Thursday, November 29, 2018

Uh Oh (Mexico Edition)

Most countries do not have independent central banks.

Politicians don’t like independent central banks. Part of this is probably personal (it stands to reason that people who run for office that control things probably actually prefer to control things). But part of it is sketchier: if you’re a kleptocrat, getting your hands on a country’s bank might be the ultimate payoff.

This probably explains why economists have found, that while most central banks are not independent, the economies of countries with independent banks tend to perform better.

Mexico has not always performed well economically, but has had a pretty good run for about 40 years. It’s now the 15th largest economy in the world by exchange rates (93rd percentile), and 11th-12th largest by PPP (94th percentile), while its per capita GDP by exchange rates is around 70th (about the 61st percentile), and using PPP it’s in the ranked in the high 60’s (about the 64th percentile).

Part of this was a move to make their central bank more independent in 1994.

But, Mexico just elected a new government which takes office on December 1, 2018. And that government has appointed an official close to the incoming president as deputy governor of the central bank (at least the guy is an economist).

This is not necessarily bad. But as a sign, it’s sort of disturbing. American presidents, for example, may appoint members of the Board of Governors of the Federal System (subject to the advice and consent of the Senate). But it’s hard to come up with the name of any president whose appointed a political insider to one of those positions. The closest thing to this may be when Clinton moved Alan Blinder from the White House’s Council of Economics Advisors over to the Fed in 1994 (but Blinder was primarily a well-known academic, who while strongly Democratic has been in and out of different administrations and positions).

Anyway, this is a big enough deal that the appointment is getting coverage from the Wall Street Journal.

Tuesday, November 20, 2018

An ‘Angry Uncle’ Conversation Primer (Optional)

This is common: many families have members or holiday guests who are argumentative and sometimes distasteful.

Often they want to discuss politics, and frequently they want to argue macroeconomics.

This is so widespread that The New York Times has come up with an app about it.

If interested, Google "angry uncle conversation" and look for a link with nytimes.com in it. The site is free to use. (Here’s a currently working link).

It's a chat bot that plays the role of a holiday guest who's angry about politics. You can role play and figure out how to approach them in a way that makes them less confrontational.

It's much more fun than a real angry uncle ;-D

Where Do Your Tax Dollars Go?

Where Do My Taxes Go? is a cool interactive site. It takes in your pre-tax income, your state, and your filing status, and returns the amount and percentages of your taxes that go to various places. Go put in your numbers!

My guess is that most people will try it out and be surprised. The big deal is the percentages: most people have some unusual biases about what parts of government are large and small. My guess is that the percentages are roughly the same for everyone. Do note that the percentages are only for Federal taxes (including FICA); no breakdown for state taxes is included.

Below, I’ve used my own household situation to generate some percentages. I’ve also broken down a little differently, and ordered the results. For curiosity’s sake, a couple working at a mid-level state university, as a full professor and a lecturer, with not much other income, pays about $23,000 in federal taxes, and $7,000 in state taxes (the latter are not included in what’s below).

The first major distinction is between mandatory and discretionary spending. According to the laws, mandatory spending is very difficult to cut.

Worse, programs with mandatory spending often define benefits in terms of per person and per situation. So, population goes up, and so does mandatory spending. More people qualify for the benefits, and spending goes up, The thresholds for qualifying for benefits can be changed, but politically, these changes are often in the direction of more rather than less spending.

The breakdown explains a lot of why it’s so hard to make meaningful budget cuts in D.C.:

Category Percentage of All Spending
Mandatory 72
Discretionary 28

How does a program become mandatory? Easy. Congress passes a long saying this sort of spending is now mandatory. Done. That's it.

Mandatory spending was non-existent before 1935. Social Security was the first program to be designated this way. Unfortunately, here’s what’s happened with the passage of time:

What sort of programs are mandatory? Here you go:

ProgramPercentage of All Spending
Social Security24
Medicare15
Other Mandatory Programs13
Medicaid10
Net Interest 8
Health Exchange Subsidies 1
Infrastructure Initiative 1

Note that percentages don't always add up due to rounding.

Here are the discretionary programs. When people discuss any sort of “spending increase” it might come from mandatory, discretionary, or both. But when we discuss any sort of “spending cut” it almost certainly comes from discretionary spending.

Program Percentage of All Spending
Dept. of Defense 13.8
Overseas Contingency Operations 2.3
Dept. of Veterans Affairs 1.9
Dept. of Health and Human Services 1.6
Dept. of Education 1.4
Dept. of Homeland Security 1.1
Dept. of Housing and Urban Development 0.9
Dept. of Energy 0.7
Dept. of Justice 0.6
Dept. of State 0.6
NASA 0.4
Dept. of Agriculture 0.4
Other Agencies 0.4
Dept. of Transportation 0.4
Dept. of the Treasury 0.3
Dept. of the Interior 0.3
Dept. of Commerce 0.2
Dept. of Labor 0.2
Social Security Administration 0.2
Disaster Relief 0.1
EPA 0.1
National Science Foundation 0.1
Army Corps of Engineers 0.1
Program Integrity 0.0
Wildfire Suppression 0.0
General Services Administration 0.0
Small Business Administration 0.0
Emergency Funding 0.0

Note that percentages don't always add up due to rounding. Also, a 0.0 indicates something positive that was rounded down.

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Here are more details about mandatory spending.

Social Security includes not just payments to retirees, but also to spouses and children (if the person who paid in dies young).

Many people are under the impression that they “deserve” Social Security because they get out what they pay in. This is not true. Unless one dies well below the median lifespan, outflows exceed inflows for just about everyone. So, it’s a morbid example, but the Federal government faces a moral hazard when it discourages smoking. Further, social security payments are gender neutral, while life expectancy is not, so if a man and woman pay in identical amounts it’s likely the woman will receive more outflows.

Medicare covers many health expenses for those over 65. It is composed of 4 programs. Two were created during the Johnson administration in 1965: Medicare Part A  covers in-patient care (e.g., hospitalization), while Part B covers out-patient care (e.g., office visits). Parts A and B offer better coverage, but less choice. Part C, passed in 1997, allows seniors to enroll in plans that limit spending but offer more choice of doctors and facilities. Part D, passed in 2003, covers most prescription medications consumed at home. Interestingly, Parts A and B were passed when Democrats controlled both houses of Congress and the White House, while Part D was passed when Republicans controlled everything, while Part C was a mix.

It is fairly common knowledge that Social Security has long-term viability problems. This is because it is difficult to collect enough inflows to cover outflows. This is mostly a problem of 1) people voting certain groups out of paying and into receiving, and 2) insufficient adjustments to the age at which benefits start to account for increasing lifespans.

What is very poorly understood is that Medicare is a worse problem than Social Security. This is because Social Security does have limits on how much one can receive in proportion to how much one paid in. Medicare has no such limits: the government has promised open-ended medical care to all seniors. So again, there’s a moral hazard in that providing better medical care extends lifespans which increases the lifetime costs per person. Yes, that is expected to spiral “out of control”. No, nothing has been done about it.

For future reference, you should also be aware of a long-standing curiosity with Social Security and Medicare: because contributions do not cover expenses, these programs should be thought of as “welfare” for senior citizens. However, since everyone makes contributions to these, and most people are in denial that their contributions do not cover what they are likely to receive, most people do not regard these as welfare.

Medicaid is a program in which the Federal government helps state governments provide healthcare for their poor. A critical difference between Medicaid and Medicare is that, by design, Medicaid can and will cover all a recipients healthcare expenses. Medicare always requires some patient contribution (which seniors can buy extra insurance, known as Medi-gap, to cover).

