Saturday, May 13, 2017

Will Fiscal Policy “Fight the Last War”?

Fighting the last war is a metaphor for doing what used to work even though times have changed. For example, French generals in 1940 expected World War II to be like World War I, so they ended up fighting German tanks with French foot soldiers inside forts.

I have been worried about this with U.S. fiscal policy for the last 20 years or so. And it turned out badly in 2007-9, and I think it might turn out worse the next time around. Scott Sumner, writing at EconLog feels the same way.

Because the U.S. is a federalized government, a significant amount of government spending is done at the state and local levels. And, while we don’t stress this detail too much any more, the basis for Keynesian fiscal policy being effective starts with the government actually buying goods and services, not with sending checks to people. So, while a lot of funding for state and local expenditures actually passes through the federal government, its sent right on as a check to the state and local governments. They spend between half and 2/3 of the government spending in this country that goes to goods and services. So, if Keynesian fiscal policy has any relevance in the 21st century, it’s because of spending a that level.

Which scares the crap out of me.

The reason is that at the state and local level, fiscal policy has been taken over (for a few decades), by both Republicans and Democrats, who view balanced budgets as the way to go.

The problem with this is when a recession hits: your tax revenue goes down, and your spending requirements (for welfare and so on) go up. If you have to balance the budget this means you have to raise taxes and cut spending actively, because to offset the passive movements in the other direction from the business cycle.

Here’s how Sumner sees this panning out:

I don't have much confidence in the Keynesian view that the stance of fiscal policy has a big impact on the business cycle. But let's say I'm wrong. Here's what I expect to happen:

1. The President and Congress will enact deep tax cuts and increases in military spending, which will cause the deficit to balloon. Entitlement spending will also rise as boomers retire.

2. The deficit will rise to unsustainable levels, with the national debt steadily increasing as a share of GDP.

3. By the time the next recession is on the horizon, there will be a political backlash against expansionary fiscal policy. Policy will tighten and become effectively pro-cyclical.

I hope that I am wrong, but this is the danger I see from running a series of large budget deficits when the unemployment rate is 4.5%. What will we do if unemployment rises to 7.5%?

I agree. And I have some hard-ish evidence to support this. In 2009 I got a call from a member of the Utah Legislature from this region. They wanted to know if this was a good time to start spending out of their Rainy Day Fund. I was flabbergasted. If the worst recession in a generation isn’t a time to spend your rainy day fund, when is?

Wednesday, May 10, 2017

Why Macro Is So Hard: What Passes for an Expert

This is actually an addendum to a topic that’s already part of the canon (here’s an example, and it’s been in the principles lecture on this topic for years).

So, here’s Deadspin’s headline from another example:

Florida's Go-To Stadium Economist Is A Hack,
A Shill, And Also Not An Economist

Everyone should know by now that sports stadiums and arenas are a very bad investment for their communities (and everyone around SUU should absolutely know this, given how much Berri, Price, and I repeat it).

In this particular case, Tampa is building a stadium for a team that doesn’t even have Tampa in its name.

Wha, wha, what?

Tampa is building a stadium for the Toronto Blue Jays to use for spring training.

(Now, if you’ve never been to spring training, it is a thing, but not a big thing. We’re talking about 15 or so games, held over 5 weeks, that average about 5K fans a piece.)

For perspective, Tampa is spending 4 times on this stadium what SUU is spending on new business building.

Maybe one reason is they hired a consultant who produced an economic report indicating that it was a good way to spend their money:

If Bonn’s studies don’t sound very economically robust, perhaps it is because Bonn isn’t actually an economist! He is a professor at FSU’s school of hospitality, where he teaches marketing and wine-tasting, and his degree is in resource development.

Which doesn’t necessarily mean Bonn can’t do the economic work; I also do not have a degree in economics. Then again, I don’t charge $23,000 for economic impact studies …

For clarity, Bonn wrote the report, and the “I” in the quote is the author of the linked piece on Deadspin.

Sunday, May 7, 2017

Paying for Healthcare

In tandem with the previous post, now that healthcare is a major macroeconomic policy issue, it’s useful to think about why people won’t pay for their own healthcare, and should the government?

America is a useful example for the rest of the world. We are rich, so more people here can afford healthcare. Yet we also have a somewhat open market in which a lot of people choose not to buy health insurance. Why is that?

Finkelstein, Hendren and Shepard have new research on that. This is a working paper, but given the lead author and topic, I expect it will come out in a top 5 peer reviewed journal in the next year or so.*

People who don’t buy health insurance often make quite clear that they feel it is not a good way to spend their money. Finkelstein et al. don’t look at that. Instead they estimate what people are willing to pay from the choices they make. The result is startling: willingness-to-pay (WTP) is about a quarter of expected health care costs. This is not saying people can’t afford health insurance. Instead, it’s saying that they won’t pay for it even it’s a breakeven proposition for them.

Further, they estimate that even if you subsidize 90% of people’s healthcare costs, 20% of them still would not pay the remaining bit out-of-pocket.

Note that paying large subsidies, but requiring some contribution from the recipient,is a key part of Medicare Part D (prescription drug coverage for seniors), the Obamacare exchanges, and CHIP enrollment (in some states).

They also find that adverse selection is not a big driver of this behavior. Adverse selection is the Republican bugbear that people will not buy insurance because they aren’t sick, but will change their minds when they do become sick. Yes, it happens, but it isn’t a big contributor to unwillingness to pay.

So what is? Uncompensated care: that’s when the patient gets the healthcare first and the provider is never (fully) compensated afterwards. In short, people like free stuff.

Of course, it could be that people don’t have the money (that they are liquidity constrained). But if this were the case we’d see both adverse selection, and a tilt towards buying the cheapest possible plan. But that’s not what people do. When the poor do buy health insurance, they often buy the more expensive option.

There could also be a problem with inertia, inattention, or lack of information. They looked at this too. But new purchases of health insurance behave in precisely the same ways as people won don’t buy insurance. Yet they must have overcome inertia (they changed their choice, inattention (they made a choice), or lack of information (which is available freely to people who are interested in making a choice).

So, the authors are back to people like free stuff.

Yes, there’s also moral hazard (you make less healthy choices once you have insurance, to the tune of about a 25% increase in costs). But that would explain only a fraction of the small WTP.

This is where things get nasty. The scale of uncompensated care is large enough to explain the difference between WTP and costs of insurance. Uncompensated care takes two forms, direct and indirect. Direct care that is uncompensated is what most people view as charity, basically, the free clinic, the county hospital, or a religious organization that provides care. Indirect care is both filing bankruptcy to escape your bills, or just not paying them and waiting for the creditors to give up. Can you imagine the sh**storm if politicians proposed getting rid of those so that poor people would accept their Obamacare subsidies?

But this raises a new policy question. Direct costs of uncompensated care are borne by the whole society, and costs indirect care are borne by significant fractions of society, but in both cases the rich provide most of the funds through taxes or charitable contributions. So is there a better way to connect the sources of funds with the recipients by cutting out the intermediaries? The evidence from the earned income tax credit is that just giving money to the poor and trusting that they’ll make decent choices is awfully efficient at improving welfare.

Again, the public perception of such a policy would be a big problem. Can you imagine: oh, hey, you’re poor, here’s $20K, go buy some health insurance? An awful lot of good choices with that sort of windfall would be cancelled by one bad story on the local news at 6.

So, what are we left with? Progressive style ideas that can get enough support from the middle, like Obamacare requirements with subsidies. Or conservative style ideas like rely on our existing network of charity, free stuff, and high legal costs, cross-subsidized through taxes and charity. Or European style ideas of not posting prices or requiring much payment from anyone at all, and hoping you can cover the expenses on the back end.

Lastly, none of those is helped by people who expound the viewpoint that healthcare is a right. That sounds quite nice, but keep in mind that freedom of speech isn’t something you’re expected to pay for at the local free speech clinic. Healthcare is a valuable service, and it would be nice if the people who benefitted from it were the ones who paid for it. But they don’t wanna’.

To me though, this really means that all the details in Obamacare and Trumpcare are secondary. What a country’s political system needs to figure out is where to draw the borderling between two separate but unequal healthcare systems: one in which people pay essentially nothing, and one in which people pay something extra but expect to get more in return. Obamacare was never really about that borderline, but rather about how we run the former system. So maybe we should have worried about it less.

* I would advise against the mistake of viewing these authors are Republican/conservative hacks. Finkelstein is one of the best economists out there: she was a Marshall scholar (like a Rhodes scholar, but that requires brains and athletics), she’s a full professor at MIT (a top 5 school for decades), and a winner of the John Bates Clark Medal (given to the best economist under 40). And, of course, Boston is not exactly a Republican/conservative stronghold. Oh, and she did her dissertation under Jonathan Gruber, who was one of the main economists that designed Obamacare.

