entire budget for cash assistance for families in the United States amounts to one-tenth of 1 percent of the nation’s economic output. The average across the O.E.C.D. nations is 11 times bigger.

How do Europeans come up with more tax revenue?

Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending, like gas taxes and value-added taxes on consumption. …

Liberal Democrats have long opposed them because they fall much more heavily on the poor, who spend a larger share of their incomes than the rich. But these taxes have one big positive feature: they are difficult to avoid and produce fewer disincentives to work or invest. That means they can be used to raise much more revenue.

The article makes no explanation of how the American system can be more efficient at actually getting the money it has out to the poor.

What I find most disturbing about our current tax system and its ability to help the poor is summed up in this chart:

Governement's Effect On Income Distribution, from the 12-11-28 NYT

The rich are taking in more than they used to, and the poor are taking in less (thus the two lines spreading apart between left and right). No surprise there. And out social programs are not helping out the poor as much as they used to (thus the flatter dark line). The thing is, we’re actually taking more from the rich already, as shown by the percentages. And if the rich are actually bringing in more, that further increases what the government has to play with.

So, where’s it all going if it’s not going to poor people? Duh … middle class people. Way more many people are benefitting from government largesse than they used to.

Read the whole thing, entitled “Combating Inequality May Require Broader Tax” in the November 28 issue of The New York Times.

Labor Force Participation and the Baby Bust*

There’s been a lot of discussion over the last few years about Americans not working as much as they used to, and how this is related to the Great Recession.

It’s true: we’re not working as much as we used to.

But it’s false that this has much to do with the Great Recession.

Labor Force Participation from the 12-12-12 NYT

The bottom panel shows the big picture: labor force participation peaked 9 years (and 1 whole business cycle) before the Great Recession?

Why is that? The reason is demographics. The baby boom ran from 1946-64. If people are going to have an unstable job history … they’re usually done by the time they’re 35. This means that America had a large swell of the population entering its most dependable working years between 1981 and 1999. Labor force participation rose through this period and peaked towards its end. It’s been declining since because of the baby bust.

So … we should expect labor force participation to continue to decline … probably for at least another decade.

Read the whole thing, entitled “When Looking at Job Numbers, Add In a Changing America” in the December 12 issue of The New York Times.

* This is related to last month’s post about whether disability claims are rising faster than they should be (they’re not).

Taxes, Tax Rates and Spending

The New York Times did a very comprehensive piece on taxes and spending in their November 30 issue.*

The only big economic complaint I have is the focus on average rather than marginal tax rates. Anyway …

Here’s the summary of the spending and revenue picture (I copied and pasted this image, but the original is here):

Chart from the 12-11-30 New York Times About Government Spending and Taxes

Several points are obvious over the last 30 years:

  • Spending is up by 20%
  • Total revenues are down a bit – about 5%.
  • Current deficits are largely a spending problem.
  • Federal income taxes are down 30%.
  • Corporate taxes are down 20%.
  • Payroll taxes (mostly Social Security and Medicare) are up 15%
  • State and local taxes are up 15%

Here is a screen capture of an interactive graphic (go here to see and play with the real thing):

Capture of Interactive Charts from the 12-11-30 New York Times

What can we learn from these 7 colored panels, each divided into 9 graphs by income level? Note that you could roughly view the leftmost graph as “the poor” and the 3 to the right of that as “the middle class”.

Panel 1 (gray): average tax rates are lower for everyone. The Reagan tax cuts are at the left of each graph, and they mostly affect people at the top incomes. The G.H.W. Bush (1990) and Clinton (1993) tax increases — that led to the surpluses of the late 1990’s are in the middle, and the G.W. Bush tax cuts are further to the right.

Panel 2 (blue): the rich have paid a bigger share of their higher income, and continue to do so. For example, someone with $100K in income paid about $16K in 1980, while someone with twice as much income paid almost 3 times as much in taxes — about $46K. That was 1980: now we take even more from the rich, with the comparables being $9.9K and $36K, or almost 4 times as much.

Panel 3 (green): average payroll tax rates are higher for everyone. They are not much higher for those with high incomes because we cap the taxable amount at around $100K.

Panel 4 (pink): average state and local tax rates are higher for everyone, but mostly on the poor. This is largely because states and localities have higher sales and sin taxes.