That means that when progressives tout medi-something-for-all, what they are envisioning is something like Medicaid in which the consumer pays no out-of-pocket expenses.

Unfortunately, Medicaid is also the program that doctors and hospitals complain about so much. If you have lived in an area where you have heard about doctors or hospitals not accepting patients, they are talking about Medicaid rather than Medicare. The problem here is that Congress routinely does not supply funding for Medicaid that keeps up with expenses. This has been a problem for decades, both when Republicans and when Democrats controlled Congress.

Health Exchange Subsidies are part of “Obamacare”. These include payments to private health insurers to stay in business in regions in which they would otherwise lose money.

Net Interest is fairly obvious: gross interest paid on federal debts minus gross interest received by the federal government on its loans.

The Infrastructure Initiative is new under the Trump administration. What they did here was try and reduce overall infrastructure spending (which was discretionary and volatile), with mandatory spending that was smaller, but also tied to a formula that provided reliable increases with the passage of time.

What’s in those other mandatory programs? Ooh, lots of stuff that’s individually smaller. he Earned Income Tax Credit (EITC) returns some taxes to the working poor. Most welfare programs are here too: Supplemental Nutrition Assistance (SNAP) helps pay for food for the poor (and was formerly known as food stamps), Temporary Assistance for Needy Families (TANF) is what most people think of as conventional welfare, as well as Unemployment Insurance. Also in here is Supplemental Security Income, which is available to seniors, the blind, and the disabled if their other support is insufficient. All of your retirement programs for former government workers, including the military, goes here. Agricultural subsides are in here too. Lastly, it’s very small, but all the salaries and benefits of top government officials are here too. This is because some jobs — President, Senators, Representatives, Supreme Court and other Federal Judges, Ambassadors, and so on — are mandated by the Constitution or other laws. On the other hand, when you here that the President is not paid as much as most CEO’s, the reason is that while their salary is part of mandatory spending (making it hard to cut) it also requires a special act of Congress to increase.

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Here are more details about discretionary spending.

First off, in the income breakdown of GDP in the National Income and Product Accounts, about 70% is compensation. So, in all of the programs listed here, roughly 70% is employee compensation. If the budget numbers underlying these percentages go up or down, it’s mostly because employees went up or down.

Defense is obviously the biggest one. Part of the reason you hear so many calls for reductions in defense spending is not that people are not in necessarily in favor of that, but rather that it’s literally the biggest thing by far so a little cut to defense could hugely increase some other budget you favor.

Overseas Contingency Operations are for funding help for political disasters (civil wars and peacekeeping) and natural ones too. Basically, when sh*t happens, it comes out of here.

Veterans Affairs is mostly hospitals and other more routine medical care for veterans.

Other agencies include many familiar government entities that report straight to the White House: the CIA, the FCC, the FEC, the FTC, the NLRB, the NTSB, the SEC, the Selective Service Administration, the Smithsonian Institution, the revenue shortfall of the Postal Service, and many more.

The Army Corps of Engineers is separated out because they do most of the fresh water control (with levees), and salt water control (with breakwaters) around the country.

Program Integrity is bridging over from old programs that are being done away with, to new programs to deal with the same issues.

The General Services Administration is the one that runs all the buildings: rent, repairs, utilities, copier paper, and so on.

Friday, November 16, 2018

An Interesting Site (Optional)

I do not know enough about the methodology used by this website to say that I support its conclusions. (I especially distrust that it’s just a website, and not a peer-reviewed publications). Whatever.

This was put out by ThirdWay, a progressive think tank based in D.C. What they’ve put together is some indices of how possible it is to have a good life in various U.S. urban areas. They ranked 204 metropolitan areas, and came up with some interesting (but not too surprising) “heat maps” of what they call the opportunity index.

ThirdWay's Opportunity Index Capture

Reddish is worse, greenish is better. Not surprisingly, it’s tough for a lot of people to have a good life in California. The Southeast doesn’t look too good either. The Wasatch Front is OK to good. The best parts are the Midwest, parts of the Northeast, the big urban areas in Texas, and few cities in the west: Denver, SLC< and Seattle.

Perhaps some of you will find this useful for planning a relocation.

Friday, November 2, 2018

Who’s Better: Trump or Obama?

How about … neither?

Former student MC sent me a link to this piece entitled “Two Charts Show Trump’s Job Gains Are Just a Continuation from Obama’s Presidency”. It’s by Chuck Jones, and appeared in Forbes.

I am not sure how much I’m supposed to read in to the word “continuation” in the title. To me, it’s not clear if the author means that Obama is responsible for Trump’s good numbers, or just that the economy is doing its thing, and Obama and Trump just rode the same wave.

Either way, it makes a point that I made in principles classes just this morning: the labor market data doesn’t show that Trump is doing anything special.

U.S. employment

U.S. unemployment rate

The big point here is that the differences are overblown (so I’m of the opinion that they are both lucky to be riding a good wave). If you’re a Trump-lover, he’s nothing special. And if you’re a Trump-hater: he’s not wrecking anything either.

P.S. At the time that I write this, I’ve barely begun the revision of my text for Spring 2019. One thing I intend to include is some simulations looking at whether we could have forecast the economy’s performance over Trump’s first 7 quarters at the time of the election. So there will be more to come.

Thursday, October 18, 2018

Putting Real GDP Per Capita In Perspective

The Philippines is not one of the poorest countries on the planet. But it certainly was a century ago, and it has not grown as well as its neighbors. Currently, its real GDP per capita is about 3K/yr in American Dollars. Ours is about $60K.

What does that get you? Check out this gripe from the comments at Marginal Revolution:

Airspace homogenuity is a 1st World gripe. Here’s some of my 3rd World concerns: do we have any more Philippine spitting cobras in our backyard? (We’ve killed two in the last year, one of them at 10:00 am in the outdoor kitchen, slithering up to somebody; it can shoot their venom up to 10 feet, kills many within 30 minutes, too short to make it to the hospital); are we going to run out of water in this rain forest climate that has no dams, though we just dug a second pressurized well?; does burning plastic (there’s no trash pickup here) cause cancer though we’ve taken precautions to build a big pit and stay upwind? (diesel fuel helps but it’s so rainy here it’s hard to burn anything); did the diseased bat that almost landed on my head carry Ebola or rabies (I have anti-rabies shots, but not Ebola)?; will the volcano erupt again and bury us with pyroclastic flow, like it almost did earlier this year (the magma the size of a football stadium that rolled down the mountainside was spectacular, I saw it when it happened); will our new concrete house get damaged by an earthquake (I think not, we used good concrete not the crumbly stuff they use here to save money), or a typhoon (we have a steel roof; the Philippines gets something like a dozen typhoons a year, and we’re in ‘typhoon alley’); will we have another power cut just when I’m typing this? (the PH regional power plant is geothermal, which sounds good but in fact is prone to breakdowns, a brownout for a few hours every week is common, and more common during rain, a coal-fired plant is actually more reliable and btw electricity costs are about 2-3x more than in the USA, and people here are poor). Why are fruits and vegetables so expensive here ($1 for an ordinary apple; 80 cents for a small fist sized greenish tomato or huge, dirt filled–it’s comical–carrot) and why won’t my next-of-kin eat them? (sad people here eat nothing but sugar, white rice, pork, chicken, and the bony talapia fish, all fried of course since nobody even sells ovens and the one oven I bought, imported, had a gas leak and is inoperative, serves me right for trying to buck custom and buying things knowing everything here is sold from First World county rejected equipment, I kid you not).

It’s both amazing from the perspective of history, but not so amazing from the perspective of the internet that this commenter chimes in rather often on the world’s most popular economics blog.