UPDATE: I had the additional thought that one could view these results as supportive of the typical pro-government interpretation. This is that if the government is going to engage in programs that are charitable, for practical purposes they need to eliminate the competition from the private sector to promote uptake.

Friday, May 5, 2017

OK. Now They’ve Started Something

With respect to the last post, the Republican House has now passed an update to Obamacare.

And America is unhinged about it.

First off, it’s not a law yet, and it’s not clear it will be.

Second, it’s not a repeal.

If that word is on your lips, you should probably just bite your tongue until the feeling passes. It isn’t a repeal. The thing is, that word is on everyone’s tongue. Unfortunately, like most of the work in Washington, this bill attempts to fix a Frankenstein monster by excising some parts, stapling on some other parts, and coloring over the whole thing with Sharpies. Here’s a summary.

Third, it keeps some of the bad parts.

Get the message: Republicans like helping people with pre-existing conditions, it’s just that Democrats love helping them. Politically, this is a no-brainer for both parties. The thing is, everyone has the good sense to not put up with nonsense like this in other areas of life. Both parties need our help on this one to develop some fortitude (more on this several paragraphs down).

A huge problem with this is the perception, sold through anecdotes, that this is a common problem. It isn’t. Most of what gets labeled as a pre-existing condition issue is just people who won’t/can’t pay their bills. That’s unfortunate, but it is different, and it requires a different solution. The actual proportion of pre-existing-condition-health-insurance-conflicts is about 1 out of every 3,000 people. That is a small problem to address: would you sacrifice 1/3000 of your healthcare to help these people? Of course you would. Who wouldn’t? This could be covered with $10-20 a year from every person insured through their employer. That is chump change comparable to the taxes and fees that anger people on their phone bills. OOH OOH … wait for it … and you already pay something like this with your auto insurance. So it can be done. It isn’t done because when we start substituting feeling for thinking, politicians see opportunities to spend other peoples’ money. We now have a huge bureaucratic edifice built around the public perception that uninsured sick people are a huge problem, while we have zero bureaucratic edifice built around the fact that some drivers on the road are uninsured and the disturbing corollary that they’re not the best drivers. Politicians of all stripes view the solution to the uninsured motorist problem as something they do not want to repeat with healthcare.

A far smaller negative is the continuation of the right to continue to have your kids covered by your family’s health insurance plan through the age of 26. Macroeconomically this is a requirement that everyone’s paycheck be smaller so that some generally healthy people stay covered. It sounds nice, and it is nice. But follow the money: who is helped by allowing parents to continue to have higher premiums withdrawn from their paychecks that really don’t get spent covering people who use the least healthcare? In short, it’s a backdoor transfer to heavier healthcare consumers. It’s weird, and it’s dodgy, and we should know better.

Fourth, here’s the more cosmetic updates.

  • Firms are freed up at the low end: they no longer have to offer health insurance.
  • Firms are also freed up at the top end: a tax on high end health benefits has been pushed off ten years into the future.

The above two sound problematic, and they may well prove to be. But be clear-headed about this: it’s a move back to the system that we had from the 1940’s through 2010. For firms, it’s still cheaper to pay employees with healthcare than it is to pay them with cash.

The primary issues with that are not whether or not they want to (Tom Perez notwithstanding). The primary issues are if they can afford to pay their employees at all (you know … staying open, no layoffs, stable hours), and how much latitude they have to deal with your compensation if your productivity doesn’t keep up with the healthcare they promised to pay you with (you know … stay under 50 employees, and keep people under 30 hours).

  • Keep your eye on the ball: Obamacare was not really about improving coverage so much as improving the chances that provided services were actually paid for. The new bill pushes more billing back in the direction of consumers (which is a good thing), except that consumers have a poor history of consuming their healthcare first, then maybe sorta’ paying for it later. And yes, the cost is part of that.
  • That last one means hospitals are going to be hurt (doctors’ offices have an easier time of avoiding people who are unlikely to pay).
  • A corollary to those last two is that Medicaid will shrink a bit. For all the talk about Obamacare improving coverage, on the ground that mostly amounted to pushing people into Medicaid who probably could’ve gotten Medicaid before but were (maybe) too dysfunctional to follow through on that. The problem with this is that Medicaid itself sucks: it does not pay its bills completely or in a timely fashion. All of those stories you hear about doctors not accepting new Medicaid patients, or regions having no Medicaid providers, lead right back to Congress making promises they don’t keep. One wonders how people like Bernie Sanders can even praise Medicaid without breaking out laughing: are they doing it on a dare or something?
  • Obamacare’s main source of bleeding is health insurers fleeing the exchanges. Democrats didn’t address this when they had a chance, and Republicans didn’t do anything about it either. I think there’s a big disconnect here between whether these things should or can be fixed. Republicans don’t think they can be, so they’re not trying. Democrats take the view that they should be fixed, but don’t seem to like to address whether they can be fixed at all. That’s not a policy, it’s a wish. The fact that they didn’t fix the exchanges when they had a chance makes me think they knew it wasn’t worth the effort, but didn’t want to take the blame.
  • Individuals without employer provided health insurance will face less penalties if they don’t self-insure. That’s what they want as individuals, but it isn’t very good for the system as a whole. The Democrats approach with Obamacare was to push people to buy something they didn’t really want. The Republicans have moved in the direction of pushing less, but encouraging more and cheaper choices. Yes, those could be worse. But in every aspect of life, we seem to like the riding-the-plane-in-coach model better, so why should healthcare be any different?
  • The whole debate about pre-existing conditions seems divorced from reality. No one would put up with this nonsense with auto insurance: for one reason or another you are not insured, you didn’t get insured, then you had an accident, and now you want to buy insurance that you didn’t buy just a few minutes ago? With cars, we would label someone who behaved that way as a jerk. And talking about the cost of the insurance is a dodge. The fact is that the accident changed your preference for what you want to spend your money on. But anyway, the Republicans didn’t change Obamacare’s requirement that insurers put up with this crap. What they did do is relax, somewhat, the extra that insurers can charge you for changing your mind. Oh … and they recognized that this is problematic and threw a ton of money out there to help people adjust to this, a move Democrats never considered. How much? Between a third and half of the cost of “The Wall”. Sounds like serious money to me.
  • The Obamacare approach to getting the folks from the last two points to buy insurance was to threaten them with a small stick (the modest tax penalty that was rarely enforced). The Republican approach is to give them a carrot with tax credits.
  • The Republicans aren’t going to cut people who are currently in Medicaid. But they’re going to keep new people from joining for coverage reasons. That’s probably a good thing, since the political will to make sure Medicaid pays its bills is just not there. But, they merely promised to fix that. Don’t hold out much hope for that. Democrats didn’t fix it either, but I wouldn’t hold that against them. I would point fingers at them for viewing one of the few things we know is not working as the thing that was going to make Obamacare work at all. When Democrats say that Republicans are mean, I think they have a lot to answer for on this one.
  • The Republican plan will make old people cough up more money. This is a good thing: they are the richest group in the country, and they consume the most of what they’re going to pay more for. The problem is that they vote. Republicans will get killed on this if they don’t watch out. But they’ve made a big bet on the future by tilting reform towards the young. Democrats are still pissed that Reagan got so many young people on his side.
  • States are going to be funding a bigger proportion of healthcare for their residents. But they will get greater flexibility in how to do so. This is a big slam on the grayer populations of the northeast and midwest. But, Republicans are running most of the country at the state and local level, and they want out of the top-down Washington model of how to run their states.

Oh, and Republicans are keeping a good piece of Obamacare: the general trend away from paying for services to paying for outcomes has not been touched. If Obamacare changed the terms of that debate, it is an unalloyed good thing.

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Keep your eye on the ball, folks.

If you need healthcare, on average you’re better off getting it in the U.S. than anywhere else. If that doesn’t change, we’re still on the right path.

But, you get what you pay for: Obamacare is a Cadillac, and Trumpcare is a Lincoln. The similarities are bigger than the differences.

That’s OK too. Top to bottom, we’re the richest country in the world with the highest level of consumption on .. just about everything.

It is a big problem that healthcare is unevenly affordble. Do not mistake uneven affordability with uneven availability: the healthcare that people receive is far more equally distributed than the bills for it are. That’s a good thing. Maybe we can do better. But don’t break availability to fix affordability: this is why you can’t find an obstetrician in Las Vegas if you’re on Medicaid. You should be suspicious that one of the words in the formal title of the act that passed Obamacare is “afforable”.