Panel 5 (orange): average corporate taxes are down too — the most for people near but not at the top. Note that the caption makes very clear that corporate taxes are not incident on the firms themselves, but rather on people. It’s unusual in the legacy media for them to take the textbook rather than the layman’s position on this.

Panel 6 (olive and black) is a bit misleading. The black shows the share of income earned by the different groups — and the share earned by the top group has gotten larger. It’s misleading because it gives the impression that this was taken from others. But with shares you can’t think about it that way  — the income earned by each share has grown through time. The olive lines show an interesting pattern though: there are more poor and more rich than in 1980.

Panel 7 (black): shows that the tax system is progressive, but not as progressive as it was in 1980.

* The New York Times was thorough in putting all this together. 

… This analysis offers a more complete picture of taxation in the United States — the combined impact of federal, state and local taxes on American households.

There are no comprehensive statistics on the distribution of state and local taxes, so The New York Times used other government data to estimate the distribution of those taxes.


Last week I posted about Obama’s startling position that we don’t' have a spending problem. He sees it as a healthcare funding problem, and implicitly that he’s solved it.

Yesterday, the lead editorial in The Wall Street Journal raised the same point.

"We don't have a spending problem. We have a health-care problem." For our money—and yours—those are two of the most remarkable sentences our Orator in Chief has ever strung together.

So, he and the Democratic congressional majority passed Obamacare:

… Speaking at a pep rally for House Democrats shortly before they voted to pass what he called "one of the biggest deficit reduction measures in history," Mr. Obama said that "Everybody who's looked at it says that every single good idea to bend the cost curve and start actually reducing health-care costs are in this bill."

Except for … say … shifting the supply of healthcare professional to the right (but that might tick of the AMA). Last I checked, that’s how we teach freshman that prices go down.

One of my favorite quips about Clinton, and one which I’ve used many times even though I don’t know the source goes like this: what made Clinton an OK president was that he could BS, but he knew better than to believe his own BS. Not so Obama:

He seems to believe his own advertising. The White House position is that the government health gnomes now have the tools they need to solve the problem. And that would help explain why Mr. Obama refused to consider more than token reforms in the budget talks in 2011 or after the election.

Buchanan’s Contributions

Here’s Tyler Cowen at Marginal Revolution (the biggest economics blog, and what you should be reading):

Matt asks this question.  I am a bit on the run, so I will do this in link-less form, but all the sources should be easily googled.  Here goes:

1. He developed the “theory of clubs,” which sets out the conditions under which private associations supply excludable public goods at optimum levels.

2. For his time he had the best and most rigorous analysis of the incidence of public debt.

3. With Gordon Tullock he pioneered the economic analysis of voting rules in terms of transactions costs and external costs imposed on others.  Any current blogosphere discussion of say the filibuster will rely on this approach, though we now take it so for granted we don’t realize how impressive it was at the time.

4. He had pioneering economic analyses of bicameralism, logrolling, and other aspects of legislatures, again with Tullock.

5. Along with Harsanyi, he formulated aspects of the “original position” before Rawls did and he was a major influence on Rawls.  By the way, I have seen Buchanan numerous times with top professional philosophers, and he has no problem holding his own or better.

6. He helped pin down, including on the technical side, the economic concept of externality.

7. He provided the most important revision to optimal tax theory since Ramsey, namely the point that supposedly efficient methods of taxation can be too easy to use.  That was in The Power to Tax, with Brennan.  His piece on static vs. dynamic versions of the Laffer curve, with Dwight Lee, is also significant.

8. He provided a public choice analysis of why Keynesian economics would not lead to the appropriate budget surpluses during good times and thus would contain dangerous ratchet effects toward excess deficits.

9. He thought through the conflict between subjective and objective notions of value in economics, and the importance of methodologically individualist postulates, more deeply than perhaps any other economist.  Most economists hate this work, or refuse to understand it, either because it lowers their status or because it is genuinely difficult to follow or because it requires philosophy.  Yet it stands among Buchanan’s greatest contributions even if a) I do not myself agree with his approach, and b) I do not think it is easily summarized or even well-explained.  Buchanan took Knight and Shackle very seriously and he understood that the typical pragmatic dismissal of their caveats was not in fact  well-founded.

10. His Hayekian work on “order defined only through the process of emergence” and “economics as a science of exchange and catallactics” is a very important take-down of the scientific pretensions of much of economics.  It doubted whether the notion of efficiency could be independently conceptualized at all.  Again, this work is disliked or ignored.  Buchanan may be going too far, but it is a very important and neglected perspective.

