Sunday, March 29, 2015

Every TV News Report On the Economy In One

Charlie Brooker’s Weekly Wipe is a British TV show, more or less like The Daily Show. Here they’ve put together a faux news report containing all the features that usually go into one of these things … with just about as much actual economic content as usually go into these things:

You shouldn’t always take these things you see on TV too seriously. There often isn’t very much to them.

Via Alex Tabarrok from Marginal Revolution.

Wednesday, March 25, 2015

This Post Is Not a Joke

Would you love to have a sidekick? Ideally a useful one? You sort of do already if you use your smartphone for more than texting links to kitten videos. This isn't just claptrap ... or maybe it is.

Wait for it ...


It's difficult to get across to people the scale of economic growth produced by compounding of technological improvements (e.g., a 4,000 to 1 improvement in the cost of lighting over 175 years).

However, it's critically important to do so because, even in a developed country like the U.S. that is not posting ridiculously high growth rates (like, say, the 10-15% per year that Mongolia has been averaging) it's still reasonable to forecast a doubling of well-being during an adult's working lifetime, and perhaps a quadrupling from birth to death. What exactly will that entail, when there's lots of stuff (like food, clothing, and transportation) that can't increase much? Well, it means a lot of other stuff that will go from nothing to something.†

But, it's worse that that. All this growth is caused by improvements in the productivity of workers. This comes from increased use of capital. But we've now figured out how to further improve our ability to use capital by inventing technology that allows individuals to control more pieces of productive capital. That's what technology does: it turns workers who are productive because they use capital into more effective workers who are more productive because they use technology to increase the amount of capital they control.

Now, put on your tinfoil hat: how far are we from a future in which you can control a piece of technology mixed with capital that is capable of controlling the other capital you already control with technology? What is the world going to look like when you have ... not just a drone ... but an avatar?

An example may help: I'm not talking about transitioning from human-driven cars to self-driving cars, but rather a transition to an avatar that hangs around you and that you can tell to go to the car and drive to school and sign your sick kid out of the nurse's office and bring them home?

Think about the numbers for this. We float along year after year benefiting from improvements in technology of say 2% per year, and we float through our lives while that compounds over 10 years to a smooth and steady 22% improvement that we take for granted. And then you buy your first avatar, and it isn't perfect, but it immediately gives you a 20% jump in productivity. The thing that makes this thought experiment different from other ones we might conceive is that I want to assume that the avatar also benefits from future technological improvements: because it does what you do, when your productivity improves its productivity improves too, so you'll be compounding your compounding of productivity growth.

You end up with something that charts out like this:
What's critical about this is not that the blue "curve" has jumps (each time you get a new and improved avatar), or that it's higher than the orange curve (because the avatars improve your productivity), but that the slope of each long segment of the blue curve is steeper than the orange curve. As a result the slope of the jumps gets steeper too. This is what it happens if a sequence of improved avatars gets the same productivity improvements that its person gets.

BTW: What are you going to do when you're old if you're on the blue curve instead of the orange one, and you live long enough? What will you buy? Trinidad? Or will you be outbid by someone with 2 avatars?

I'm writing this because yesterday, a retrospective video game box set went on sale: Borderlands: The Handsome Collection — Claptrap-In-A-Box Edition.

When you play Borderlands, you're assisted by an annoying but useful robot sidekick named Claptrap that can act somewhat independently of you.

The thing is, the new box set comes with your own physical version Claptrap.

This Claptrap doesn't do too much. But it moves, it repeats phrases, and so on. Very much like other toy robots that have been around for 15 years or so. (Did you know that in Japan people are starting to have funerals for their robot dogs that are starting to die from something akin to old age?). But this Claptrap runs the android operating system, and can be programmed from your phone (even remotely). How many generations of marketing are we away from a physical avatar that comes with the game being more useful than the character within the game? So, you might need Claptrap to find water in the game, and the Claptrap in your home shows up a couple of minutes later with a mug of hot chocolate that it made from scratch because it knows its still winter outside and you'd like that better, especially if the milk is free of antibiotics?

Even better — some of you know that I'm taking Josh Price's Stata class with about half the students from this class — what will happen to you when a Dave Tufte can have his avatar learn Stata to compound Dave Tufte's productivity? Your absolute productivity will go up from learning Stata, but your relative productivity may fall further behind a Dave Tufte who leverages his avatar first.

Folks, I'm not sure how advanced such avatars will be in your lifetime. But I'm pretty sure that they're going to be independently productive enough that they're going to influence how we measure and understand productivity at the macroeconomic level.