It’s weird that half the country gets its health insurance through employers. This is a historical relic of World War II that should go away. Let it. Currently, the party that wants to do things (a little) differently is the Republicans. They were not this way before Pelosi, Reid, and Obama. The Democrats are not this way now; when they get their chance it will be nice if they are.

I was watching Bill Maher’s show the other night. He considers himself to be a solid Democrat/Progressive/Liberal. He stated his conception of healthcare provision quite clearly. What he described was a social security system for healthcare. I think a lot of people take that view (and I’m OK with it too). Fair enough. That is not what we have now. Some people do not favor a move towards a social security system for healthcare because we’ve screwed up our social security system for retirement. Again, fair enough. The economics are that social security systems are feasible, practical, and affordable. It’s the politics that goofs them up: people vote themselves out of the paying group and into the receiving group. If you don’t solve that problem first, your social security system for healthcare won’t work. Promise.

Senator Elizabeth Warren was on the same show. She’s presented healthcare as a uniquely American problem. It isn’t. Different countries just paper over the issues differently. Her entire set of positions lacks credibility once you recognize that. She’s a Democrat but there are people on both sides of the aisle that should be tuned out on that basis alone.

Macroeconomically, all countries suffer from the same problem. Data shows that every consumer treats healthcare as a luxury. Denying that is not helpful. This means they spend more on it as they get richer. So economic growth means a greater proportion of an economy devoted to healthcare. Except data shows that healthcare is not a dynamic, productive sector. That’s a problem. But there’s a really obvious implication: don’t bind it up even tighter (with regulatory and bureaucratic systems).

Once again, politicians have completely avoided the one simple way to make healthcare cheaper: shift supply to the right. That’s economist lingo for educate more doctors, nurses, and so on. It seems like everyone wants to go into healthcare because those are “good jobs”. If one industry/sector has “gooder” jobs, that imbalance isn’t sustainable. Unless, of course, the political system is preventing that. Get the message: Republicans and Democrats are prejudiced against all the people who don’t have an MD or RN after their names.

But, of course, doctors and nurses say that their pay isn’t enough to compensate them for all the hassles. Don’t make it harder for them. Again, D.C. seems to have real problems with this. Start by turning Medicaid into a program that pays its bills.

Monday, May 1, 2017

I’ve Been Biting My Tongue All Semester

The class has gone through the first semester under President Trump (the legacy media, with their attraction to creating milestones where there are none, is noting it as the first 100 days).

So why didn’t we cover Trump much at all this semester?

Honestly, because I had a suspicion that seemed too unusual to voice openly. Macroeconomically, I thought all the bluster (from both sides) would turn out to be just one big nothingburger.

And I think I was right …

  • Repeal Obamacare? Yeah, right.
  • Reform Obamacare? Nope.
  • Tax reform? Just getting that onto the table.
  • A wall? As a construction project this was never going to happen overnight anyway.
  • Trade wars? Any decent economist knows that trade is between people and firms, not countries.
  • Gorsuch or Garland? For better or worse, this is something. But it’s not macroeconomics.

I could go on.

The Democrats are ungrounded, unmoored, and unhinged in various proportions.

The Republicans need to go back to high school English classes and learn the importance of a dramatic foil for understanding how the story unfolds … and that they are not in high school English any more.

The Trump administration needs to get someone on its side. It isn’t that they have too many chiefs (although they may). It’s that they don’t have enough Indians. Heck, they don’t seem to have any Indians at all.†

And everyone thinking about fiscal policy needs to revisit the word ossify. Here, let me us a variation in a sentence. Governments of developed countries are so ossified that it isn’t much use paying attention to fiscal policy.

† Excuse the political incorrectness — whose apocryphal source described a genuine decision-making problem for 19th century Native Americans.

Tuesday, April 11, 2017

New-ish Country Groupings

Chapter VI in the Handbook seems out of place sometimes (someone even asked this semester if it would be tested on, since I don’t cover it much).

The thing is, when you go out and start reading the news, or researching issues, people group countries based on the similarity of their economies currently. This is a cross-sectional approach, which is why it appears before we start time series in the Handbook.

The reason for these groupings is because, while residents regard countries as similar, how different are they on the ground? For example, foreign tourists have trouble differentiating the U.S. and Canada, but not the U.S. and Mexico.

Anyway, the IMF has created some new designations that need to get in the next revision of the Handbook. Here’s a chart from Visual News:

Fossil Fuel Subsidies: Energy Subsidies by Region and Subsidy Component, 2013

Some of the grouping are obvious, some not so much:

  • LAC is Latin American Countries
  • Advanced is the 40 or so “rich” countries
  • Emerging Europe is mostly eastern European countries, most of which were dominated by the Soviet Union for 50 years or so. We now recognize that they were also held back economically.
  • E.D. Asia is Emerging and Developing Asia; pretty much everything along the south rim of Asia from India eastwards, and along the east rim from Vietnam northwards, that is not already classified as Advanced
  • Com. Of Ind. States is the former Soviet Union
  • Sub-Saharan Africa is self-explanatory, although you might want to look at a physcial map
  • MENAP is Middle Eastern and North African nations, Afghanistan and Pakistan; this is not exclusively Moslem, nor do all Moslems live there, but this is what most people think of when they visualize Islamic countries. I made the modification in red after class (and yes, the acronym probably should have two A’s, but I didn’t dream it up).

Everything above here is required.

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Everything below here is optional.

The source article is about energy subsidies. There are two big issues that are glossed over: who is subsidized, and where is it subsidized.

Who is subsidized is an issue we’ve been concerned about in the U.S. because of the large subsidies given by the Obama administration to the solar and wind industries. Most developing countries are doing the same thing.

An argument is often made by those who are in favor of subsidizing these “cleaner” energies that these subsidies are OK because other energy industries are also subsidized. Yes and no.

Subsidies to clean energy industries are typically expicit and on the supply-side. They help defray some costs, essentially shifting the supply to the right, reducing price and increasing quantity. These are labeled as “Pre-tax” in the source article. The chart above shows that most countries outside of the Middle East don’t subsidize energy production at all.

Subsidies to fossil fuel industries are typically implicit and on the demand-side. In these, buying and using those fuels creates external costs that are not internalized. If they were, demand would shift to the left, reducing both price and quantity. These are labeled as “externalities” and “foregone consumption tax revenue” in the source article.

Globally, where energy is subsidized is kind of weird. A minority of countries have significant fossil fuel industries (coal is pretty common, but oil and gas are not). In most of those countries, fossil fuels are extracted by a “company” that is actually part of the government. For political reasons, often in less-developed producers, gasoline (and other fuels) are often sold below cost. This map gives you some idea:

Global Gouging: A Survey of Fuel Prices Around the World

Believe it or not, there are differences of up to 100 to 1; in 2013, gas (if you could get it) sold for 6 cents a gallon in Venezuela. That’s a huge subsidy since supply is shifted to the right. The original source article covers this extensively, but the blog post from Visual News downplays it. The chart at the top shows that the lion’s share of the subsidization of fossil fuel use goes to consumers in Asia who don’t pay for their externalities.

Wednesday, April 5, 2017

Are American (Non-Rich) Incomes Really Stagnant?

It’s a fact that no one seems to question: incomes of Americans who are not rich have stagnated. The time frame is flexible: 20 years, 40 years, whatever.

Except that you may have noticed that there’s a lot of flexibility in how we measure prices and calculate real values.

There’s new research on this:

The finding of zero growth in American real wages since the 1970s is driven in part by the choice of the CPI-U as the price deflator …

Intermediate students know that the CPI is calculated using the Laspeyres method. This results in substitution bias that makes inflation appear higher than it is and the resulting real values appear lower than they are.

An additional twist here is the U in CPI-U. This is the most popular measure of CPI, but it applies best to urban consumers in only the largest urban areas. If you apply it elsewhere, you are adding a second source of upward bias to inflation. It’s sort of like asserting that “Gee … apartments are getting more expensive in San Francisco, that must really hurt the people living in Beaver.”. Not so.

This is just not that hard to figure out when there’s readily observable evidence like this just laying around:

The number of cars per household with below median income has doubled since 1980 …

Here’s the conclusion:

Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.

Do note that those are the big three explanations given on the campaign trail by Clinton, Sanders (and Trump) last year: income ienquality, consumption inequality, and decreasing labor share.

Saturday, April 1, 2017

Tim Worstall’s Column for Bangladeshi’s

While in Bangladesh, Worstall was asked to write a column for one of the big newspapers.

It’s pretty basic economics, that some people in the Trump administration would do better to understand. Well, pretty much all U.S. administrations, but they’ve been getting worse since Clinton.

You see, Bangladesh is worried about their trade deficit. One thirtieth the per capita GDP of the U.S., and the government is worrying about the same dang thing. Maybe the problem is the people in government, not trade.