11. He thought more consistently in terms of “rules of the games” than perhaps any other economist.  This point remains underappreciated and underapplied.  It makes technocracy out to be a fundamentally different endeavor.

12. He did important work in the history of economic thought, reviving interest in the Italian school of public finance and public choice.

13. His late papers with Yoon on the work ethic, increasing returns, and economic growth remain underappreciated.  I also admire his work with Yoon on the anti-commons.

There is more, but that is a start.  Try his article on why pollution should be taxed for Pigouvian reasons.  I could add that Buchanan understood the importance of monetary rules, and favored a regime where the supply of money would be elastic in response to negative economic circumstances.

Pasted in full with apologies to Tyler (who knows everything better than I do).

Sunday, January 13, 2013

Improvement in Long-Term Unemployment

One feature of the most recent recession, that was different from previous recessions, was the long-term unemployment.

More specifically, short-term unemployment recovered fairly quickly in 2009-2010. The recently unemployed were able to find work just about as easily as they had been before the recession hit.

Not so with the long-term unemployed. Those that were out of work and stayed out of work for a year or two had a much harder time getting back into jobs than in previous recessions.

There are three explanations for that.

One is that when the recession hit, business shed workers who were not very employable first. These people had gotten jobs in the boom because there was no one else to hire. The economy isn’t back to that point, and those people are still without jobs.

A second explanation is structural unemployment. The long-term unemployed are likely to still be unemployed after a few years because the jobs they had have been eliminated, and are not coming back.

A third explanation is that the generosity of unemployment benefits discouraged people from looking for work.

There is some evidence that this situation is improving.

The charts that accompany the article are a bit confusing to the unaided eye. Check out this one:


Clearly it shows improvement for both short-term and long-term unemployment. But it is missing the “compared to what'” part. It’s scaled so that 0 (on the left) is the worst that the unemployment got at the end of 2010. From there, moving in negative direction means that unemployment is going down. But … how far can or should it go?

Consulting the BLS website, at the end of 2010 there were 6.428 million long-term unemployed. It is now down to 4.766 million. That figure was as low as around 1.1 million in 2006. That works out to about –83% on this graph. So, we’ve made some headway, but there’s a long way to go.

The short-run unemployed are everyone else: 7.926 million at the end of 2010. This figure got down to about 5.6 million in 2006. That’s about –30%. Again, we still have a long way to go.

NA-BU523B_ECONO_G_20130110211902Here’s the second graphic, composed of a number of charts.

The chart along the bottom tells the story of the first explanation given above. The vertical axis is the average duration of unemployment. For it to go up, people have to be out of work longer. Note how it rises steeply after the recession. The way this happens is if people were pushed out of jobs during the recession, and not rehired after the recession — so that the duration of some of the unemployed was going up with each month. Only lately has then started to change … and not quickly.

The two charts at the top tend to support the third argument. Note that there has been a decline in the number of unemployed who are in the range, 1-3 years, where conceivably their benefits are running out. But, this data also supports the first explanation: for those unemployed more than three years … those who’s benefits expired long ago … there’s still not much tendency to be back to work.

It’s an open question how the proportions of those hard-core unemployed split between 1) people with weak skills who are less likely to be rehired, or 2) people without skills for the jobs that the economy still has.

From the article “Long Term Jobless Begin to Find Work” in the January 11 issue of The Wall Street Journal.

Friday, January 11, 2013

James Buchanan

James Buchanan passed away the other day. He was a big deal that business majors should know about.

Buchanan won the Nobel Prize in Economic Science in 1986. He won for being one of the first, and certainly the biggest exponent of a field known as public choice.

In short, public choice is the idea that we need to apply the same ideas of constrained optimization to the choices of politicians and bureaucrats, rather than just to consumers and firms.

Among the key insights of public choice theory are that:

  • Special interests gain power in democracies by focusing benefits on the few and spreading costs across the many.
  • Politicians will focus on elections rather than the needs of voters.
  • Bureaucrats will focus on job preservation rather than helping those in need.
  • Government will find it easier to impose costs on those that can’t vote. This is why social programs operate in reverse-Robin-Hood fashion by taking from the young/poor to give to the old/rich. This is also why governments run deficits: they are deferring taxes from those that vote to those that aren’t born yet.