† One of my favorite nothing to something improvements in well-being that's impossible to quantify is an app called SoundHound. I'm old enough to remember when few people knew the names of the songs they liked. That's weird, right? This was the mid to late 1970's. And there were two new technologies that were disrupting the lives of teenagers: FM radio and cassette tapes. FM allowed broadcasts in stereo with greater dynamic range (there's a reason that AM still sounds worse than FM). Cassette tapes allowed people to record cheaply and easily. The problem for the music industry was that people could tape songs off the radio. The way the music industry got around this was by encouraging a bunch of antisocial behaviors on the part of radio DJ's: fading in and fading out songs, talking over the fade in and fade out, and mentioning the artist's name but not the song's title (or discussing the lyrics too much). DJ's got kickbacks to behave this way! And listeners had to go pay real money to get all that stuff that we might now call metadata. The reason was so you'd hear this, say, really trippy song on the radio and all you'd know was that it was by the Eagles, and you'd go to the record store and there'd be a bin filled with copies of an LP called Hotel California and you'd buy the whole thing to find the one song (at $5.99 when it came out in 1976, or about $25 in today's dollars). I kid you not: to avoid this people would have tapes that they'd love, and their friends would love too, and the labels were blank because no one knew the names of all the songs. No one knew the lyrics either, which is why in 2015 sites like KissThisGuy feature misheard lyrics of mostly older songs: that site is a response to what used to be an actual problem for music listeners. And now we have SoundHound. Do you know this app? If not, you turn it on when you hear a song you like that you don't know ... and it listens to the song for a few moments, identifies the song, locates its metadata, and sends it back to your phone ... with streaming lyrics if you're into that ... and links to buy that song with a click or two.

All of this footnote may seem like so much navel-gazing. It isn't. Back then we spent money on records that got counted in GDP that no longer gets counted ... so the numbers tell us we're poorer now. But we aren't. Further, we spent ridiculous amounts of time back then looking through friend's record collections trying to glean little bits of metadata. We wanted that, so it must have been valuable, and should have been counted in GDP, but it wasn't so the numbers back then were telling us we were richer than we really were. Flash forward, and SoundHound provides us all of that in a form that's impossible to measure with GDP, so we're richer on this count too, but the numbers don't show it.

Monday, March 23, 2015


Here are a couple of bits about Singapore that are relevant for this semester.

1) We have a student, JB, who did an exchange program in Singapore. So we have inside information.

2) Lee Kuan Yew passed away this weekend. He was prime minister of Singapore from 1959 to 1990. Singapore has a one party political system, so this position was akin to CEO. He then took another position, more advisory, less day-to-day, that might be regarded as something like a corporate president, which he held until 2004. After that he took an emeritus position for 7 more years. Anyway, he's such a big deal that his obituary is on the front page of today's issue of The New York Times (they do that once or twice each month). In the annals of developing countries, Lee Kuan Yew is the ne plus ultra of effective leaders: Singapore was a developing country when he took over, and was a developed country when he stepped down. No one else has done that. If you're ever in a discussion of the success, or lack thereof, of developing countries, you'd better have him in the mix.

3) This is a good time to bring up an observation, based on a descriptive growth model (that we'll be covering over the next month), of how we explain high growth rates in some East Asian countries. This is based on an article entitled "The Myth of Asia's Miracle", written by Paul Krugman, and published in Foreign Affairs in 1994. Krugman's position is that the common understanding that growth in East Asian countries is a symptom that they are doing something special that should be emulated elsewhere ... is an urban myth.
[This conclusion is] called into question by the simple observation that the remarkable record of East Asian growth has been matched by input growth so rapid that Asian economic growth, incredibly, ceases to be a mystery. [quote corrected after class]
Essentially, Krugman is saying that other countries don't match the growth in East Asia because they do not have societies or governments that are capable of marshalling capital as readily.

Krugman's position has been widely influential. But there's also a cautionary tale. Simple simulations of descriptive growth models show that output growth derived from capital growth is fairly limited, and that developed countries are as rich as they are because they transitioned from capital growth to technological growth. He cautioned that Singapore has not matched the growth numbers of Hong Kong because it is primarily a technology importer rather than a technology innovator. This argument carries over to contemporary China: a lot of discussion in developed countries that China's growth rates are not sustainable relates back to the continued absence of technology driven increases in growth rates.

Thursday, March 19, 2015

Do Minimum Wage Increases Cause Unemployment?

Theoretically, economists usually assert that increasing a binding price floor will decrease quantity transacted.

The minimum wage is a price floor, and it is binding in many locations. So we expect to see increases in the minimum wage being associated with reduced employment or increased unemployment.

Except that this has been remarkably hard to show in the data. The seminal paper here is Card and Krueger's 1994 piece entitled "Minimum Wages and Employment: A Case Study of the Fast-Food Industry In New Jersey and Pennsylvania". Their work found little effect of minimum wage increases on unemployment.

There have been many criticisms of this paper over the last 20 years, and it has taken some hits. But don't criticize it casually: Card and Krueger are major researchers from Princeton who published this in  American Economic Review. Their results should not be taken lightly.

The latest paper in this fight is from Jeffrey Clemens and Michael Wither of UC San Diego. They looked at the three national increases in the minimum wage that occurred each July from 2007 to 2009. And they did find some negative effects.

We talk a lot in here about the decline in labor force participation over the last 15 years or so. But that includes both the employed and the unemployed. No one is saying that changes in the minimum wage have significant effects on the opportunities of the already unemployed. So they focus on a slightly different statistic: the employment/population ratio rather than the (employment+unemployment)/population ratio. This too has fallen, although it peaked a little later (in April 2000). Here's what it looks like:

So, obviously, there's a big drop off with the Great Recession. And the government was increasing the minimum wage just before the peak, just after the peak, and in the middle of that big downward slide. Roughly, we're talking about a drop from 62.9% to 58.7%.