Read the whole thing.

Thursday, March 30, 2017

The American Dream Is Alive and Well in Salt Lake (Not Required)

Libertarian-ish Bloomberg columnist and virtual acquaintance Megan McArdle came out to Salt Lake City to figure out how a red state can have the least income inequality, and at least for the last several years, the most income mobility in the country.

There’s no getting around it: For a girl raised on the Upper West Side of Manhattan, Salt Lake City is a very weird place.

I went to Utah precisely because it’s weird. More specifically, because economic data suggest that modest Salt Lake City, population 192,672, does something that the rest of us seem to be struggling with: It helps people move upward from poverty. I went to Utah in search of the American Dream.

Columnists don’t talk as much as they used to about the American Dream. They’re more likely to talk about things like income mobility, income inequality, the Gini coefficient — sanitary, clinical terms. These are easier to quantify than a dream, but also less satisfying. We want money, yes, but we hunger even more deeply for something else: for possibility. It matters to Americans that someone born poor can retire rich. That possibility increasingly seems slimmer and slimmer in most of the nation, but in Utah, it’s still achievable.

The piece is entitled “How Utah Keeps the American Dream Alive”, and it extensively quotes Josh Price’s older brother Joe.

Explaining Dropping Labor Force Participation – Opioid Abuse

Got an email from former student SF yesterday. He’s still reading this blog from the Bay area.

The post about whether the number of ex-felons in the population is affecting labor force participation had caught his eye. I mentioned that I had saved some links to a related issue, so here it is.

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Disclaimer:

Let me step out of my professor role, and note that on a personal level I am not a prude or scold about recreational drug use.

But, professionally, there’s an awful lot of data showing that this time it’s different.

And, it’s Utah in 2017, so personally I have a lot of experience with adults/parents/neighbors who should know better popping these things like candy.

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Labor force participation is down in the U.S. It’s been declining for decades, so there are definitely some long-run things going on. And, the baby boomers are starting to retire, so there’s more people dropping out now than, say, a generation ago. And we had women enter the labor force in large numbers (although that seems to have stabilized about a generation back). And we’re having trouble employing people with less education. And, and, and …

The bottom line is that we’ve looked at a lot of explanations, and the problem seems to be a combination of all of them.

But, even so, there’s still a residual of unexplained dropouts that economists are working on explaining. The acronym for this is NLF, short for Not in the Labor Force. There are lots of reasons to be an NLF. Heck, most of you students are probably NLF’s. What we’re really worried about is men in their prime working years, from ages 25-54, that are NLF.

One think we’re working on is opioid abuse (mostly oxycodones, and hydrocodones, but increasingly fentanyl) affecting both ability and willingness to work, but also likelihood of passing a drug test (if one is required).†

Alan Krueger, one of the best labor economists (and former Obama advisor) notes that half of prime-age male NLFs are taking pain medication daily, and 2/3 of those are taking an opioid (this is a full length academic paper that is not required reading).

Let me put some perspective on that: roughly 1 out of every 50 adult men is both not working and taking an opioid. Quinones reported that in Ohio 1 in 9 people has an opiate prescription (not required). My guess is that, to make the numbers match, a good portion of those 1 in 9 are not taking the pills themselves.

Some of those people have good reasons for not working. And some of the prescriptions are legitimate. But we all know from the accidental overdose data that many of them can’t be.

Even so it’s not unreasonable to make a ballpark estimate that this contributes to a couple of percentage points of the 4% or so drop of the labor force participation rate.

The article that everyone is talking about this past winter is “Our Miserable 21st Century” by Nick Eberstadt. He’s a conservative, and it’s in the pop conservative magazine Commentary, so it’s not unbiased. Even so, Eberstadt has been around for a long time, and most people take him seriously. He makes the point that the election of Trump surprised many people because they are in denial about how lousy life is in much of America. He’s also sympathetic to Trump’s position that “true” unemployment is much higher than what is announced.

BTW: Eberstadt’s Figure 1 does not use logged data for net worth, and his Figure 2 uses a linear deterministic trend (Case 1 from the handbook). I would label those “wrong” if it were me (or you) trying to produce some neutral analysis, but Eberstadt is making a political point so I think it’s tolerable. You should just have a mental filter that adjusts for that.

Note that Eberstadt also discusses the huge number of ex-felons mentioned in Monday’s post: roughly 23 million, or 1 in 8 adults. He adds the interesting point that the federal government doesn’t seem very interested in collecting data on the life outcomes and well-being of these people (former students may note that I mention the avoidance of data collection in the Why Is Macro So Hard? lecture I do in principles classes).

A related article from last winter that people are still talking about is Case and (and 2015 Nobel prize winner) Deaton’s “Rising Morbidity and Mortality In Midlife Among White Non-Hispanic American In the 21st Century” (again, not required). They note that there’s been an unprecedented increase in death rates for middle-aged white Americans. They attribute most of this to opioid abuse:

The CDC estimates that for each prescription painkiller death in 2008, there were 10 treatment admissions for abuse, 32 emergency department visits for misuse or abuse, 130 people who were abusers or dependent, and 825 nonmedical users …

If you tie Krueger, Quinones, Eberstadt and Case and Deaton together, you get a picture of a very unhealthy labor market for a small but sizable fraction of the population.

Half of all job applicants in the U.S. are now drug tested. Interestingly, drug testing benefits African-Americans the most. This is consistent with ex ante discrimination. In this case, ex ante means after entering the job market but before you have a job (that’s ex post). The interpretation is that potential employers are extrapolating from drug problems being more common among African-Americans to African-Americans should be rejected because they’re likely to have a drug problem. That’s a non sequitar, since it’s a small fraction of any population that has drug problems, and thus discrimination (again, it’s a full article from The Review of Economics and Statistics, and is not required).

Monday, March 27, 2017

Geographic Correlation and Well-Being

Interactive graphics showing the patterns in which we live together are becoming really common. They’re a useful way to think about our world.

This is important in macroeconomics, because we choose to live in places near others, and we agglomerate around areas where living standards are either high or growing quickly.

Today’s addition to this is that the Bureau of Transportation Statistics (part of the federal Department of Transportation) has produced a map of noise pollution. It’s interactive, so you should click through.

Obviously, most of it is related to airports and roads. But, of course, where do you want to live? Probably within an easy drive of an airport. Here’s a screen capture that readily shows the pattern of where we are living our lives and spending our days in the Great Basin:

BTS Noise Map Capture

Just about every place in the region you’ve ever spent time in is on these orange lines.

Via bookofjoe.

Declining Male Labor Force Participation – “Having a Record”

Why are so many prime age (25 to 54) men not in the labor force? This has gone from 3% to 12% over the last 50 years.

One reason may be jail time. How so?

First off, labor force participation is counting the labor force divided by population. In this case we’re just taking the prime age male subset of that.

Secondly, men in jail won’t affect this number. This is because it is “civilian non-institutional” population that is used for these calculations. Institutions includes prison.

Third, there are a bunch of factors pushing up male non-participation generally across developed countries: job-destroying technological improvements, trade, the internet, and changing life choices. The thing is, these explain why this is going up everywhere, but not why it is worse in the U.S. (click through for the interactive chart).

One factor that is different between the U.S. and other countries is that we have incarcerated a larger share of our population historically, but especially over the last few decades.

So a possibility that economists are actively studying is whether American men are not working has to do with “checking the box” that they are a convicted felon on a job application. If places won’t hire you because you’re a convicted felon, it’s probably easy to just drop out of the labor force. Some states are not waiting for evidence, and have made such checkboxes illegal.

Thursday, March 23, 2017

What Makes Macro So Hard? Not a Yogi-ism, But Still Good (Optional)

This relates to Aaron’s question from the class quodlibet.

Attributed to Jan L. A. van de Snepscheut:†

In theory, there is no difference between theory and practice. But, in practice, there is.

In a nutshell, this is the problem with teaching macroeconomics. Is there any other field where the theory in texts is more blithely ignored by the practitioners?

Via the comment thread at Newmark’s Door for this post.

† This quote is often mis-attributed to Yogi Berra.

Monday, March 20, 2017

Stephen Ross, R.I.P. (optional)

All finance majors (and most economics majors) should learn about Stephen Ross’ contributions to the field.

He has been on everyone’s short list for a Nobel Prize for years. They are not awarded posthumously, and he passed away suddenly last week.

He did not have a homepage on Google Scholar, but if you search for him you’ll come up with this list of top cited papers. For comparison purposes, at SUU a few thousand cites in your career across all your publications makes you a top researcher in our School of Business. Ross had over a dozen papers that had more than a thousand citations each.