Marginal Revolution has posts about Buchanan here and here. Here is Arnold Kling writing on askblog.

Here’s his obituary in The New York Times. You should also take a look at Stephen Miller, Donald Boudreaux (of CafĂ© Hayek), and the editorial that appeared in the January 9 issue of The Wall Street Journal.

Thursday, January 10, 2013

What Obama’s Thinking

I was stunned when I read this. First some caveats:

  • The source is an article that summarizes a sit-down he had with House Speaker John Boehner by Stephen Moore in January 7 edition of The Wall Street Journal. Boehner is a fairly conservative Republican, and Moore is a libertarian. So … this isn’t going to be pro-Obama.
  • Personally, I’m negative to neutral on Obama and the Democrats. Mostly this is because the Republicans are … hmmm … go read this thing written by Bret Stephens almost a year ago about why the Republicans were bound to lose this year. In short … the Democrats are in the game, while the Republicans went home in a huff and tried to take their ball with them but couldn’t even get it out of Obama’s hands. So … I’m on the lookout for bad things about Obama.

Having noted all that, I couldn’t believe this point.

What stunned House Speaker John Boehner more than anything else during his prolonged closed-door budget negotiations with Barack Obama was this revelation: "At one point several weeks ago," Mr. Boehner says, "the president said to me, 'We don't have a spending problem.' "

The president's insistence that Washington doesn't have a spending problem, Mr. Boehner says, is predicated on the belief that massive federal deficits stem from what Mr. Obama called "a health-care problem." Mr. Boehner says that after he recovered from his astonishment—"They blame all of the fiscal woes on our health-care system"—he replied: "Clearly we have a health-care problem, which is about to get worse with ObamaCare. But, Mr. President, we have a very serious spending problem." He repeated this message so often, he says, that toward the end of the negotiations, the president became irritated and said: "I'm getting tired of hearing you say that." [emphasis added]

If you’re like me, and you have trouble understanding where the Democrats in D.C. are coming from, this is the clue you need.

Think about the implications of this: 1) we’re in this situation because of healthcare costs, and 2) presumably because the Democrats passed the Obamacare bill they wanted we’re all going to live happily ever after.

OMFG: this is benighted (that’s a good word for a college student to learn, here’s the definition).

This position denies that:

  • We’ve had a passive increase in the deficit and debt because of the Great Recession of 2007-9, but we’re still not really moving in the right direction with this.
  • We’ve had a structural increase in the deficit and current and future debts because of responses to the Great Recession in the “Obama” and Bush stimulus packages.
  • That concerns about the size and scope of Federal spending have not been a major issue for over 30 years now.
  • That social security isn’t a big problem as well.

While there were certainly some problems with access to healthcare prior to Obamacare, no one should deny that the fundamental problem was with Medicare: how was the government going to sustain providing open-ended medical care to seniors. Everything else was just details.

And the problems with Medicare really boil down to three things:

  • Healthcare works.
  • Healthcare is a luxury good.
  • We lack political will to adjust the age at which Medicare coverage starts.

Think about these:

  • If healthcare didn’t work, no one would want it, and we wouldn’t spend so much on it … and the problem would go away.
  • The income elasticity of healthcare is well over +1: as people become richer they’ll buy proportionally more of it. Spending on healthcare isn’t a cause of problems; instead it’s a side effect of a society that’s doing well economically. Go ahead: name all the poor countries where healthcare spending is high on the policy priority list.
  • If people are living longer, this changes the proportion of Medicare payers to receivers. The only way to make this work is to hit the payers up for more cash, or to raise the age at which you can begin to receive benefits. Right or wrong, democracies consistently choose the former.

In what way did Obamacare (which is essentially the Republican healthcare position of the 90’s, as passed by Republican Mitt Romney in Massachusetts a decade later) address any of these? Is it even reasonable to think that it could or should have?

Let me give you a metaphor for all this. Society and the economy is a football team playing defense. They are lined up in their stances, snorting and ready to go. The Democrats are on offense, and Obama is the quarterback. Except the Democrats just walked on to the field in his pinstripes and baseball caps. Some of them think they won’t get hurt because the referees are on their side. Obama’s got a baseball in his hand and is looking for the pitcher’s mound. The Republicans have gone home because they don’t want to play basketball. And the media is wringing its hands because it would prefer that politics was a more cooperative sport … like rowing.