What they found was that about 1/6 of that big drop was due to the minimum wage increase. So that's far smaller than the changes produced by the demographics of aging baby boomers, which accounts for perhaps half of that big decline. But it's not nothing: it's about 1.4 million people who lost their jobs as a result of the three increases.

That's a big deal because far fewer people work for the minimum wage than is commonly recognized. Only about half the population actually works for wages (about 76 million). The rest work for salary, commission, piece-work, and so on. Of that 76 million, only 3.3 million worked at the minimum wage in 2013. So this is saying that would have been roughly 4.7 million without those minimum wage increases.

So what we have here is that 3.3 million people got a 40% increase, and 1.4 million got a 100% decrease in their wage.

It's not an easy ethical question to address whether that was worthwhile or not.

But, here's a thought experiment. The product of the 3.3 and the 40% is 1.32, which is roughly the same as the product of 1.4 and 100%. Thus, to an approximation, an increase in the minimum wage for workers who retain their jobs is paid for by completely cutting enough people to cover the difference. So, if you worked with 5 other people, would you vote to approve firing one of them at random, and splitting their wage to give everyone left a 25% increase? I wonder.

Extended Unemployment Benefits Are Probably a Bad Idea

One of the things that was done differently in the U.S. in the Great Recession was the extension of extended unemployment benefits nationwide. Depending on your location, the Feds guaranteed you up to 47 extra weeks of unemployment. This policy was unprecedented at the national level.

The motivation for this was good-hearted: the unemployed have a tough row to hoe, and recessions aren't the fault of individuals. Of course, there was also all that hyperbole about this being The Great Recession, when really it was just ... as we showed in Case 5 of the time series portion of the class ... worse than the last two. You know just maybe using the worst thing in a generation as a justification for doing something you've never, ever, done before wasn't the best idea.

The "Depending on your location" is the key part. Because when Congress rescinded those benefits in December 2013, it provided a natural experiment for looking at the before and after effects.

Do note that in the past in this class that we have discussed the effects of extended benefits, and at the time I remarked that I didn't see that they'd made much difference because there just wasn't much evidence either way. I was wrong.

The results are now in and  ... are not pretty. Hagedorn, Manovskii and Mitman have an NBER working paper attributing 1.8 million of the 3.1 million jobs created in 2014 to rescinding those benefits. Further, they estimate that 1.0 of those 3.1 million were people who entered the work force: that is they saw people who'd been collecting benefits get them cut and go get jobs, and figured they could do the same thing too. The latter is critical because frequently critics of cutting benefits make the casual argument that if you cut benefits people just leave the labor force: the data says it's the other way around.

You can't readily disentangle the raw numbers to get at how much the unemployment rate would have changed has Congress not rescinded extended benefits. But, the unemployment rate dropped from 6.7% to 5.6% over the year, and it seems plausible that half of that was due to the benefits change.

N.B. Do note that now that we're in Spring 2015, people call the behavior of the labor market full employment, and remark that we somehow turned the corner on a weak recovery over the last year. Perhaps our members of Congress just got smarter one day in late 2013.

America: Is There a Problem with Your Rich People?

Here's two interesting bits of research.

Let me lay out some stylized facts:
  • There's a broad feeling across Democrats and Republicans that there's something wrong with America.
  • Republicans tend to view this as a combination of Democratic policies holding back the rich and encouraging the poor.
  • Democrats tend to view this as "the game is rigged in favor of the rich".
  • America has a problem with the appropriate valuation of housing.
  • America has a problem with not enough people being interested in working.
I think that's a set that most would think form a reasonable description. So what do we make of these two bits of research?

1) Adelino, Schoar and Severino have a new NBER working paper entitled "Changes in Buyer Composition and the Expansion of Credit During the Boom". The story we've been telling the last 5 years is that the financial crisis was brought on by making mortgage loans to poor people who couldn't afford the payments. This is known as decoupling (of income from ability to make payments). Adelino et al. provide evidence that this is false: decoupling is an artifact of analyzing the data by zip codes. Instead, if you look at individuals, you see no evidence of decoupling.
... There were no severe distortions towards poor or low-income people in the way banks allocated capital at loan origination.
Instead, what we see is rich people borrowing too much because the bubble looked too good to pass up:
... Lenders and borrowers bought into high house price expectations and ignored potential equilibrium effects from a large fraction of borrowers being levered to their maximum ...
The paper includes a chart showing that the portion of mortgage delinquencies among the rich increased from 7% to 32% from 2003 to 2006.

2) Robert Hall, one of the senior generation of macroeconomists on everyone's medium list for an eventual Nobel Prize reported to a Republican Congress that, now that the Great Recession is a memory, the problem in the labor market is the participation of ... the rich. Check it out:
Of course, this is showing that lack of labor force participation has been a consistent reason why the poor are poor. But what is new is that this problem is distinctly not getting worse. Instead what we are seeing is roughly a 5% decline in labor force participation across the top half of the income spectrum over the last generation. That roughly explains all of the decline in U.S. labor force participation over this period. The raw numbers are ridiculous: labor force participation by teenagers from the top quartile (the blue and green at the top) is down by 16%.
In particular, the data do not seem to support the view that the social safety net is discouraging participation ...
Note that these numbers are over the course of a generation, so we're not seeing business cycle effects (in fact it's pretty hard to see the two recessions in this chart). Further, this is participation. That includes people who are unemployed: so this isn't about a lack of jobs but rather a lack of interest in working at all.