Wednesday, October 3, 2018

Hyper-Local Institutions, Family Income, and Future Prospects

As time progresses, we get better and better data about what helps people avoid poverty.

The old school story was that it was about your parents’ income: the richer they were, the richer you were likely to be.

The new school story, developed in other parts of macroeconomics over the last 30 years, is that once we correct for readily observable differences (like parents’ income), what’s left over as a residual is the effects of the harder to measure institutions that make up societies and cultures. And those institutions seem to make a lot of difference, although we have trouble pinning down what they are.

There’s new research discussed in an article in The New York Times entitled “Detailed New National Maps Show How Neighborhoods Shape Children for Life” that shows this. You have to click through to run the interactive graphic: I just have screen captures below.

What they found is that children of poor families in some neighborhoods did better than those from other neighborhoods. A half-mile radius makes a difference, which is why they use the word hyper-local for this effect.

Of course, my guess is that most of you could identify a neighborhood close to where you grew up where you could just bet that many peoples’ lives didn’t work out well.

Cedar City doesn’t work too well for this (we’re too small). I’m going to go back to a neighborhood where I used to live in New Orleans. If you saw the house we used to live in, by Utah standards you’d think we were poor. But New Orleans is expensive, so I assure you it was an upper middle class neighborhood. But it wasn’t rich. It’s the greenish area under the darker blue rectangle in the center, next to the big park (in white). It would take 10 minutes or less to walk it from west to east.

Poor Kids from New Orleans Neighborhood Capture, NYT 18-10-03

You don’t know this, but I do: New Orleans is a great example for something like this because rich and poor live much closer and more spottily than in other cities (if you’ve never been to the South, more limited zoning makes them far less segregated than you’d expect).

Even though this was a good neighborhood, the map shows only outcomes for kids that grew up in poor households in these neighborhoods (richer kids are not shown here at all).

And what you see is that a poor neighbor where we used to live, would have kids that would grow up into middle incomes, but only so far. The poor kids just to the north, who would have gone to the same elementary school ended up a lot better off. The poor kids just to the north and a little west did well, but not as well as the ones straight north (our best — and much richer — friends lived in that neighborhood that somehow did less for the poor). All the way to the north along the lake … which was super rich, poor kids did pretty well, but not as well as in other neighborhoods nearby. That little greenish triangle southeast of where I lived was not regarded as a great neighborhood … but somehow kids there do fairly well.

Here’s Salt Lake City, which I’m guessing is far more segregated by income:

Poor Kids from Salt Lake City Neighborhoods Capture, NYT 18-10-03

Yes, the south end of the valley is richer, but that isn’t shown here. But there’s something about it that helps poor kids turn into rich adults. And if you look at The Avenues, there are some neighborhoods there (that are pretty much all rich) where poor kids are not getting something they need to improve their lives.

You probably need to go to the interactive graphic to zoom in, but in my old neighborhood (now called Westpointe because no one liked being associated with Rose Park) the dividing line goes down the main street by our old apartment. The neighborhood was all apartments, but poor kids in our complex turned out better (on average) than poor kids in the complex just across the street. Weird.

It’s also interesting to compare the two maps. These are all for kids whose families had the same incomes in New Orleans as they did in Salt Lake City. But there’s something about Salt Lake City that helps those kids grow up to be financially better off than kids from big chunks of New Orleans. Somehow the culture in SLC is one in which the poor do better.

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On a different note, the article discusses a policy choice made by the Seattle Housing Authority.

This should be fairly obvious by the time you reach this class: passing policies is easy, finding policies that work is hard.

In this case, they’ve assumed that it’s something in the good neighborhoods. So they’re subsidizing poor people with vouchers to cover higher costs in the good neighborhoods. That will have a direct effect of increasing the number of poor households in those neighborhoods. But there will be an indirect effect: the vouchers will shift demand to the right, pushing up prices, and pushing out some of the marginal people who could afford those neighborhoods without the voucher.

Even so, this is problematic. This policy does not acknowledge that people may have self-selected into those neighborhoods, and their choices may be correlated with other behaviors. If good outcomes result from what residents do rather than what they have, then this sort of policy is likely to be a waste of money. An important caveat to that is that it may be helpful to push poorer families to move nearer to families with better habits, in which case the policy will work. But in contemporary society, that’s viewed as inappropriately judgmental. Politically, that tends to trump whether it works or not.

Monday, October 1, 2018

Was There a Mini-Recession in 2015-6?

Recessions are officially “called” by a group called the NBER Business Cycle Dating Committee (made up of academic macroeconomists from the best schools).

They are looking for a pervasive decline, that is correlated across both space (most of the country), and time (at least several months for a recession).

In this class in Spring 2016, we discussed heavily whether or not the U.S. seemed like it was peaking, or had already peaked (see here, here, and here especially).

This soft period didn’t last, and the Committee did not call a peak or trough.

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Neil Irwin (a journalist who covers macro) now argues in an op-ed in The New York Times entitled “The Most Important Least-Noticed Economic Event of the Decade” that this was a mini-recession.

There’s no such thing officially. But we have had significant soft spots before (1986-7 associated with the stock market crash, and 1966-7 associated with widespread urban riots).

So what does Irwin think about this one?

First, while the Trump administration has claimed full credit for a surge in business investment, the bounce-back from the mini-recession is a major factor.

White House economists have presented charts showing a surge starting in the fourth quarter of 2016, when the election took place. But that turnaround began in mid-2016 by most measures, not late 2016 as suggested by the White House’s “six quarter compound annual growth rate” measure.

Second, the mini-recession might well have affected some political attitudes during the 2016 election. While the economy was in pretty good shape for people in large cities on the coasts, 2016 was rough for a lot of people in local economies heavily reliant on drilling, mining, farming or making the machines that support those industries.

I don’t put too much stock into these, but I don’t dismiss them either. Macro is like that.

Thursday, September 27, 2018

Try and Fix the National Debt

I am not of the opinion that the national debt of the U.S. is a big problem. But many people are. If you’re one of those, here’s a tool that allows you to play with policy options and see what they do to the debt.

One thing I don’t like about tools like this is that you can mentally “cheat” a little. You can do this because each little policy choice has a price tag, and the visual tools update immediately to let you know how far you still have to go.

So, there’s a big list of policy options: several pages of about a dozen each. I recommend you start out with some sort of rule for how you think about the world, and then spot the 10 or 20 that fit that rule, and see how you do. Sample rules might be: vote against all defense spending increases, or vote against anything (positive or negative) involving Obamacare, or vote in favor of everything that reduces tax complexity.

Monday, September 17, 2018

Who Led the Most Interesting Life In Recent Times (Optional)

This was posted on Marginal Revolution. Tyler’s suggestion is:

Keynes pops to mind as one contender.  He was a top-tier intellect and economist, he was closely connected to the arts, had plenty of brilliant Bloomsbury people to chat with, married a ballerina, played a major role in politics several times, and he participated in several critical and indeed formative moments of history (Treaty of Versailles, fiscal policy, Bretton Woods).  He experienced both world wars (no one said “interesting” has to be good!).  Still, he didn’t travel enough to be a slam dunk (I can’t quite bring myself to write “nor did he have the internet.”)

The post has links to many more.

Friday, September 7, 2018

Cost of Democratic Socialism

It’s 2 months before the 2018 election, and in the wake of Bernie Sanders presidential run and aspirations, “democratic socialist” candidates are all the rage.

These candidates often propose new government programs with large benefits: single payer healthcare, guaranteed jobs programs, free college, and so on.

Benefits have costs. Politicians and voters are not unaware of this. Ideally, we’d only like to pursue things for which the benefits exceed the costs (or net benefits are positive).