You may have been or will be exposed to Ross’ contributions in Haslem’s FIN 4250 class or FIN 6100. Option pricing using binomials is a topic I covered when I taught each of those classes. Arbitrage pricing theory is something that I helped a lot of students with at my previous school. And the paper by Cox, Ingersoll, and Ross is a big crossover into the macroeconomics taught in graduate programs.

Here’s the obituaries from the Wall Street Journal and The New York Times.

Tuesday, March 7, 2017

Oil and Gas Infrastructure

One more on infrastructure, this one showing mostly privately owned wells and pipelines, and publicly owned resources. The source for this is the piece entitled “The United States of Oil and Gas” that appeared in February 14 issue of The Washington Post. Click through for many more and better graphics.

17-03-07 Capture from The Washington Post about Oil and Gas

The oil is in green and the gas is in purple. In Utah, when we think of oil production we think about Vernal, but note how small that field is compared to other parts of the country.

The trick for a 21st century economy is getting the oil and gas from where it comes out of the ground to where it can be used. The oil and gas pipelines shown pass about 15 miles west of town; you can see them out by the Wecco facility.

It’s hard to tell from the map below, but the gray areas are the earlier gas wells in this area. They did not use horizontal drilling of fracking. Note that they extend into New York. But, for better or worse, New York has largely banned horizontal drilling and fracking, which is why the yellow and red dots pretty much stop at the border.

17-03-07 Capture from The Washington Post about Oil and Gas 2

Part of the reason the estabishment of the Bears Ears National Monument in southeastern Utah is controversial within our state, again right or wrong, is that it’s right in the middle of a large field of relatively unexploited oil (you can see this if you click through to the article). It’s been presented in the media as an issue of Native American rights (and it is), and tourism (and it is), but it’s also about the Obama administrations interests in blocking the oil industry.

More Infrastructure

Electricity generation and transmission is a big part of our infrastructure too. Most people have no idea how it’s generated.

This is another piece that you have to click through to see the interactive graphics. Here’s a non-interactive sample showing where solar power is generated in the U.S.

Solar

17-03-07 Capture from The Washington Post of Solar Generation

Nationwide, most of our electricity still comes from burning coal in large powerplants (like the one outside of Delta, or the smaller one along I-80 on the way from downtown Salt Lake out to the airport). Coal is down to about 1/3 of the total, but in Utah it’s about 80%. This is because of the large coal fields in northeastern Wyoming, and the far better than adequate freight rail network in the intermountain west.

Natural gas also powers about 1/3 of what we do. This is a fairly recent development, mostly related to technological advancements in (primarily) horizontal drilling and (secondarily) fracking. One thing I am curious about, but have not been able to document, is that it seems to me that there must have been excess capacity in gas pipelines before that happened, because it doesn’t seem like they’re building pipelines everywhere.

Nuclear power is next, with about 1/5 of our power generation. This is mostly in the eastern half of the country. Nuclear plants use about twice as much water for cooling as other power plants (although they contaminate none of it, and recycle most of it). There’s a reason the Fukushima plant was hit by a tsunami: they put it on the coast on purpose.

BTW: many people think any cooling tower is a sign of nuclear power, but they can be used for any sort of plant.

Oil is down near the bottom of the list. We use oil for a lot of stuff, but it has transportation costs that are on the high side for electricity generation, so it isn’t used much for that.

***

There’s a huge problem with electricity generation infrastructure that is not mentioned in this otherwise useful source. This is that electricity is very hard to store: you generate, and you use it. Generally speaking, batteries are lousy: inefficient, toxic, and not biodegradable. That’s why we use them in our small devices, but not in, say, hairdryers.

The four sources listed above are the ones that can be ramped up and down to satisfy peak demand (late afternoon into late evening, mostly in the summer). The ones below are unlikely to ever fit our usage patterns, unless we figure out better storage solutions (e.g., molten salt, kinetics, flywheels).

***

Collectively, wind, solar, and hydro cover about 1/7 of our needs.

Hydro appears to be stuck at current production: no one wants any more dams. And, really big ones, like the Hoover and Lake Powell dams don’t generate that much power (I personally recommend a dam tour sometime, it’s sort of amazing how little they actually accomplish with this huge structure). Wind power is starting to be subject to the same problems: the same places with wind are the ones where people have clear views they’'. Solar is fine, but nowhere near as important as people think it is: it won’t be until it’s a lot cheaper.

Sunday, March 5, 2017

Visualizing the Global Economy

A Voronai diagram of the global economy":

This is based on World Bank data, which is adjusted across countries using PPP. PPP isn’t bad or wrong, but it is more of an upper bound that shows poorer countries being bigger than they probably are.

Via howmuch.net, Business Insider, and Newmark’s Door.

What Do Economists Know?

I think I annoy many students.

They come to me with questions, generally about policy. And they want definitive answers: is this policy beneficial or not?

They could ask these questions of anyone.

But they ask me because they think I will be able to back up my answer more solidly. After all, I’m a macroeconomist, and I think a lot about policy.

Here’s the annoying part: a lot of my back up leads me to the conclusion that I don’t know the answer, and no one else does either.

That’s not very comforting. It’s also hard to digest, because when we watch or listen or read about policy analysis, we’re confronted by people who are certain they have the right answer. It’s easy to mistake their certainty for a preponderance of solid evidence supporting one side of the policy or the other. Certainty is very common. Convinving evidence that tilts us one way or the other is much rarer.

Economics is not alone in this problem. It crops up in all the social sciences, and a good chunk of the harder sciences as well (e.g., anthropogenic climate change).

One last note before I move on. At the risk of sounding age-ist, the tendency to see the world in black and white diminishes with age. I think this is a good thing, but I’m no longer young. Here’s the thing: there’s pretty much never been a former student who you run into many years later who remarks that economics make less sense than it once did. And most of the time their opinion revolves around to noting that they didn’t realize how few solid conclusions there were about anything, until they’d gotten out in the adult world for many years.

***

I am not alone in my position. And I fancy it to be rather “grown up”.

Russ Roberts has published an essay on this entitled “What Do Economists Know?”. Read it.

John Cochrane has a good follow up on this, urging more humilty amongst economists. Don Boudreaux riffs on that here.

For my part, the intro to Roberts’ piece happens to me with not just journalists, but students and other professors:

A journalist once asked me how many jobs NAFTA had created or destroyed. [substitute most questions about economics there] I told him I had no reliable idea. …

The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer.

Yep, that annoys people. Here’s what we hope happens, but sometimes it doesn’t:

What usually happens is that very smart well-trained people on both sides of the issue argue. …Eventually, sometimes a consensus emerges but that consensus can be reversed by further empirical analysis. … This consensus is … like the two sides in a trial — one hopes the process yields truth more often than not.

But there is no way of knowing reliably if the consensus reflects the truth. It may rely instead on the underlying biases of the prosecutors and defendants in the intellectual trial of ideas. Or where they received their PhD degrees. Or the fashionability of certain positions over time as society changes. … there are no clear feedback loops in the world of academic economics. You can say something that is wrong and the price you pay may be zero. In fact you may be rewarded.

So, here’s where I am coming from in your class:

Where does that leave us?

First let me make it clear that facts and evidence matter. I am not saying that measurement is irrelevant.

Facts matter but some facts are extremely difficult to measure … Some facts are quite difficult to pin down and prone to extreme misinformation and even deception.

Or as Brian Nosek, Jeffrey Spies and Matt Motyl put it:

Published and true are not synonyms.

So where does that leave us?

If I am right, economists are mostly dangerous. At least economists as the world perceives them. But most of the people I am talking about are not economists. They are really applied statisticians.

Those are the people that I think are in the Trump White House. And the Obama White House.

And I think they are mostly applied statisticians who aren’t very comfortable with the tools actual statisticians use.

Think people who spend many seconds perusing the box scores after the game and think they know something about why a certain team won. Policy is made that way in capital cities all over the world.

Roberts continues:

Economics is primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops. Studying economics sensitizes you to these things and others and helps you appreciate complexity and various outcomes …

Economists understand that many things are more complicated than they seem. …

… These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.

… [But we] economists should be more humble and honest …

Cochrane sums up with a discussion of 7 things he thinks we learn from economics (the bullet points and organization are my summary of a couple of pages of finer points):

  • Economics leads you to great sensitivity to the fact that  correlation is not causation.
  • Budget constraints and accounting identities. I think good economists quickly follow the money one more step than most analysts.
  • Unintended consequences. Our field is, perhaps, best described as a collection of funny stories about unintended consequences.
  • Supply response, (or demand), and competition. … we are not always great at quantifying their relative significance. But "not zero" is usually an eye opener in public policy.
  • The fallacy of composition ought to be right up there with correlation is not causation. We can't all negotiate better.
  • In sum, I think economics provides an excellent set of bullshit detectors. This is my stock answer about my own professional expertise. I may not know what makes the economy grow, or how monetary policy works. But I now [sic] with great detail exactly why the ten stories in front of us are all wrong, and typically logically incoherent.
  • … Let's call it Hayekian humility. This is the hardest one for so many economists to admit, as we all like to play central planner.