Let me summarize: rich adults made stupid real estate purchases, and are raising kids who aren't interested in work. So, the problem with America is ... the OC.

Greece Is Not Just a Teenager, But a Difficult One At That

Remember that post from a few weeks back that everybody pays back the IMF eventually?

Catch this:
International Monetary Fund officials told their euro-area colleagues that Greece is the most unhelpful country the organization has dealt with in its 70-year history, according to two people familiar with the talks.
In a short and bad-tempered conference call on Tuesday, officials from the IMF, the European Central Bank and the European Commission complained that Greek officials aren’t adhering to a bailout extension deal reached in February or cooperating with creditors ...
This kind of points towards a conclusion that Syriza's worldview is that because they've chosen to wear white hats that this makes the other guys bad. There's a lot of window dressing on it, but at the core that may be what's going on here.

Via Marginal Revolution.

Will Greece Get Capital Controls?

The EMU imposed capital controls on Cyprus after their financial crisis in 2013. Will Greece get capital controls when (and if) it becomes cleared that their crisis is only on hold?

But Cyprus' problem was different. It was mostly about the Cypriot government letting its banking sector bloat up with presumably ill-gotten Russian deposits, and then being too small to act as a lender of last resort when those banks became insolvent.

Greece ... has bigger problems. Recall the post from earlier this semester: people are starting to use the word "failed state" when referring to Greece. This is a word we usually reserve for places like Somalia.

Even so, if the money starts flowing out again, capital controls may be coming. The problem is that half of the assets of Greece's banking system are IOU's issued by the Greek government that it promises to pay out of tax revenues. But it's having trouble collecting taxes.

What we need to pay attention to over the next few months is the decisions that the European Central Bank (ECB) makes regarding Emergency Liquidity Assistance (ELA). If they are tight with that, then the government of Greece may need to impose capital controls.

Also keep your ears open for any data about capital flows out of Greece.
This chart is poorly explained: what bears watching is the bars and the scale on the right. I'm eyeballing that and seeing €4B in December, €13B in January, and €4B in February. Does that mean that the smart money has already left, or that Greeks were holding out hope in February that Syriza might be able to make a better deal?

Revisiting Cyprus

The big topic in this class 2 years ago was the financial crisis in Cyprus. It's time to revisit how the Europeans addressed this issue, and how that's worked out.

First, a primer. The crisis in Cyprus was different from my coverage of Greece II this year, or Greece I whenever the last time was that I had to explain Greece to you folks. Over the previous decade, Cyprus had rapidly evolved into an offshore banking center for Russians, who deposited wealth that was often ill-gotten (proximity, warm water, and nice beaches all help). At the same time, it was admitted to the EU in 2004, and the EMU in 2009 (so the Russians were getting their money out of Russia and into the EMU). Those deposits needed to be invested somewhere, and Cypriot banks invested a lot of them in ... get this ... bonds issued by the government of Greece. When those went south, Cypriot banks became insolvent. But the EMU has organizational problems: all those deposits were now in euros which could move freely within the EMU, but the Cypriot government was responsible for being the lender of last resort for its own banking system. And they couldn't raise the money. So they went begging to the troika, and they weren't that happy to be providing deposit insurance to ... mostly Russian oligarchs. So they demanded a bail-in: in the final agreement depositors were required to contribute part of their deposits back to the banks to reestablish their capital. Basically, large depositors were told that to avoid the banks shutting down (and depositors losing everything), that half of their deposits would be forfeited, and the other half of their deposits would be replaced with shares of stock in the bank (whose value quickly fell to almost nothing) that was able to stay open due to the cash infusion. Pictures are a lot easier right: here's what a bail-in really means.

So, how'd that work out for Cyprus?

Well, the unemployment rate in Cyprus (that was in the 4-6% range for most of the oughties) climbed up to about 16% and has plateaued there.

One thing we've learned, again, is that despite economists dislike* of the political solution of capital controls ... they seem to work OK. And after 2 years, the capital controls are set to be lifted soon. If money doesn't start pouring out of the country again, then Cyprus is probably good to go. But here's a picture of what a capital control looks like.†

And, Cyprus has worked to rationalize some of its financial laws with how things are done in other countries. In particular, they're working on giving banks better recourse for dealing with non-performing loans.

But the Cypriots themselves are ticked off at the rest of the Europeans: they feel they didn't get the help they needed when they needed it, and are still paying for the trouble.

* Why do economists dislike capital controls? It's the whole voluntary exchange thing: if consumers want to move their wealth out of someplace, that's a form of free trade that probably should be permitted. Why do politicians like capital controls? Well ... hmm ... because they get blamed for financial crises, and sometimes those end with politicians getting killed.

What specifically do capital controls mean? Pretty much no acceptance of "checks or debit cards, your checking account is now a savings account from which you can make limited daily withdrawals, your savings accounts is now a CD, your existing short-term CDs will be automatically rolled over into long-term CDs, and you can’t cash them out early."

85 Disruptive Ideas

One implication of growth theory is that improvement in well-being can be about using more resources and accumulating more capital, but that doesn't do remotely enough to explain the richness of developed countries. Technology is far more important.