This is a surprisingly hard thing to do because it’s hard to pin down costs.

David Riedl, an economist working for the conservative Manhattan Institute, has stockpiled a lot of numbers from neutral to progressive (not conservative) sources all in one place. It’s not pretty.

The Federal government is projected to collect $44T in revenues over the next decade, to help pay for $56T in spending (the difference being national debt increases from running deficits). The democratic socialist proposals that are on the table are projected to add $42T in spending to that total.

Single payer healthcare provides a good example:

And here is a key point: … I have yet to come across even one specific single-payer proposal that raises anywhere close to the roughly $30 trillion needed to pay for the new system …

Democratic socialists are disingenuously cagey about the exorbitant tax burden they require. Alexandria Ocasio-Cortez recently offered a list of tax increases — such as a 28 percent corporate tax rate, a “Buffett tax” on millionaires, and carbon tax — that collectively add up to just $2 trillion over the decade, according to the CBO.

Here are three ideas that are in fairly common discussion. We’ll go back to the whole slate of $44T of new spending, and take at face value progressive estimates that $10T of that would be covered by savings over current systems. Fair enough. You can come up with the remaining money by:

  • Taxing corporations and the rich: a 100% tax on corporate profits and a 100% tax on all income over $150K would do the trick. This presumes corporations would stay open, and the rich would still work.
  • Introduce a VAT of 87%. This is essentially a nationwide sales tax on all items.
  • Add a new payroll tax of 37% on top of the 15% FICA tax we all pay now.

Do note that these three could be combined to lessen the burden of each.

Read the whole thing, entitled “America might be ready for democratic socialism. It’s not ready for the bill.” at Vox.

Hat tip to Tommy Austin, who took principles of macro from me back in the mid-90s, and who still sends cool links to his old professor.

Friday, June 29, 2018

The Problem with How We Think About Greece

From June 28, 2018

Sometimes posts get lost. Sometimes they get abandoned. Often that’s because I can’t find the cite I need. I started this one in the summer of 2015, and returned to it 3 years later when the missing source material came across my screen.

Greece has improved a bit since then. Back then, it was slow motion train wreck of international macroeconomic news stories. I started this post the day that Greece defaulted on loans from the IMF. Headlines like this one were common: "Greece: The First Developed Country in History to Default to the IMF"

A problem when we in western developed countries think about Greece is that we think it’s one of us. It probably isn’t.

When we think about developed countries, we start with the U.S. What makes it developed? It isn’t that it’s GDP is big, but that it’s GDP per capita is big (and then maybe we exclude a few oil sheikdoms and offshore banking havens where the high GDP per capita might not be representative of actual citizens of those countries). Then we look around, and we see that there are places like Canada, Japan, Australia, Israel, and South Korea that are similar. But most of the similar countries are in Europe. But that starts with northwestern Europe (remember from middle school geography that Europe goes all the way to the Caucusus and Ural mountains). It’s easy for us to say that France, Germany, and the UK are also developed. And some smaller countries in and around them, like the Netherlands or Sweden or Austria. But as we stretch to the south and east, they get rarer. Italy is certainly developed. Spain … not so much. Croatia? Nope. Poland? It’s trying.

Here’s the thing. People are both inclusive and tribal. We have our tribes, but we do like to find new members too. What the EU and the EMU have been doing is adding countries from southern and eastern Europe that look less and less like those in northwestern Europe.† And then journalists call those countries “Developed”. They aren’t. Instead, they’re members of a club in which they’re still trying to fit in.

So when the headline reads that Greece is the first developed country to default on an IMF loan, the part that’s incorrect is probably the usage of “developed”. Just because people from developed countries are willing to vacation there doesn’t make it developed. Just ask Mexico.

And, in a very real sense, Greece is out of the news now because it defaulted then. Think of it like a company that’s faililng versus one that actually went bankrupt and was liquidated. Right now, the firm that’s in that situation is Toys ‘R Us. It’s been a company in decline for a decade. But remember all those warm fuzzys you have of it? In a few years it will be forgotten. Just like Child World has been. So Greece isn’t out of the news because the situation is all better, but rather because it crossed the threshold into bankrupty, and everyone gave up on it for a while.

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From June 30, 2015

Greece has financial problems … and oh … Plato used to live down the street.

I think that the serious thinking of a lot of people about Greece’s problems starts to fall apart because they somehow think that Greece is special. We’d better off thinking about it as a place that was special.

Here’s a two question quiz: 1) name as many Greeks as you can who were born more than 2000 years ago, and 2) name as many Greeks as you can that were born in the last 2000 years? The problem is that we seem to get this Greek Derangement Syndrome because we don’t make the connection that all those Greeks from a long time ago don’t matter much to the Greece of today.

An example of this comes from this chart:

15-07-01, WSJ, Record Greek Default to the IMF

They haven’t put Greece on here yet. But I bet you when they do they make it a different color from what they now show as Europe. They’ll invent a new category because Greece isn’t just part of Europe (like Bosnia and Herzegovina, or the rump Yugoslavia). No, Greece is a member of the more exclusive European Union, and the even more exclusive European Monetary Union (aka the Eurozone).

Those distinctions are made because people want to believe that Greece is different … mostly because um … Aristotle went to school with someone you kinda’ sorta’ know.

This is nonsense. Greece has been a horribly run backwater on the edge of Europe since westerners forced its independence in 1830. It is in financial trouble with the Germans because the Greeks won’t lend to their own government, so its gone begging elsewhere. It was bailed out in 2010, and again in 2012, and already had the best terms for repaying its debt of any country in the EMU … before they spent the first half of 2015 begging for more.

The chart is drawn from the article entitled “Record Greek Default Deals a Blow to the IMF” that appeared in the July 1 issue of The Wall Street Journal.

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Back to June 28, 2018

How is Greece more like the countries in the chart than the rest of the EU or EMU?

Well, for one thing, it’s most statist. Both Americans and Europeans view Europe as being more statist. By that we mean that the economy is more dominated by the government. (This is sort of an urban myth created by not counting the much larger sub-national governments that the U.S. has: when you count all levels, we’re about as statist as western Europe). But we all recognize that the private sectors of most European economies are filled with firms making things and doing business (you know … BP, Volkswagen, Carrefour, Fiat, Siemens, HSBC, Nestle, Bosch, ThyssenKrupp, Airbus, Unilever, Maersk, Nokia, Volvo, and who can forget the now Belgian Anheuser-Busch InBev). That list from Wikipedia contains no Greek firms in the top 150 European firms.

Stop for a minute. Can you name Greece’s largest business (other than tourism, which is dominate dby multinational firms everywhere)? You can’t, because they don’t do much. They do have firms, but I challenge you to find a name on this list that you recognize. This is what makes Greece statist: there isn’t much economy other than the state. Here’s Scott Sumner writing at EconLog in June 2015, from a post the broadly discusses why those on the left have trouble figuring out what’s wrong with Greece:

… Back in 2008, when I did research on neoliberalism in developing countries, I found that Greece was the least neoliberal economy in the developed world, according to a variety of metrics. Note that at this time Greece was booming, so this was not a question of people who liked neoliberalism calling Greece statist just because they wanted to peg that tag on a failed system. Indeed I was surprised that Greece did so well until 2008, despite being so amazingly un-neoliberal.

Of course we all know what happened next. The world discovered that the Greek boom was funded by unsustainable foreign borrowing, and that the Greek government lied about how much they had borrowed. When the huge debts were exposed, Greece had to sharply curtail its borrowing. Even worse, the eurozone crisis pushed Greek into recession. Greece is now widely seen as the worst economy in the developed world …

Sumner is right/libertarian, but I think he too suffers from the point in my thesis here that we’re giving Greece too much credit.