Boudreaux’s post takes on a faux debate format between a non-economist and an economist over policy questions. Good stuff too.

Thursday, March 2, 2017

Tim Worstall Visits Bangladesh

Bangladesh was the poorest place on the planet when I was a kid. We’ve defined relative global poverty upward. Now we talk about living on $2/day as extreme poverty, but it used to be $1/day, and most Bangladeshi’s didn’t make that much.

Tim Worstall is there right now as an invited speaker. It’s his first visit.

Tim and I have been virtual friends for 12 years now; we were both very early economics bloggers. He’s had a varied career, one part of which is that he’s now an occasional columnist for Forbes.

On his blog Tim often uses language that some might find offensive. You’ve been warned.

Sexist too. You have been warned. The articles he gets paid for are far less … hmmm … salty.

Per capita incomes in Bangladesh show that it has risen to about the 30th percentile amongst countries, so it has overtaken the level of well-being of perhaps sixty others.

Bangladesh, like China, is what the growth models we’ll be doing after spring break say should be happening in every poor place. That it is not is an astounding commentary on the amount of poor policy practice around the world; many macroeconomists, myself included, assert that the poor choices of many governments around the world qualify as crimes against humanity.

Tim is giddy about what he is seeing in Bangladesh, so I felt I would paste in his entire post. Our world has, over your lifetime, undergone the greatest reduction in poverty and misery in human history. Heck, more people have been lifted out of poverty over that time than in all the rest of human history. That’s a story that every college student should know by heart. Here’s Tim, starting out by noting that Bangladesh was so bad 45 years ago that most international advisors didn’t even know where to start:

In a piece of his talking about how sweatshops ain’t great but they’re better than what poor places have to offer as an alternative Krugman says something like “even Bangladesh”. On the basis that 120 million people on the flood plains of the Himalayan rivers, with little other than the people and the flood plains, has always been one of those places where the development specialists and planners go “Well, what the fuck do we do here?”

Which rather speaks to this comment on the blog here:

I’ve become more optimistic since taking the time to read Tim’s Register and Forbes articles. I like that the world is getting richer. I didn’t realise how much and how quickly.

They’re having an industrial revolution, something that’s not pretty nor nice up close but it is happening. And like most other places that have had one they’re starting in textiles. Here it’s making up the garments, not the weaving or spinning. But that industry employs 4 million and produces 82% of exports.

It’s the old thing. The options are staring at the south end of a north moving water buffalo or the factory. And the water buffalo option produces an income (including domestic production of rice etc) of perhaps 2,000, maybe 3,000 takka a month. 20 to 30 quid. Rickshaw drivers get about the same. One thing I noted was that they’re direct drive, no gears on them. Asked around and gears are considered too expensive…..that’s a certain level of poverty, no? A short rickshaw ride is 10 takka. Got to do a lot of 10 p rides to make a living….

Minimum wage in the factories is 5,000 takka. Time and a half for overtime etc (not included in that number and min wage goes to the new entrants, no training etc). As ever in these sorts of industries the “names” pay better, offer free school for the kiddies, health care etc. The penumbra of subcontractors don’t. A typical career path is off the paddy into the subcontractor factory, a year or two later, with some experience and training under the belt, into one of the main contractors.

Yes, these are shitty wages and neither you nor I would want to try to live like that (note they’re at market exchange rates, not PPP, they understate the standard of living quite a bit, at UK prices think more like £150 a month). But the change wanted, the change desired, is happening.

I was talking to one of the industrialists, and at another time to an Oxford Prof who studies these things (household surveys on stress and mental health of those in and out of the industry for example, being in it raises stress for the worker, lowers it for the extended family…economic security is valuable it seems), and both said much the same thing. The biggest problem for the factories is access to labour. They’ve pretty much swept up that reserve army and are now, to their consternation, competing with each other for access to the desired labour.

As even Marx pointed out, that’s when wages start to rise, seriously and substantially.

The people who invited me out there are the mill owners. Not even Victorian yet, this is still a Georgian economy and some are taking the high road, some the low. Some are training and developing their staff, some are squeezing them. It ain’t, as at the top, pretty nor nice up close.

But the big question in development economics has been, over these past 5 or 6 decades, well, we think we know quite a lot about various places. But what the fuck do we do about Bangladesh? No, really, that’s been the general conclusion all along. And the answer seems to be, as it always has been everywhere, to have a free market driven industrial revolution.

And it is free market too. The creation myth of the industry is that back in 197x, a bloke (I was told his name, cannot recall it) corralled a few dozen sewing machines into a couple of apartments and started. Exports in year one were $20,000. He shipped a dozen likely lads off to Korea for 6 months training, the understanding being that they would then work for him for 5 years, a non-compete clause. None of them kept to that for even 12 months, having seen that this was a bit of alright this business. Absolutely no planning, no legislation, no government help, nowt. Just the lust for profits and market experimentation.

Exports will be $28 billion this year, there’s those 4 million in employment making that double the normal wage (a teacher in a government school might make 8,000 takka a month, with free accommodation, a high school teacher in the private sector would be thoroughly middle class on 15,000 takka. 5,000 takka plus overtime straight out of the fields doesn’t look so bad).

The great economic question in all of history is how do we move on from us all standing around in muddy fields. “So, Rasel, you know how this rice stuff works?” “Fucked if I know Faruqe.” “Mohan, Mohammad, know how we stop the buffalo eating the stuff? “Not a scoobie, sorry.” The answer being that all go off and work in factories.

And it’s happening. Even in that arse end of the development universe, Bangladesh. 5 and 6% GDP growth per year from a Stone Age starting point doesn’t sound like much but they’ve been doing that for two decades now. I spent 22 hours of yesterday traveling, I should be feeling like shit. I don’t think I’ve ever been quite this generally cheerful about the world. Sure, of course, I’ve been personally more excited (that realisation that the bird with the Big Tits is about to put out always generates a certain joy for example) but in that agape instead of eros sense I am indeed that cheerful.

We’d all like this to have happened 250 years ago, when it happened to our forefathers. But it’s true, the poor are getting rich. Life for great vast multitudes of people is getting better.

Time for the Happy Dance, no?

It’s only the dawn but there’s a certain bliss to being alive and knowing it is happening. Now what I’ve got to do is work out if there is some manner in which I can get involved, help prod it along. Probably not, for it has all happened without the intervention of the western upper middle classes in how it works. It’s been everyone else voting with their dollars, buying the stuff produced, which has made it work.

But bugger me, it is working. Ain’t that fucking grand?

There are some Britishisms you may not know. “Quid” is slang for a single English pound. The “Georgian” period ran from 1715 to 1837, with the “Victorian” following — so he’s asserting that Bangladesh is still very early in their industrial revolution. “Nowt” is nothing. “Not a scoobie [doo]” is rhyming slang for a “not a clue”. In America, we probably would not say “arse end of the development universe” but we might say “armpit of the universe”. And “bugger me”? Please don’t go and look that up for a literal meaning and blame me. For slang, in contemporary Utah it is akin to “oh, my heck”.

If you care about people, the economic growth over the last generation is one of the most important stories in all 5,000 years of human civilization. Every economic issue discussed in our recent election cycle pales in comparison.

Tuesday, February 28, 2017

Another Clue About Labor Market Softness: The Decline In Single Quarter Jobs

One feature of the JOLTS data that has changed over the last several years are that both hires and separations (leaving a job for any reason) have declined. Together, these mean that workers are staying one place longer.

Some people start and end jobs in the same quarter. New research (here’s the working paper, since they want you to pay for the journal article) suggests that half of that decline in hires and separations is from a decline in those single quarter jobs. But there’s a problem:

[These jobs are] commonly held by younger workers and by those who take jobs at newer firms, but, nevertheless, the aging of the workforce and the decline of business startups explains relatively little of the decline in single quarter jobs. [emphasis added]

So what does cause the decline of single quarter jobs? It turns out they couldn’t find a decent answer.

The decline of single quarter jobs is not accompanied by individuals substituting long duration jobs for short duration jobs, but is merely part of an overall decline in jobs of both short and long durations.

But maybe the decline is a good thing:

We analyze whether single quarter jobs are “stepping stones” that allow individuals to move into longer duration and presumably higher paying jobs … We find some but not much evidence for this stepping stone aspect of single quarter jobs.