But our definition of technology is expansive: it's basically everything that 1) affects productivity, 2) doesn't depreciate, and 3) only has to be paid for once.

That makes large aspects of a smartphone technology, but it also means that coming up with a mundane idea like ... we can leave gardening products in the parking lot at big box retailers because most people won't steal them ... is also a technology.

This is just food for thought. Take a look at this article from Bloomberg Businessweek entitled "The 85 Most Disruptive Ideas In Our History". Do note that this is a self-centered gimmick for the magazine: it came up with 85 ideas from the last 85 years because it was first published 85 years ago.

Even so, it's an interesting list because of its mix of the high tech ideas that everyone thinks of as technology (e.g., smartphones, modems, DNA sequencing, the Google) and also the "low tech" that only macroeconomists recognize as technology too (e.g., GDP, shipping containers, workplace safety, sexual harassment).

Via Kottke.

Are We Winning the War On (Absolute) Poverty?

If one only listens to progressives, it would be reasonable to conclude that we are not making progress against poverty in the U.S.

In the legacy media, the most progressive major newspaper is arguably The New York Times. Within that, The New York Review of Books, a tabloid-like section that comes with the Times on Sundays, is widely regarded as even more progressive.

So their publication of the article "The War On Poverty: Was It Lost?", a review by Christopher Jencks of Legacies of the War on Poverty is remarkable. The article is accessible to undergraduates throughout.

The 50th anniversary of President Johnson's declaration of a war on poverty was last spring, and here's what surveys tell us people think about that:
"... Given four alternative ways of describing how much the War on Poverty reduced poverty, 20 percent chose “a major difference,” 41 percent chose “a minor difference,” 13 percent chose “no difference,” and 23 percent chose “made things worse.”
Broadly, those views are supported by official data showing that the poverty rate now stands at about the same point (14%) that it did in 1967. Do note that business cycle expansions are capable of making that rate fall by up to 4%, and recessions can run it up by that much too.

A natural questions is, if we don't think it worked, does that mean we should try harder or start over?

But, perhaps a better question would be: how many people making either argument are even conversant in the problems with that measurement?

First off, the income levels in the poverty level are adjusted for changes in inflation with ... the CPI. Recall from class that the CPI, by construction, systematically overstates changes in prices. Therefore, using it to adjust the poverty level means that the real income in the poverty level will grow each year by the overstatement of inflation, and that those overstatements are compounded annually.

It gets worse.

The 1 in in 9 couples that cohabit (both straight and not) are more likely to be counted as 2 poor individuals than would be a married couple with the same income.

The poverty line counts cash income, so it does not count welfare benefits that are not cash. That's almost all our food programs, housing programs, and Medicaid. Further, it's only a subset of the poor, but veterans' benefits don't get counted either.

The poverty line is determined from pre-tax rather than post-tax income. But thanks to the ideas of economists like Milton Friedman we have the earned income tax credit, which amounts to an negative income tax for the poor.

We only have solid measurements on how the poverty rate would change for using a better price index, the value of food and housing benefits, and the EITC. But together, those three alone move about 3/4 of the people who fall below the poverty line out of poverty.

That's huge, and it's essentially impossible to make this point in polite company.
... When I tell my friends or my students that “there is still a lot of poverty, but less than there used to be,” they have trouble remembering both halves of the sentence. Some remember that there is still a lot of poverty. Others remember that there is less than there used to be. Few remember both.

All  of the above is an argument about absolute poverty. But some are still concerned about relative poverty. This is one facet of the income inequality debate that has been big for the last several years.

But there's an ethical question that is rarely asked. Suppose our primary concern is only relative poverty. Then our measurement issue is — relative to what? A concern that relative poverty is the primary issue means that we may end up being more concerned for people in Nogales, Arizona than we are about people in Nogales, Sonora, even though absolute poverty is far worse in the latter. The implication is that the pink lines in atlases that mark borders also determine moral sensitivity. That's seems flippant to me.

Do Wealth and Income Cause Health?

It's fairly obvious in developed countries that those rich in wealth, rich in income, or rich in both, are healthier.

There's a presumption in discussions of public health and welfare that wealth and/or income causes health outcomes to improve, and therefore that inequality of wealth and/or health contributes inequality of health outcomes.

To the extent that one thinks that good health is human right conferred at birth, these presumptions form the basis for a moral case for redistribution of wealth and/or income.

Unless one of those assertions is false.

New research from David Cesarini and Erik Lindqvist entitled "Wealth, Health, and Child Development: Evidence from Administrative Data on Swedish Lottery Players" looks at the health outcomes of people before and after they get windfalls through lotteries.
... In adults, we find no evidence that wealth impacts mortality or health care utilization ...  
... We find that wealth increases children's health care utilization ..  and may also reduce obesity risk.The effects on most other child outcomes ... can usually be bounded to a tight interval around zero. Overall, our findings suggest that correlations observed in affluent, developed countries between (i) wealth and health or (ii) parental income and children's outcomes do not reflect a causal effect of wealth.
This is not a direct test, but it is suggestive that causality goes the other way: that people make lifestyle choices that are jointly beneficial to health, wealth and income, or jointly non-beneficial. So this research points in the direction that policies to redistribute income and wealth punish better choices and reward worse choices.

