Friday, December 23, 2016

U.S. Urban-Centered Mega-Regions

National Geographic reports an excellent job with a new version of an idea I included in my text starting with version 2.0. This is that much of macroeconomics is about where you live.

So check out this article entitled “Four Million Commutes Reveal New U.S. ‘Megaregions’”. I do think they need a better editor: it’s not the megaregions that are new, but rather the use of four million commutes to map that out.

Anyway, they produced this map:


Each line on here is someone’s commute. The shading is chosen to indicate the hubs for commuting that have evolved because this is an emergent process. Those are based on an algorithm rather than personal preferences. Interestingly, it determined something that most Cedar City and St. George residents know, but that seems lost on SUU administrators and Utah state officials: we’re in the Las Vegas megaregion, not the Salt Lake City one. If SUU feels like an afterthought across the state, now you know why.

This is based on an academic article entitled “An Economic Geography of the United States: From Commutes to Megaregions” that appeared on PLOS|one. That’s not required, but even so it has lots of maps that even an uninterested reader might find interesting.

Tuesday, December 6, 2016

Why Is Macro So Hard? Voters Sometimes Get What They Want

The news this week is that President-Elect Donald Trump has convinced executives at Carrier to not move a production facility from Indiana to Mexico.

The backstory to this is that the business had bottom line reasons for wanting to move to Mexico, and government officials (with the explicit backing of the currently powerless Trump) bought them off with tax dollars.*

Here’s Larry Summers view:

Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders.

This is similar to this H.L. Mencken quote from just over a century ago:

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

If that seems like a micro-offense, please recognize that those were different times.

Hat tip to Greg Mankiw for noting Summers’ turn of phrase, and to Don Boudreaux for repeating this Mencken quote many times through the years.

P.S. A couple of days after posting this, Tim Worstall posted a similar quote:

Populism: the unpardonable sin of offering the populace what they appear to want rather than what they ought to.

* On the negative side, in the short-run, we’re all investors in Carrier whether we want to be or not. In the long-run, this may solidify the dangerous precedent of corporate executives holding out for government handouts. On the positive side, it’s still early … perhaps Trump will just do this once to establish credibility that obviates it’s future need.

Sunday, December 4, 2016

An Example of Bizarro Journalism About Cuba

After I wrote this, Tim Worstall linked to a supportive article about Castro.

The only data charted in it is GDP of Cuba, versus two comparables: The Dominican Republic, and Jamaica.

The chart is used to support the position that Castro did OK.

Except the variables charted are not corrected for either inflation or population growth.

That's kind of like asserting that Castro was great because he taxed away nominal wealth (with an inflation tax) but let people have babies.

Friday, December 2, 2016

Putting the Cart Before the Horse

Macroeconomics is generally not an experimental science. It’s observational.

One of the advantages of an experimental science is that you can control causes to isolate their effects. You can come up with different stories about what the causes are, but in principal you can confirm whether those stories are supported by the data. In some sense, you can go “fishing”.

In an observational science, you have to get your story about causality straight first. By that I mean what effects you expect to see and what you should not see. Then you can go and check your data.

Unfortunately, we’re bombarded with GDP data, but not with stories about the causality that generates it. This leaves a lot of room for getting things wrong.

Which brings us to Trump’s nominee for Secretary of Commerce: Wilbur Ross. Here’s his theory (taken from a Wall Street Journal editorial entitled “Trump’s Money Men”):

… Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. …

The causality Ross presumes is pretty clear: “… trade deficits … weaken…”

This is weird: GDP (and trade deficits) are something we measure after they occur. They’re a description of what did happen, not an explanation of how it happened.

It’s more correct to say that a trade deficit might be a symptom of a weak economy, rather than a cause.


Ross is making a ridiculous logical mistake here, but one that is all too common in thinking about macroeconomics.

First off, GDP is what we count up after production and consumption happen. And as we’re counting, perhaps we divvy it up into different bins, including (gross) exports and (gross) imports.

  • This is analogous to going to one of those old-fashioned machines where you put in a quarter and it dumps out a handful of, say, Skittles. That’s your macroeconomy.
  • Then you count up your Skittles. That’s your measure of your economy’s GDP.
  • Then you divide up the Skittles by color, and call the yellow ones exports. And then you announce that if you’d gotten more yellow Skittles you would have gotten more Skittles in total.

A child might make that mistake. An adult should not.

Secondly, there are interconnections within GDP besides Y = C + I + G + X. Let me introduce 4 alternative variables:

  • DP►DC, this is Domestic Production that goes into Domestic Consumption
  • DP►FC, this is Domestic Production that goes into Foreign Consumption
  • DC◄DP, this is Domestic Consumption that comes from Domestic Production
  • DC◄FP, this is Domestic Consumption that comes from Foreign Production

My notation is a little bit weird: do not think of the the ► as a >, or the ◄ as a <. But there is a method to my madness.

Note that DP►DC and DC◄DP have to end up with the same number (although you might make a measurement error here or there).

In terms of the conventional textbook items:

  • C + I + G = DP►DC (or DC◄DP)
  • Gross Exports = DP►FC
  • Gross Imports = DC◄FP
  • GDP = DP►DC + DP►FC – DC◄FP (or DC◄DP + DP►FC – DC◄FP)

The cool thing about this is that we can think of these new variables in this way. Remember the fable about getting a mule to move with a carrot and a stick? The stick is work, and the carrot is your reward:

  • DP►DC, means that your carrot and stick are balanced
  • DP►FC, means that you’re all stick
  • DC◄FP, means that you’re all carrot

Now let’s think about some naive policy ideas.

Let’s export more! So we’re going to make DP►FC bigger. This means we have to both work more here, and somehow get foreigners to buy stuff they weren’t before. Maybe we could advertise to make the latter happen. But there’s only two ways to handle the former part: actually work harder (by using more stick), or divert some of our work by making DP►DC smaller to make DP►FC larger. Except that we can’t make DP►DC smaller without making DC◄DP smaller. If you think about it, this amounts to giving away our carrots. So there you have it: a proposal to increase exports either means more stick or less carrots.

Let’s import less! You can probably see where this is going. This means making DC◄FP smaller. One way to do that would be to make DC◄DP larger. That way we could keep the number of carrots the same, but just get less of them from foreigners. But again, it gets weird: we’re getting the same number of carrots, but because DC◄DP = DP►DC, we have to work harder. So there you have (part of) it: you get more imports with more stick and no extra carrots. You can work out on your own that you could also get less carrots with the same amount of stick.

I understand that these examples are not easy. But that’s the point: trade policy is not something that most people think about very clearly … including people we put in charge.