Interestingly, single quarter jobs are treated differently in the creation of two stylized facts about the labor market. One is that earnings have stagnated, and it turns out this stylized fact is developed by including single quarter jobs. The other in increasing inequality, and it turns out this stylized fact is developed by excluding single quarter jobs.

For earnings stagnation, it turns out that including single quarter jobs makes the average wage go down (no one is surprised that single quarter jobs are lower paying), but it also reduces the stagnation. This suggests that for workers that come and go — essentially, a spot market — the labor market is working just fine. Therefore, it’s not working just fine for long term employees, and combined with stagnating earnings, suggests that employers and employees are tied into too many poor long-term relationships.

For income inequality, the exclusion of single quarter jobs reduces measured inequality, but leaves it with an upward trend: this suggests that inequality is mostly about some people lucking into long-term jobs that are really good. Including them increases inequality (because single quarter jobs are mostly low end), but turns the trend in inquality downward. That’s what we’d expect if these low end single quarter jobs were going away.

Taken all together, this adds more evidence to the weird feature of the U.S. economy in the 21st century: people need to be more fluid … there really are more people stuck in ruts than before.

Food for Thought (Optional)

New colleague Paul Schneider repeated this example in brown bag seminar on teaching:†

Paul Schneider Brown Bag Capture

Honestly, I wonder how many adults would respond that this question is not answerable.

In doing quantitative work, particularly with undergraduates, I run into something like this. It’s a sure fire sign that a student doesn’t understand the problem their working with if they print out every possible digit produced by their computer or calculator. Rounding, I guess, is an indicator of comfort with your level of understanding.

† I believe the cite for this is Bransford, John D., and Barry S. Stein. "The IDEAL problem solver." (1993).

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Monday, February 27, 2017

Long Video for a Quick Idea

Cold Spring Shops posted this video from 1944 about how steel is made. It’s about 10 minutes long, and only the last minute or so is required for class. But, if you’re curious why steel production is mostly done in other countries, the first 9 minutes should make it clear why you wouldn’t want this sort of work.

Starting at the 9:07 mark though, the narrator makes a bunch of points that sound like they came out of Monday’s discussion of Ethan’s question in the Quodlibet on Canvas: at that time there seemed like there were few coordination problems, but people could remember when they’d occured recently, and the idea was dawning that those coordination problems were correlated geographically.

BTW: the volume is very low in the source. Not much you can do about that.

Infrastructure

What the heck is infrastructure anyway? Maybe all you know is that politicians want to spend a lot of money on it.†

Part of that is or may be need. But part of it is also the Keynesian story that government spending is expansionary only when the money is spent on stuff that the private sector won’t pay for (rather than just sending out checks to people).

The Washington Post has an excellent article about this entitled “Six Maps That Show the Anatomy of America’s Vast Infrastructure”. There’s too much to copy, so you must click through to the source.

Here are the big 6 components:

  • The electrical grid is all the high voltage lines that connect power plants to your utility.
  • Pipelines connect our oil and gas wells with our refineries. The success of anti-pipeline protesters is hugely problematic, because the opportunity cost of pipelines is not “no pipelines”, but rather “more tanker trucks” and “more tanker rail cars” that can explode in accidents (and the article does a disservice to readers by only noting a rarer, and typically smaller, pipeline accident).
  • Railroads, and particularly the second map of railroad traffic.
  • Airports and flightpaths (that are monitored by air traffic control).
  • Ports. The article does not make a comparison, but what’s probably new to a bunch of students from Utah is the importance of barge traffic in the Mississippi River valley. You can get data on port volume here, and you don’t have to go very far down the list to find big ports that are not on the ocean. Foe example, Cincinnati is busier than Norfolk (the home of most of the Navy’s Atlantic fleet).
  • Bridges are included in the article, but I think this is a charismatic megafauna effect: when bridges collapse it’s big news, but it just doesn’t happen that often. Imagine the “charismatic megainfrastructure effect” if the Golden Gate Bridge collapsed in an earthquake.

† A position usually associated with economist Steven Landsburgh is that in democracies, the parties are supposed to disagree, so we should beware of things that the parties actually agree about.

Wednesday, February 22, 2017

Ken Arrow, R.I.P.

Kenneth Arrow, who I mentioned in my answer to Colin’s question in the Quodlibet, passed away yesterday. Here is the obituary from The New York Times.

Friday, February 17, 2017

Augmented Capital

What if capital owned the labor instead of the other way around?15-12-05; Dilbert; Capital Owning Labor

In growth theory, it’s called augmented labor, when we invent technology that allows a worker to control/use more capital at the same time. The robot above is capital, and it needs augmenting.

In this comic strip, that might be something like a way for a bunch of humans to nap with a minimal number of robots watching over them. Gee … sort of like a more benevolent vision of The Matrix.

This also illustrates growth and level effects, of technology. If the robots invented a technology that allowed them to control more humans, that would be a level effect that’s good for the robots. But having to deal with all those extra humans needing their nap would be the negative growth effect.

From the December 5, 2015 issue of Dilbert.

Thursday, February 16, 2017

Hans Rosling, R.I.P.

Hans Rosling died last week. He was a Swedish statistician known for his TED talks. I usually include at least one of them in this course, but usually later in the semester.

His stock-in-trade was debunking gloomy stereotypes about poor countries and economic development. There were five surprising facts, for instance, that he loved to hammer home: population growth is slowing rapidly; the divide between the global rich and poor is blurring; humans are living much longer than 50 years ago; many more girls are getting an education; and the number of people in extreme poverty fell by a billion between 1980 and 2013.

That’s from the obituary The Economist. Everyone should know those facts by heart (here’s a more detailed version, with a short video on the first point). It is deeply disturbing the extent to which otherwise normal people think life on this planet is getting worse. The broadest sustained improvement in the human condition has occurred during your lifetime. Denying that is a twisted pasttime that is all too popular. Fight it.

(I’ve been putting together a video answer to Pascal’s question for the class Quodlibet. It uses Lego bricks. I swear I was working on it before I saw this video from the obituary in The Guardian):

(In all honesty, lots of people use Lego bricks to make points about statistics, including my son in a 1st grade science project back in 2006).†

From the obituary in The New York Times, here’s Rosling on the magic that is all around us:

“My mother explained the magic with this machine the very, very first day,” he recalled. “She said: ‘Now Hans, we have loaded the laundry. The machine will make the work. And now we can go to the library.’ Because this is the magic: You load the laundry, and what do you get out of the machine? You get books out of the machines, children’s books. And Mother got time to read to me.”

“Thank you, industrialization,” Dr. Rosling said. “Thank you, steel mill. And thank you, chemical processing industry that gave us time to read books.”

This is Rosling’s most famous video (and also the one I usually require students to watch at home in April) about improved well-being around the world:

There’s also a shorter version of this one that I show in class.

Here’s a similar one, that’s a bit more about improving technology:

Here is a longer one about why we should not worry about overpopulation entitled “Don’t Panic — The Facts About Population”; you do have to view this one through the website of the enterprise he founded, Gapminder.

P.S. Rosling tweeted in 2010 that he’d noticed how average he was statistically back in 1972. Some of you are probably still idealistic, and certain you will turn out nothing like your parents. You probably would not even move the meter on that one when compared to me at your age. But how do things turn out? I have a 14 year old who thinks I’m sooooo old and out-of-touch because I’m 52. And yet in 1978 I was 14, my dad was 52, and I was certain he was sooooo old and out-of-touch. Turning out like your parents in a world with washing machines or Uber is actually pretty sweet.

† I would not differ from Rosling on what’s going to happen to the number of little black disks representing carbon dioxide, but I would question his implicit assumption that they matter much. I’m not an anthropogenic global warming denier; but I will point out that global temperature is really, really, inelastic with respect to carbon dioxide emissions, which in turn are really, really, inelatic with respect to people’s quality of life. That’s a recipe for worrying a lot more about the quality of life of poor people, and for worrying a lot less about temperature. Rosling is on the record agreeing with that conclusion.

Monday, February 13, 2017

Record Tax Revenue

Federal tax revenue over the first 4 months of the 2017 fiscal year† (October through January) set a record.

Big deal.

There are two things to consider here.

First, if tax rates are more or less constant, and income goes up, tax revenue will go up too. So we should not be surprised if tax revenue sets records when GDP is setting records. It’s just not that hard for a growing series.

Second, this is actually a good thing. No one like paying taxes. But if tax revenue is going down, and your policy hasn’t changed, something’s really wrong.

† Do note that this is a politically conservative site. It’s biased. But they’re just reporting numbers that are public information.

Wednesday, February 8, 2017

Unemployment Rate for January 2017

The unemployment rate went up a tad, from 4.7% to 4.8% in January.