How Much Does the Minimum Wage Help the Poor

It's taken as a given by most people that the minimum wage is beneficial on net, and that it helps the poor.*

Thomas MaCurdy has a new piece on this in the Journal of Political Economy (one of the A+ journals) entitled "How Effective Is the Minimum Wage at Supporting the Poor?" (you can't get this directly without paying for it, but you can go through our library).

Proponents of minimum wages assert that the gross benefit to those who get higher wages outweighs the gross cost on those who lose jobs or suffer deadweight losses. There is a presumption in this argument that the benefits and costs both accrue to the poor.

MaCurdy shows that the benefits do not occur mostly to the poor: only 14% of benefits go to families on welfare, only 13% to the slightly different set of families supported primarily by low wage workers, and only 35% to families whose income is twice the poverty level (that's $48.5K for a family of four ... about what an assistant professor in biology earns at SUU).

Who gets the other benefits? I'm generalizing, but broadly it's teenage children of white middle and upper class parents.

* Note that opposition to the minimum wage on economic grounds is that 1) theoretically it must help some people and hurt others, and 2) that evaluating the net benefit/cost is an empirical question that is still open (but articles like the one cited here are getting pretty definitive). Political opposition to the minimum wage is rarely this nuanced.


Discussions in class, and after class, makes me thing that my view here is being interpreted incorrectly. What I'd prefer is to replace thinking exemplified by this statement:

Let's raise the minimum wage to help the poor.

With this statement:

Let's raise the minimum wage to help the poor.

Even better, I'd like people to recognize that the first statement should really be written like this:

Let's raise the minimum wage, that mostly gets paid to rich white kids, to help the poor.

If we did that, it might be easier to get people to see that this next statement is an improvement.

Let's raise the minimum wage, that mostly gets paid to rich white kids, to help the poor.

Monday, March 9, 2015

No Improvement In Standards of Living

Many people (outside of economics) seem to take as a given the oft-repeated idea that there’s been no real improvement in the standard of living of most Americans since the 1970’s.

I think this is ridiculous, but there’s a lot of people that believe vaccines cause autism too.

Anyway, Scott Sumner, writing at EconLog, has documented how some of the support for that idea comes from people improperly deflating nominal consumption (from GDP) with the CPI (not based on GDP). He even links to a Nobel Prize winner who does this.

I don’t make this mistake, and I didn’t incorporate it into your handbook. But it seems plausible that other people have done this.

But, of course, I did stress that the CPI — because of the method of its construction — is biased towards finding inflation rates higher than they really are and real values smaller than they really are.

Some Anthropology of Growth

Read this Jared Dillian piece entitled “The Anthropology of Finance”. It’s about how, if you’re an investor looking for new opportunities to earn returns, you need to look at the local culture.

What I’m trying to say is that the people of Norwich have no aptitude for making money. I’m not saying they are dumb. I’m not saying they are anti-business. Norwich leans left, like the rest of Connecticut, but there are many left-leaning places that are thriving economically. I’m saying that commerce is not in their culture …

In measuring why economic growth occurs, we subtract out population growth, yielding a residual: what’s left over. Then we subtract out capital growth, yielding a smaller, finer, residual. At simple levels we stop there, but at higher levels we go on with whatever data we can get our hands on.

And what we’re left with is residuals that vary from place to place. And those variations are positively correlated with well-being. We don’t know how to measure it yet, but macroeconomists are working very hard on quantifying what it is about culture that leads to improvements in well-being.

America seems to have a lot of it though. Contemporary Utahns are very sanguine about their own culture. Unfortunately, the data suggest that Utah is merely average when compared with other states.

Via Marginal Revolution Cafe Hayek.

Sunday, March 8, 2015

What’s Changed About the Standard of Living 1

Cato Unbound is running a series of 4 op-eds about how the standard of living has changed in the U.S. over the last several decades.

They let the conservatives go first, so go and read Megan McArdle and Brink Lindsey.

Here’s Megan:

We should never pooh-pooh economic progress. As P.J. O’Rourke once remarked, I have one word for people who think that we live in a degenerate era fallen from a blessed past full of bounty and ease, and that word is “dentistry.”

… Changes in job and family structure that have made the lives of people who are indisputably vastly materially richer than my young grandparents were, nonetheless feel much more precarious. We look into the numbers and think we’re seeing hard facts. But in fact, like someone reading tea leaves, we are projecting our intangible impressions onto an ambiguous picture.

Here’s Brink:

As the comedian Louis C. K. put it, “Everything’s amazing and nobody’s happy.”

In contemporary society, paid employment along with marriage and childrearing are far and away the most important social relationships we have. They ground our personal identities and imbue our lives with meaning and purpose. Yet these vital interpersonal connections are now fraying badly.

Remind me in a few weeks if I don’t post what the two liberals have to say.

FWIW: Both Megan McArdle and Brink Lindsey would probably object to my label of conservative. I think they both would like classical-liberal, but few know what that means. I think Lindsey probably votes Republican, but would call himself a libertarian. McArdle is much more eclectic.

Heinlein Quote On Well-Being

I am not sure which of Robert Heinlein’s works this came from, but it speaks to the improvement of well-being in human history:

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as "bad luck”.