The research he refers to is here. It’s from 2008 when everyone was fooling themselves that Greece was like other EU or EMU members. Here’s the thing: there’s roughly 200 countries on the globe, and “developed” applies to the top 40 or so in GDP per capita. Greece is either at the low end of that range, or beyond it. And if we look at the Index of Economic Freedom (in the link at the start of the paragraph) Greece is ranked around 80th, between Honduras and Nicaragua. But what other countries are about 40th on the one list and about 80th on the other? Kazakhstan.

Do you think of Kazakhstan as developed? Probably not. Then don’t fool yourself that Greece is either … even if you think Lysistrata has some relevance to #MeToo.

† And if you don’t think the EU and EMU are tribal, you should read up on how they have slow walked admitting Turkey.‡ Even though Turkey is a lot more developed than most of the places between Istanbul and Brussels. Many international policy critics view Turkey’s turn towards Islam as partially resulting from being rejected. The Turks spent hundreds of years trying to get closer to the west, and the closest anyone ever let them come was joining the Central Powers in World War I.

‡ You can probably imagine what the slang phrase “slow walked” means, but if not you can find it in Urban Dictionary. Apologies in advance for any other NSFW things that catch your eye there.

Wednesday, June 27, 2018

We’ve Gone Too Far: Income Redistribution, Effective Marginal Tax Rates, and Our Angry Middle Class

Mankiw makes the point that the effective marginal tax rate on a poor person in the U.S. is currently 76%.

What does that mean? Is it high? Should we do better? It turns out the answers to those questions tell us that U.S. income redistribution policies go too far towards helping the poor, and are too harsh on the middle class.

So what does the 76% mean? As typical in income inequality work, we’re dealing with quintiles of the population. And Mankiw’s numbers come from this report (also used for class in this post), with his calculation motivated by this op-ed piece. The report is important because it is currently the most comprehensive analysis of income, in that it counts more additions to income (like social programs) and subtractions from income (like taxes) than any other source. For example, it shows in its Table 4 that the lowest quintile takes home 2.2% of the income earned across the country (that’s the sense in which we have an income inequality problem), but after counting all other changes to their income they end up with 12.9% of the income (that improvement is the sense in which our social programs are helping the poor). That last number is called Final Net Income After All Taxes and Transfers (FNIAATT).

Mankiw then asks a question that’s been bugging some economists for a while: is it worth it for a poor person to try and not be poor? The problem here is that to improve their lot the poor must earn more income. But in doing so, they often lose out on a lot of benefits, and pay somewhat higher taxes. For example, if they worked more hours, and earned 60% more income, but lost 42% of their starting net income by losing some benefits, they’d only be up 18% because an effective marginal tax rate of 70% took the rest away (that’s one minus the difference of 60 and 42 divided by 60).

The hobgoblin making that happen is usually means testing. This is the idea that we should help the poor more than the not-quite-so-poor because the poor need more help. It sounds efficient, and it definitely reduces the size of transfer programs. But it also means when someone is climbing the ladder of success, the government is kicking at them from above.

Mankiw then does something a little goofy (I’m not sure if this is a feature or a bug). He doesn’t calculate the effective marginal tax rate from the lowest quintile to the second lowest, but rather from the lowest to the middle one. Whatever, it’s not a big deal. Here’s what he finds. The share of FINAATT for the middle quintile is 15.4%, so the improvement is 2.5%. But the share of income earned in the market by the middle quintile is 12.6%, so the improvement is 10.4%. Here’s the thing: the people in the middle worked more, harder, or better to get that 10.4%, but lost most of it as taxes and transfers changed leaving them with just 2.5% — 76% of what they worked more, harder, or better for was taken away. That answers my first question. If you’re interested in the less-goofy question about going up from the lowest to the second lowest quintile, the rate is a tad higher at 79%.

On the face of it, that’s sounds like a huge discouragement to work more, harder, or better. Let’s not be so hasty. Most of us are comfortable living in a society in which at least something is transferred from the richer to the poorer. So we shouldn’t expect that number to be zero. And, we’re pretty used to paying a chunk of our income in federal income tax, having FICA withdrawn from our paychecks, sending more to states and localities in income and real estate taxes, and then paying sales taxes on top of that. Total those up, and you’re in the 40% range for many people. Note that this is an average rate: the math gets a little arcane, but effective marginal rates can diverge quite a bit from average rates, and a progressive tax system puts them on the high side. The bottom line is that we shouldn’t jump too quickly to presuming that my 79% (or Mankiw’s 76%) is too high.

A better way to assess this would be to figure out the effective marginal tax rates for all upward shifts. So, it’s 79% to go from lowest to second lowest, and then 73% to make the jump from second lowest to the middle quintile, 59% to go one step further, and then 44% to go from the second highest to the highest quintile. Now we’re getting somewhere. Our system as it currently stands punishes everyone for working more, harder, and better. But don’t forget that this is OK: it means we’re all chipping in to help the less fortunate. The thing is, we punish the poor who work more, harder, and better more than we punish the upper middle class who choose to do that. Is it any wonder that there’s a perception that the upper middle class has more strivers?

That answers my second question. Yes, 79% is too much to take from the poor who are trying to improve their lot because we don’t take as much from those who are better off and trying to do the same thing.

The third question is mathematically tougher. How could we do better? Let’s start with not punishing poor people who try to improve their lots more than richer people who try and improve theirs. That means we need to figure out how to simultaneously change all of the FINAATT shares so that the sequence of four rates are all the same. Here’s what we’d get:

Quintile
Current FINAATT Share
Improved FINAATT Share
Lowest
12.9
12.9
Second
13.9
14.9
Third
15.4
17.1
Fourth
18.6
20.2
Highest
39.3
35.1
Note that the shares shown may not add up to 100% due to rounding.
 
With the shares on the right, no matter which quintiles you move up from, and no matter how many steps you go up, the effective marginal tax rate is always 60%. That’s right in the middle of the four rates noted above. Do note the calculations show that the FINAATT share of the lowest quintile should go up ever so slightly, but not by enough to round up to the next digit.
 
There’s something for almost everyone here. Democrats/Progressives will be happy to see that more is redistributed away from the highest quintile. Republicans/Conservatives will be happy to see that we’ve already helped the poor “enough”. And (at least in word) everyone likes to help the middle class (generally understood to be the middle three quintiles), and these numbers show that they need some help: in the range of a 10% improvement in their share. That’s $5-10K more per year for tens of millions of households across the country: in the range of a car payment, tuition, health insurance deductibles, or a sweet family vacation.
 
This result is ironic. There are duel concerns about whether we help the poor the right amount, and whether the poor have appropriate incentives to improve their lot. It turns out that getting the incentives right for the poor is mostly about making the middle class more attractive.
 
This also goes some way towards explaining what some view as capriciousness on the part of middle-class voters. Many are perplexed at the numbers of the middle-class who voted both for Trump in 2016, and Obama in either of the two previous elections (and maybe even showed an interest in the maverick or third-party campaigns of Dean, Nader, McCain, Buchanan, Perot, or even Anderson). They say they’re hurting, but it’s been difficult to pin down how that could be. Now we know.
 

We’ve Gone Too Far: Income Redistribution, Effective Marginal Tax Rates, and Our Angry Middle Class

Mankiw makes the point that the effective marginal tax rate on a poor person in the U.S. is currently 76%.

What does that mean? Is it high? Should we do better? It turns out the answers to those questions tell us that U.S. income redistribution policies go too far towards helping the poor, and are too harsh on the middle class.