This isn’t an official result, but my feeling has always been that no one can feel a change in the unemployment rate sharper than about 0.5%. So I view this uptick as … nothing at all, really.

Here’s the table of rates from the last 10 years:

17-02-08 Unemployment Rate Table Capture

You can see that we’ve been bobbing, mostly downward, through a 0.5% range for over a year.

I think we’re at full employment, or alternatively, near the natural rate of unemployment. That is not a solid number (it depends on demographics, and people’s self-definition of whether or not they’re looking for work or not). I usually assert that it’s like the mucky bottom of a muddy stream — not really very solid but firming up somewhere down there. For me, that’s about the 4-6% range.

You can see that in the two ends of this chart:

17-02-08 Unemployment Rate Chart Capture

Of course, some people might interpret any increase in the unemployment rate as a bad thing (It’s Trump’s fault! or It’s Obama’s fault!). Don’t take that seriously. If you look up in the table in late 2008 and early 2009 you can see that we were getting movements of 0.5% (the amount you can feel) every month or two. That was serious.

You can also see the asymmetry of the unemployment rate in the chart: it goes up faster than it comes down. This is normal. From the same site, here’s a chart of the unemployment rate over the last 70 years or so:

17-02-08 Unemployment Rate Chart 2 Capture

The asymmetry is fairly obvious across the entire period. There isn’t much we can do about that. But we do need to keep it in mind when we use the unemployment rate to evaluate policy: the rate not coming down fast enough in response to, say, Obama’s post-recession policies in 2009, or Bush’s in 2002, or Clinton’s in 1993, or Reagan’s in 1983 is normal and not their fault.

These charts do not mark NBER business cycle peaks and troughs. But, for reference, they were in December 2007 and July 2009 the last time around. Eyeballing the first chart and the table, the peak was still when we were in that soft 4-6% full employment range (although it had snuck up 0.6% since May of that year), and the economy’s trough was about 3 months before the unemployment rate topped out.

All of these tables and charts are from the Bureau of Labor Statistics (BLS) unemployment rate page. They’re site has a lot of slick tools for analyzing their data.

Friday, January 27, 2017

Real GDP Growth for 2016 IV

The advance (first draft) news release comes out the last Friday of the month following the end of the quarter, around 6:30 Eastern time: so, early this morning.

The growth rate for that quarter was 1.9%. Positive, but not good.

Considering the population growth rate in the U.S., I typically assert that we have to exceed 2% to feel good about the economy. So we missed that.

But, this is just a quarter, and we also can’t really feel these things until we string a couple of quarters together.

That’s exactly what we’ve been doing, and that’s why we feel that the economy is underperforming. We did not reach 2% for 2016 as a whole, and we’ve missed that mark a few times over the last decade.

It used to be that real GDP growth for the U.S. averaged about 3.3% per year. But we have not hit that rate since the middle of the second term of Bush II.

In other posts from past years I argued that about half of the shortfall appears to be demographic in nature. The baby boomers are starting to retire in big numbers, and you’ve got to account for subtracting those people out of the labor force. This is because overall real GDP growth comes from the sum of growth of labor, growth of capital, and growth of technology. If the first one is lower, the whole sum will be lower.

The other half is more troublesome though. We seem to not be getting the growth from capital and technology that we should be. Is that because we’re not doing enough with what we’ve got, or is it because there’s something wrong with the capital and technology we have? No one is quite sure.

Now, something like half the country thinks we should blame Obama for this. Fair enough. Everyone is entitled to their opinions, but if we’re being serious about macroeconomics we have to support those opinions. So, an acceptable theory for a macroeconomist that leads to the conclusion that “it’s Obama’s fault” has got to include one or more of the following:

  • We have enough capital but something is discouraging us from using it.
  • We have better technology but something is making us stick with the older and less productive technology.
  • We’re investing in capital, but it isn’t the right capital.
  • We’re creating new technology, but it isn’t that useful.

Justifying any of those positions is tougher.

Wednesday, January 25, 2017

One Opinion About Why Politics and Economics Seems All Goofed Up, Both In America, and In Other Developed Countries

I am mostly posting about this article for the graphs (that I’ve pasted below). The source article itself is not required, but it may interest some of you.†

This is a useful chart (although it’s not really saying too much):

https://www.ft.com/__origami/service/image/v2/images/raw/http%3A%2F%2Fcom.ft.imagepublish.prod-us.s3.amazonaws.com%2F5095fbe2-d348-11e6-9341-7393bb2e1b51?source=next&fit=scale-down&width=600

In the U.S., where we think we’re the center of the world, we sense that the rest of the world is catching up to us … and because we think we’re the center of the world we tend to infer that means we’ve done something wrong or someone else has cheated. This chart shows that, if anything, the U.S. has maintained its share of the world economy over the last 35 years. It’s the EU and Japan that have faltered. Obviously, that’s not what Trump would say. But interestingly, it’s not what Obama would have said either (recall that he readily admitted that he wanted the U.S. to be more like Europe).

This chart is not that useful:

https://www.ft.com/__origami/service/image/v2/images/raw/http%3A%2F%2Fcom.ft.imagepublish.prod-us.s3.amazonaws.com%2F53927fb4-d348-11e6-9341-7393bb2e1b51?source=next&fit=scale-down&width=600

This is an example of a bad chart because the scale is not logged. GDP per capita is one of those series that grows through compounding, so if it’s not logged … beware. The reader will have problems with any comparison made from this chart, but I’ll focus on the U.S. versus Japan. Towards the right, it looks like Japan is close to the U.S., but not that close. So then there’s a tendency to follow the lines to the left and think … oh … Japan is just as far behind as they ever were. But that’s not the case if you think of it terms of multiples: on the left the U.S. GDP per capita is perhaps 5 times Japan’s, but on the right it’s more like 1.3 times as big. That means Japan has improved a ton over the 65 years shown.

It’s worse if you’re focused on China. How accurate is your estimate of how much bigger America’s GDP per capita is than China’s on the left of the graph: that could be 10 to 1, or even 20 to 1. Who knows, right? That innaccuracy arises because this data isn’t logged.

It’s also very trendy to focus on income inequality. In the U.S., we think about this through the filter of Democrats and Republicans, and just having had 8 years of Obama, and a recession and financial crisis that has been largely blamed on “the rich”. Fair enough. But at this level, we need to go look at data, and here’s a chart of the primary measure of income inequality:

https://www.ft.com/__origami/service/image/v2/images/raw/http%3A%2F%2Fcom.ft.imagepublish.prod-us.s3.amazonaws.com%2F5496348c-d348-11e6-9341-7393bb2e1b51?source=next&fit=scale-down&width=600

The most striking feature of this is that inequality has gone up in every single one of the developed countries shown here. So any explanation of that must focus on something global rather than national. This means that this Democratic/Republican thing that we have going on in this country — that mean Republicans are taking all the money — just can’t be right. One might argue that this is due to increasing political conservatism around the globe. I’m not going to go into the details, but I’ll warn you not to go there: the data doesn’t support that either.

More broadly, in social sciences, we call explanations like that political one “just-so stories” after the Kipling children’s book. They’re too easy to explain, and not thoughtful enough. Macroeconomists have to deal with a lot of those.

So, for income inequality, we need a story that works in all the richer countries without referencing which party is in power at a particular time. Macroeconomists don’t have great answers for this question yet, but we’re looking at whether the sort of technological advances we’ve seen over the last few decades lead to uneven gains in income. For example, if having Facebook is a good thing, we might have to put up with Mark Zuckerberg getting rich from it.

Stretching further, another possibility that I’ll consider in more posts later in the semester, is that increasing inequality in richer countries is related to decreasing inequality across all countries. One of the weird things about these debates is that while we’re all concered about local inequality within our country, globally, the inequality between countries is much larger. But now we run into a moral issue: global inequality is a bigger problem but it’s improved drastically, yet we’re focused on local inequality (which has gotten worse) even though it’s a smaller problem. That’s twisted. An explanation that ties the economics together is that perhaps the trade that’s making the poor richer globally is more tightly linked to the rich rather than the poor in developed countries. There’s some evidence to support that; but this bugs people because it means that policies to beat up the rich in developed countries to help the local poor are hurting the more numerous and worse off global poor.

These are drawn from an article from Financial Times entitled “Martin Wolf: The long and painful journey to world disorder”. Martin Wolf writes a regular column about economics; his stuff is generally well-informed, so if you see his name outside of class consider paying more attention.

† The source article is from Financial Times, a British newspaper similar to The Wall Street Journal. Typically, Financial Times requires a registration to view articles. I recommend that you go ahead and do that. Of all the publications I read/view, the Financial Times is the one that seems to have never, ever, done something I don’t like with my personal information, or sent me spam.