Blame Glenn Harlan Reynolds for the lack of a better citation. I drew this from his USAToday piece entitled “France’s Demographic Bad Luck” which discusses the skyrocketing rates of emmigration of French Jews to Israel.

More generally, outside of macroeconomics, people tend to view economic growth as an entitlement provided for them by society: living standards have always improved in my lifetime, therefore there’s no threat that they won’t continue to improve.

If you believe that, go talk to Argentinians.

If you don’t believe that, begin to recognize that economic growth derives from a set of institutions that aren’t permanent, and weren’t planned by politicians and bureaucrats. But politicians and bureaucrats are quite willing to pull those institutions down if they think it will get them votes or perquisites. And then they’ll blame bad people (e.g., it’s Bush’s fault), or bad luck (e.g., our current expansion being weak), or bad influences (e.g., China’s crackdown on western influences just as Chinese women engage in birth tourism), bad foreigners (e.g., the current Germans are bad because some Germans used to be Nazis but current Greeks are good because some Greeks used to be major western philosophers), or bad hypothetical bogeymen (e.g., we need to enforce net neutrality now because it hasn’t been violated yet).

Via Newmark’s Door.

How Lousy Life Was … Recently

As part of my continuing meme that people don’t get the importance of economic growth because we don’t tell people often enough how recently life was lousier, I bring you this chart from Mark Perry at Carpe Diem (he has links to the data there too):


What do you like to do: eat at home, or eat out at a restaurant/bar? I think that’s a no-brainer. So, what we’re showing here is a dramatic improvement in well-being, on a small and unimportant data set, albeit one that’s familiar to all of us on a weekly basis.

There are those that say that the standard of living has not improved in the U.S. over the last two generations (or the single one shown here). Charts like this are easy to come by, and they shout out that those people are simply lying, or repeating the lies of others.

Now, this chart says nothing about the distribution of spending. I’ll discuss that below.

A few notes first:

  1. One might complain that this chart isn’t adjusted for inflation. That won’t matter since we’d normally adjust both series by the same price index. Inflation by the CPI was about 70% over this period. Spending at grocery stores was up by 80%, which means real grocery spending was up. But spending at restaurants and bars was up by just shy of 200%. That’s a lot of real (fun) discretionary spending.
  2. You could also argue that this should be adjusted for population growth. Except that was up by 25% over this period. That actually implies that real per capita spending at grocery stores actually declined by about 15%. We can probably thank Walmart for doing that single-handedly: Walmart only had 6 stores selling groceries at the time this data set starts; now they have 1,980. But for restaurants and bars, combining inflation and population growth says that spending should not quite double, and it almost tripled.
  3. Yes, I probably should have gotten the raw data, taken natural logs, and posted a corrected version. Actually, I did all that (of course, you knew I would, right?). But it didn’t show anything very different, so I figured I wouldn’t steal Mark Perry’s thunder by changing his chart.
  4. One might argue that the average ticket has gone up at restaurants and bars over this period. I do not have that data handy, but I’m pretty sure our hospitality faculty can provide data showing that the real price of most hospitality services has actually declined over this period.

Now, inequality: I’m not going to say that maybe that hasn’t gotten worse (although I really don’t think so). But let’s take seriously the idea that it has. Most discussions of inequality focus on the top 1%, the top 10% or the top 20%. If all of that spending at restaurants and bars was done by the top 20%, how much would their spending have had to increase? Spending at restaurants and bars tripled, so if one fifth of the population made that happen, their share must have gone up by 15 times. Halve that to account for inflation and population growth, and you’re saying that a generation ago the top fifth went out one day a week and now they go out all seven. That’s ridiculous. But, if you do it for the top 10%, the story becomes that they used to go out one day a week, and now they go out 14 days each week. That’s not even possible. There isn’t much point in even calculating what would need to have happened to the top 1%. One could make the argument that this is all celebrities getting bottle service in Las Vegas and Miami, and that this has gone up a lot over the last generation. But in order to believe that you’d need to think that the rich never spent gobs of money foolishly. Yeah … right. If anything, when most of “the rich” people in the country live in places like, say, St. George, it’s hard to argue that they even have extravagant tastes.

In the end, this simple graph tells a story of sustained economic growth improving the lives (in a minor way) of a very large fraction of the population.

Saturday, March 7, 2015

Deirdre McCloskey On Corruption

Deirdre McCloskey is an economist who is one of the best writers about economics. You should get in the habit of looking over just about everything you come across that she wrote.

This is actually a book review. But it’s an extended and informed one about corruption, and whether it’s a significant problem or not.

I’m not a native, but in living in Utah for two stints covering a bare majority of my adult life, we tend to focus way too much on the corruption of outsiders and way too little on the fairly ample corruption here.*

McCloskey offers some perspective on that; maybe a corrupt system is better than a busybody:

As Will Rogers used to put it, “Be thankful we’re not getting all the government we pay for.”

In macroeconomics, there’s a small-ish line of research looking at government as a stationary bandit:

Both these books are page-turners, if you can handle some 540 pages registering the crimes, follies and misfortunes of humankind. Anyone interested in good government (and bad) would do well to read both. Yet an economist might be inclined to draw a different conclusion from their reporting (and Murray Rothbard and Robert Higgs did so for decades): “Government is a band of robbers into whose clutches we have fallen”—not “thieves of state,” in Ms. Chayes’s way of putting it, but a state of thieves.