So what does the 76% mean? As typical in income inequality work, we’re dealing with quintiles of the population. And Mankiw’s numbers come from this report (also used for class in this post), with his calculation motivated by this op-ed piece. The report is important because it is currently the most comprehensive analysis of income, in that it counts more additions to income (like social programs) and subtractions from income (like taxes) than any other source. For example, it shows in its Table 4 that the lowest quintile takes home 2.2% of the income earned across the country (that’s the sense in which we have an income inequality problem), but after counting all other changes to their income they end up with 12.9% of the income (that improvement is the sense in which our social programs are helping the poor). That last number is called Final Net Income After All Taxes and Transfers (FNIAATT).

Mankiw then asks a question that’s been bugging some economists for a while: is it worth it for a poor person to try and not be poor? The problem here is that to improve their lot the poor must earn more income. But in doing so, they often lose out on a lot of benefits, and pay somewhat higher taxes. For example, if they worked more hours, and earned 60% more income, but lost 42% of their starting net income by losing some benefits, they’d only be up 18% because an effective marginal tax rate of 70% took the rest away (that’s one minus the difference of 60 and 42 divided by 60).

The hobgoblin making that happen is usually means testing. This is the idea that we should help the poor more than the not-quite-so-poor because the poor need more help. It sounds efficient, and it definitely reduces the size of transfer programs. But it also means when someone is climbing the ladder of success, the government is kicking at them from above.

Mankiw then does something a little goofy (I’m not sure if this is a feature or a bug). He doesn’t calculate the effective marginal tax rate from the lowest quintile to the second lowest, but rather from the lowest to the middle one. Whatever, it’s not a big deal. Here’s what he finds. The share of FINAATT for the middle quintile is 15.4%, so the improvement is 2.5%. But the share of income earned in the market by the middle quintile is 12.6%, so the improvement is 10.4%. Here’s the thing: the people in the middle worked more, harder, or better to get that 10.4%, but lost most of it as taxes and transfers changed leaving them with just 2.5% — 76% of what they worked more, harder, or better for was taken away. That answers my first question. If you’re interested in the less-goofy question about going up from the lowest to the second lowest quintile, the rate is a tad higher at 79%.

On the face of it, that’s sounds like a huge discouragement to work more, harder, or better. Let’s not be so hasty. Most of us are comfortable living in a society in which at least something is transferred from the richer to the poorer. So we shouldn’t expect that number to be zero. And, we’re pretty used to paying a chunk of our income in federal income tax, having FICA withdrawn from our paychecks, sending more to states and localities in income and real estate taxes, and then paying sales taxes on top of that. Total those up, and you’re in the 40% range for many people. Note that this is an average rate: the math gets a little arcane, but effective marginal rates can diverge quite a bit from average rates, and a progressive tax system puts them on the high side. The bottom line is that we shouldn’t jump too quickly to presuming that my 79% (or Mankiw’s 76%) is too high.

A better way to assess this would be to figure out the effective marginal tax rates for all upward shifts. So, it’s 79% to go from lowest to second lowest, and then 73% to make the jump from second lowest to the middle quintile, 59% to go one step further, and then 44% to go from the second highest to the highest quintile. Now we’re getting somewhere. Our system as it currently stands punishes everyone for working more, harder, and better. But don’t forget that this is OK: it means we’re all chipping in to help the less fortunate. The thing is, we punish the poor who work more, harder, and better more than we punish the upper middle class who choose to do that. Is it any wonder that there’s a perception that the upper middle class has more strivers?

That answers my second question. Yes, 79% is too much to take from the poor who are trying to improve their lot because we don’t take as much from those who are better off and trying to do the same thing.

The third question is mathematically tougher. How could we do better? Let’s start with not punishing poor people who try to improve their lots more than richer people who try and improve theirs. That means we need to figure out how to simultaneously change all of the FINAATT shares so that the sequence of four rates are all the same. Here’s what we’d get:

Quintile
Current FINAATT Share
Improved FINAATT Share
Lowest
12.9
12.9
Second
13.9
14.9
Third
15.4
17.1
Fourth
18.6
20.2
Highest
39.3
35.1
Note that the shares shown may not add up to 100% due to rounding.
 
With the shares on the right, no matter which quintiles you move up from, and no matter how many steps you go up, the effective marginal tax rate is always 60%. That’s right in the middle of the four rates noted above. Do note the calculations show that the FINAATT share of the lowest quintile should go up ever so slightly, but not by enough to round up to the next digit.
 
There’s something for almost everyone here. Democrats/Progressives will be happy to see that more is redistributed away from the highest quintile. Republicans/Conservatives will be happy to see that we’ve already helped the poor “enough”. And (at least in word) everyone likes to help the middle class (generally understood to be the middle three quintiles), and these numbers show that they need some help: in the range of a 10% improvement in their share. That’s $5-10K more per year for tens of millions of households across the country: in the range of a car payment, tuition, or a sweet family vacation.
 
This result is ironic. There are duel concerns about whether we help the poor the right amount, and whether the poor have appropriate incentives to improve their lot. It turns out that getting the incentives right for the poor is mostly about making the middle class more attractive.
 
This also goes some way towards explaining what some view as capriciousness on the part of middle-class voters. Many are perplexed at the numbers of the middle-class who voted both for Trump in 2016, and Obama in either of the two previous elections (and maybe even showed an interest in the maverick or third-party campaigns of Dean, Nader, McCain, Buchanan, Perot, or even Anderson). They say they’re hurting, but it’s been difficult to pin down how that could be. Now we know.
 

Monday, June 25, 2018

A De-Banked Country

The Republic of the Marshall Islands (hereafter RMI) is a small country composed of atolls dotted across the central Pacific.†

If you’re a World War II aficionado, some of the island’s names might be familiar to you. Even if not, the imperialist association is important. The islands has non-existent Spanish governance, then German mercantile governance, then Japanese military governance, followed by arguably more beneficial U.S. governance.

This means that domestic banking in the RMI connects to the rest of the world through the U.S. financial system. And increasing complex regulations here have made it unprofitable for U.S. firms to maintain their connection to the RMI. Ostensibly, those regulations are about monitoring and discouraging money movements related to terrorism and organized crime. But the alternative is that countries like the RMI become cash-based, which is good for terrorism and organized crime. Sheesh.

… The IMF and other agencies are now trying to help the Bank of the Marshall Islands get in compliance with the new rules.

“For a little country like this and for the small banking community there, this has been overwhelming,” said Andrew Spindler, president of the Financial Services Volunteer Corps, a New York-based nonprofit that has been working with Marshall Island officials.

“The tide has been rising over the last 10 to 15 years about what banks expect from each other,” said Adam Szubin, who has led efforts to combat terror financing and money laundering at the U.S. Treasury Department. “And that has excluded some peripheral banking systems that just haven’t caught up.” …

For now, there’s one branch of one foreign bank (the Bank of Guam) on one island.

† SUU has some students from the nearby Federated States of Micronesia. Potentially they have the same problems, although the FSM is twice as populous and has about three times the GDP.

Monday, April 30, 2018

Drones (Not Required for This Year’s Final Exams)

In class on Wednesday, in response to Aaron’s question about whether technology will force people out of jobs, I talked a little about macroeconomic speculation.

Outside of macro, people worry about capital displacing labor from their jobs. This is “old school” thinking.

Inside macro, the “new school” thinking is about how labor will compete for capital and technology when we have alternative forms of labor, like drones.

As an example, I briefly mentioned that there are quadcopters now that can do stuff like push elevator buttons.

There are also global addressing systems like What3Words. Last October I was hiking a bit and was thirsty: how long until I can have a water bottle delivered by drone to crush.blast.puff (https://map.what3words.com/crush.blast.puff)?

Anyway, check out this excerpt of an interview with Balaji Srinivasan, and in particular the last section about drones.

The macroeconomic future is not one where we have to worry about capital replacing labor, but rather one in which capital is no longer capital at all, but rather an extended form of labor.

(Sneaking any of this post into your answers for this year’s exams won’t help your score).

Tuesday, April 17, 2018

Test Post 2 (Optional)

Something isn’t right with my software. Need to make 2 test posts.

Tax Complexity Interview

For the day income taxes are due, The Washington Post ran an interview with two tax scholars about why the U.S. personal income tax system is so complex. Check it out: you may be surprised at their two main answers.

Read the whole thing, entitled “Why the U.S. tax system is so complicated — but Americans are proud to pay taxes anyway” in the April 12th edition of John Sides Monkey Cage column.

Infographic of Logical Fallacies

Last year, a few students commented towards the end of the semester that leaning about logical fallacies had helped them a lot as economists. I agree: these things are all over public discussion of macroeconomic issues.

Logical fallacies are everywhere, and it’s useful to list out the possibilities and consider ones you haven’t thought of before.

You need to click through to get the whole thing (with interactivity), but here’s a screen capture:

Capture of Logical Fallacy Infographic 2

In the original, these are more readable, and sortable.

Barriers to Entry and Income Inequality

There’s new research showing across the cross-section of countries, that higher barriers to starting new businesses is associated with higher levels of income inequality.

A problem with this sort of research is that it’s not clear if barriers cause inequality, or if inequality causes barriers. Causality is hard to establish in non-experimental settings.

However, economists are better than most social sciences at purging their results of the feedback between two possible causes, and this research does a good job of that.

The data on barriers comes from the World Bank, which publishes a cross-sectional data set on the number of consecutive steps an entrepreneur must complete prior to opening for business. These range from as few as one out into the twenties, and might include things like educational and training requirements, land or equipment ownership, licensing, testing, or health and environmental conditions.

The results show that between otherwise identical and typical countries, that the one with one more step involved in starting a business has a higher income share for the rich (roughly 31% vs. 29%), and a larger Gini coefficient (a limited and basic but very common measure of overall income inequality).

Income inequality is, of course, a macroeconomic concern. However, the microeconomic mechanism at work here is well known: more barriers means less entry in response to positive profit signals, and less competitors leads to bigger markups and profits.

The real world is no doubt a mix of these, but these results are consistent with these polar stories: 1) well-meaning governments erect barriers to protect consumers and those make the rich richer (presumably because they have the resources to overcome the barriers), or 2) the rich influence government to erect barriers to keep competitors out and this helps them get richer.

The research by Chambers, McLaughlin and Stanley appeared in Public Choice, and is entitled “Barriers to Prosperity: The Harmful Impact of Entry Regulations on Income Inequality”. The article is not available for download, but it can be viewed online for free.

******************************************************

Part of the problem of understanding the interactions of macroeconomics and policy is … the policy choices that get linked together under the banner of parties are often nonsensical.

Consider the U.S.: Democrats tend to be more interested in erecting barriers to business formation, but are also more worried about income inequality, even though this research indicates the two go together. Republicans grandstand with an opposing pair that’s just as conflicted.

Macroeconomists are too dull to come with crazy stuff like this on their own ;-D

Friday, April 13, 2018

Zuckerberg, Facebook, and Congress

Magicians will tell you that magic works because they get you to focus on the wrong thing.

And there’s a branch of the public choice subfield of economics named after Peltzman’s research on regulation.

The big news this week is Mark Zuckerberg, the founder and CEO of Facebook, testifying before Congress for two days about how information users divulged on Facebook might be used by others.

Alex Tabarrok has a piece on Marginal Revolution this week pointing out that these hearings are not what they seem to be. Think about magic. You’re probably focused on the wrong thing, and in this case the Peltzman model can tell you what you should focus on. It’s good enough to just quote in full:

If you want understand the Facebook hearings it’s useful to think not about privacy or  technology but about what politicians want. In the Peltzman model of regulation, politicians use regulation to tradeoff profits (wanted by firms) and lower prices (wanted by constituents) to maximize what politicians want, reelection. The key is that there are diminishing returns to politicians in both profits and lower prices. Consider a competitive industry. A competitive industry doesn’t do much for politicians so they might want to regulate the industry to raise prices and increase firm profits. The now-profitable firms will reward the hand that feeds them with campaign funds and by diverting some of the industry’s profits to subsidize a politician’s most important constituents. Consumers will be upset by the higher price but if the price isn’t raised too much above competitive levels the net gain to the politician will be positive.

Now consider an unregulated monopoly. A profit-maximized monopolist doesn’t do much for politicians. Politicians will regulate the monopolist to lower prices and to encourage the monopolist to divert some of its profits to subsidize a politician’s most important constituents. Monopolists will be upset by the lower price but if the price isn’t lowered too much below monopoly levels the net gain to the politician will be positive. (Moreover, a monopolist won’t object too much to reducing prices a little since they can do that without a big loss–the top of the profit hill is flat).

With that as background, the Facebook hearings are easily understood. Facebook is a very profitable monopoly that doesn’t benefit politicians very much. Although consumers aren’t upset by high prices (since Facebook is free), they can be made to be upset about loss of privacy or other such scandal. That’s enough to threaten regulation. The regulatory outcome will be that Facebook diverts some of its profits to campaign funds and to subsidize important political constituents.

Who will be subsidized? Be sure to watch the key players as there is plenty to go around and the money has only begun to flow but aside from campaign funds look for rules, especially in the political sphere, that will raise the costs of advertising to challengers relative to incumbents. Incumbents love incumbency advantage. Also watch out for a deal where the government limits profit regulation in return for greater government access to Facebook data including by the NSA, ICE, local and even foreign police. Keep in mind that politicians don’t really want privacy–remember that in 2016 Congress also held hearings on privacy and technology. Only those hearings were about how technology companies kept their user data too private.

Understanding macroeconomic policies can be problematic because elected officials are often not doing what they seem to be doing. In this case, that’s worrying about your privacy.

On the other hand, unelected officials are often more straightforward to understand. In this case, Facebook’s problem is not really with Congress (which wants a deal) but with Margrethe Vestager who wants more sweeping changes.

Or in the case of something like U.S. trade policy, worry less about Trump, and more about his advisors.

Thursday, April 12, 2018

Oversupply of Housing and the Financial Crisis

It’s become a factoid about the financial crisis of 2007-9 that construction companies were building too many homes that eventually were abandoned when owners could no longer make mortgage payments on them.

Maybe not.

Kevin Erdmann, an author and visiting scholar at the Mercatus Center† has written a fascinating paper about this (available here in full, and required). It is written at a level accessible to undergraduates.

What I like most about this is the careful stock to stock, and flow to flow, comparisons; and also median to median comparisons. From these he builds an argument that the structures themselves could not have been the problem.

  • First, his comparison of the (stock of) houses to the (stock of) population shows a steady or declining ratio from 30 years ago. No problem there.
  • Second, he shows that starts of new homes were in line with population growth. No problem there either.
  • His Figure 3 is more problematic: this sort of chart is difficult to read without distorting one’s view of the data. What seems clear is that there was a shift in the 2000’s out of manufactured homes and into traditional ones. I’m not sure what to make of that. Erdmann sees a decline in multi-family housing there, but I don’t.
  • His Figure 4 shows housing expenditures being steady as a share of income (or declining a bit) over the last 35 years. This result is the opposite of popular perception: people claim housing has gotten more expensive, and it hasn’t in proportional terms. No problem there either.
  • But, he does show in Figure 5 that while median rent and median income (a great comparison) are in line across the country. But what we do have is half-a-dozen cities where both incomes and rents are super high: people are getting paid more to afford housing there. Figure 6 shows that all of those cities do poorly on affordability of housing. No problem there either.
  • Those 6 cities are all well-known for tight housing markets with limited new construction. Figure 7 shows how emmigration from those 6 cities matches up well with immigration into nearby cities without limits on construction. In short, it was like spreading contagion: not enough construction in those 6 cities drove up prices there, so people moved nearby and drove up prices there too. And then people stopped moving as much in 2006. We don’t know why that happened.
  • The last two figures focus on Phoenix, and show that while there was huge immigration into Phoenix, it was matched by construction starts. Then both fell, and vacancies for rentals went up.