But even that is something we need to have perspective about:

Ms. Chayes and Mr. Cost want us to know that corruption matters, that the hour is late and we must do something. But is corruption so important in the grand scheme of things? Mr. Cost, for instance, reckons that his much-reviled pork-barrel projects, Medicare expenses and corporate welfare payout total up to “some extremely large figures, approaching $100 billion per year.” Wait a minute. That’s only half of 1 percent of national income. Americans spend about that much each year on recreational boating.

It’s all about growth, and for the better of us all, corruption isn’t much of a growth industry:

Beyond injustice and inefficiency, is corruption bad for growth? Growth, after all, not equality of distribution or exact efficiency in allocation, is what we seek if we really want to help the poor, rather than simply feeling good as we drink our second cappuccino while perusing the New Yorker. The astounding enrichment out of trade-tested betterment since 1800 has raised the absolute standard of living of ordinary people not by the 5 percent or even, say, the 25 percent achievable one-time by eliminating inefficiency or inequity—as studies of trade unions and governmental transfers show—but by fully 3,000 percent. Until 1800, humans staggered along at $3 a day in present-day prices. Afghans to this day earn less. Yet by now a Japanese or American makes, earns and consumes anything from $90 to $130 a day.

* I’d like to think my perspective is better than most, having spent close to the other half of my adult life in two of the most corrupt states in the Union: Louisiana and New York.

Thursday, March 5, 2015

The Greek Myth

Tyler Cowen thinks most people have it backwards:

… That out of control Greek government spending and borrowing has been converted into a (supposed) cautionary tale about the dangers of fiscal conservatism is one of the greatest (and most unfortunate) public relations triumphs of modern times.

Ponder that one carefully.

The post that came from links to this article entitled “Austerity Is Not Greece’s Problem” by Ricardo Hausmann (Cornell Ph.D., Harvard professor, cabinet official in Venezuela when it was still the richest country in Latin America). I knew the situation was bad, but not that bad:

… The truth is that the recession in Greece has little to do with an excessive debt burden. Until 2014, the country did not pay, in net terms, a single euro in interest: it borrowed enough from official sources at subsidized rates to pay 100% of its interest bill and then some.

His diagnosis of the problem is earthier than mine, but fairly similar:

Fiscal deficits, like unwanted pregnancies, are the unintended consequence of actions taken by more than one person who had other objectives in mind.

The numbers sound like the spending problems of a dysfunctional family:

… From 1998 to 2007, Greece's annual per capita GDP growth averaged 3.8%, the second fastest in Western Europe, behind only Ireland.

But by 2007, Greece was spending more than 14% of GDP in excess of what it was producing …

And Greece is not in a good position to work off its debts:

… The way to minimize the pain is to cut spending without cutting output, which requires selling to others what residents can no longer afford. …

The problem is that Greece produces very little of what the world wants to consume. Its exports of goods comprise mainly fruits, olive oil, raw cotton, tobacco, and some refined petroleum products. … The country produces no machines, electronics, or chemicals.

Sunday, March 1, 2015

Greece, Creditors, and the IMF

SF sent in a link to this article entitled “Greece Stirs Doubt On Debt Owed to the IMF” from the February 27 issue of The Wall Street Journal.

SF remarked that Greece’s grandmother may be looking peaked again. It had been less than a week since Greece worked out this year’s deal to fend off its creditors.

Here’s a podcast from NPR’s Morning Edition from 3 years ago, discussing how Greece will find a way to pay back the IMF first.

No matter what Greece says now, it will probably find a way to pay back the IMF. Think about it this way: even Argentina paid back the IMF (even if they did it 3 years too late). Basically, member countries treat the IMF like a charity: you don’t steal from them, and you make sure they get paid.

Reasonable Suspicion on Chinese Growth Rates

I have nothing against China specifically.

But, I do know generally that the real GDP values and growth rates of countries that don’t have open political and media systems should not be taken at face values.

So, in 2014 IV, China reported growth over the previous 4 quarters of 7.3%. That’s very high: it will lead to doubling in size every 10 years, and this is for a country with a very low population growth rate, so almost all of it could be viewed as improving real GDP per capita.

Unless …

Here’s an example of what Chinese academics are allowed to say about China’s economy from inside China:

… The consumer price index dropped to 0.8%; the producer price index fell by 4.3%; exports contracted by 3.3%; imports were down by 19.9%; and growth of broad money (M2) slowed by 1.4%.

Moreover, the renminbi has come under downward pressure, owing partly to economic recovery in the United States, which has fueled capital outflows. Given huge declines in industrial profit growth (from 12.2% in 2013 to 3.3% last year) and in local-government revenues from land sales (which fell by 37% in 2014) …


I suggest there’s some dissonance between what the more granular numbers say, and what the government announces for the consumption of incredulous western legacy media.

None of this changes viewpoints I’ve been clear on before: thinking China’s economy is larger than that of the U.S. right now is foolish, and thinking that China’s economy won’t be bigger than that of the U.S. in 30 years is also foolish.

Via Marginal Revolution.