Here’s the conclusion: there was no oversupply of housing. There was a big drop in regional migration, but it was matched by reductions in new construction. I am sketchier on Erdmann’s other conclusion: that that there was an undersupply of buyers prior to the financial crisis, and this was transmitted into owners who were unable to sell putting their homes up for rent.

† The Mercatus Center is a libertarian think tank associated with George Mason University. I found Erdmann’s work to be largely free of libertarian positions until the last paragraph which gives an Austrian twist that I’m not sure is merited. The rest of it is solid.

FWIW: lots of us were watching the housing market in the 2000’s. I do remember hearing, more than once, that the age of the U.S. housing stock was older than it ever had been, and that this was motivation for new construction. That fact which was so common 15 years ago has seemingly been forgotten for the last ten.

Wednesday, April 11, 2018

Forecasting with Autoregressive Behavior

In class we estimate autoregressive models of ln(real GDP). Case 3 is an AR(1), Case 4 is an I(1), and Case 5 is an ARI(1,1).

The I indicates the special case where the coefficient on a lagged dependent variable (sometimes with a little algebra and the Engle-Granger Representation Theorem) is restricted to equal one. You don’t get a stochastic trend without that restriction. So Case 4 is a restriction on Case 3, and Case 5 could be thought of as an AR(2) with one of those restricted.

TS asked after class the other day if these sort of models are used for serious forecasting. My response was that, after removing a lot of details, all serious economic and financial forecasting models have AR(p) and ARI(p,1) processes at their core.

Using any of these is a craft, and one of the things you learn is that while they can do pretty good forecasts in the short-run, their long-run forecasts are sort of uninteresting. They’re not necessarily wrong, but they may not say much.

The reason for this is those lags. They contain all the information that makes the forecasts work. This works for forecasting one period ahead (t+1) because you have the data from time t to use in your model. But what if you want to forecast t+2? Where do you get the data from t+1 for the lags? One thing you can do is use your forecast of t+1 that you made at t as an input to make your forecast for t+2. This works OK. But the forecast made at t of t+1 is missing whatever shocks do happen at t+1 to make that period interesting, so the forecasts for t+2 tend to be a little plain and less volatile. The further you go into the future, the worse that problem gets.

The end result of this is that forecasts from AR(p) and ARI(p,1) models tend to converge to the average after a few periods.

Now combine that with the idea of the stochastic trend that you get from the I(1) part of those models. This is saying that there is no central tendency for the trend to return to. It’s always there, but it comes off the most recent data point you’re at. You can be above or below it in the short-run, but the best thing we can say is that in the long-run you’ll settle down to that particular stochastic trend. If there’s a shock next period, your stochastic trend will shift, but the new forecast is that you’ll still settle down to that new one.

So, check out these 10-year Treasury Bond rate forecasts:

Presentation1

These are collected from Blue Chip, which surveys the most popular economic forecasters, who are (no doubt) using an ARI(p,1) model for these.†

What each colored curve is showing is the forecast from a particular point in time. They all wobble a bit in the short-run before converging to a flat line in the long-run. This is just an example. When you see this behavior in future publications, you know where it’s coming from.

You can check out the source post entitled “Losing Interest” at the Lawrence Economics Blog, but the whole thing is not required.

† Technically, the rates themselves are probably not an ARI(p,1). But rates are formed as a ratio of coupon payments and total amount borrowed, both of which do follow that sort of process.

Tuesday, April 10, 2018

Why Is Macro So Hard? Artificial Precision

I’m speculating here, and in a somewhat nasty way: I suspect that personality tests would show that governments are full of “control freaks”. Control issues are how therapists describe behavior in which people think things perform better because they specifically are the ones in charge.

A symptom of this is the artificial precision in many government statistics. In the U.S. we announce quarterly real GDP growth rates to an accuracy of one tenth of a percentage point. Due to annualization this is actually something a tad sharper than one fortieth of a point.

Yet, my personal opinion is that most people have trouble feeling a GDP growth rate difference of less than a percentage point. So the announcements are ten times sharper than they need to be.

Why do they do that? Most of us have experience with or as parents taking the temperature of a sick child. Doctors usually tell us not to worry (even a little) if the temperature is not above 100º F, and to not worry seriously unless the temperature exceeds 102º F. Yet many parents agonize over the tenths digit on their thermometers. At least parents have a reasonable excuse to be control freaks.

The government is doing this with GDP figures. And those are probably the most precisely measured macroeconomic statistic: others, like the deficit, are far less accurate.

We’re more mature than this. Announcers of weather forecasts get this:

RFD 18-01-11 Weather an an Approximation

They can make point estimates of forecasts that are very precise, but instead they provide us with interval estimates that are reasonably informative: like the high will be in the mid 60’s today.

Why don’t government officials behave the same way?

I think this encourages us to focus too much on unrealistic details. For example the Obama administration (and its critics) agonized over differences between 2.1 and 2.2%, when the real issue was that the economy was growing at 2% rather than 3%.

I work with U.S. real GDP data all the time. A reasonable autoregression shows that with annual data going back to 1929, the 95% confidence interval for growth is –5% to +11%.

Why worry about tenths when the range of what’s possible is so large?

Of course, you could make the argument that the annual data includes the unusual periods of the Great Depression and World War II. Fair enough. If you run the quarterly data from 1947 onwards you still get –1% to +7%.That’s a huge range of possibilities for controllers within the government to encourage people outside the government to fret over.

Monday, April 2, 2018

How Big a Problem Are Medical Bankruptcies?

Healthcare financing is a national macroeconomic problem. We see this through the lens of our last major reform: Obamacare.

Obamacare did a ton of different things, but it was heavily marketed based on emotional scare stories: people doing without care because of pre-existing conditions, and people declaring bankruptcy due to medical bills.

Unfortunately, one doesn’t need a license to practice economics. So there was a lot of economics done by non-economists. Sometimes that isn’t high quality work.

We’ve now got some harder evidence indicating that some of the earlier research was shoddy. Do award points for getting the issue on the radar screen (but back off the conclusion as needed).

The big one was published in The American Journal of Medicine. This sounds impressive, but obviously it’s not where I’d go looking for solid economics. And, unfortunately, it’s not that solid for medicine either: it’s ranked 118th in one list of medical journals. But, it said the right thing at the right time, and one of its authors is now in the Senate in part because of her research. And what it said was that a big chunk of bankruptcies were the result of medical bills.

Not so, but it took a while to do the research properly. The original paper looked at bankruptcy filings and counted up the proportion in which there were medical bills. They came up with roughly 50%. However, the authors were 2 doctors, a sociologist, and an attorney. This does not make their work wrong. But perhaps we should have been more incredulous about letting it strongly influence public policy.

The problem with this is that it does not take into account the order or motivation of the purchases. If you exhaust your savings on medical bills, that’s obviously a medical bankruptcy. But if you spend your savings on a luxury home, then have a health problem, and file bankruptcy because you can’t pay your bills … it really isn’t related strongly to your health problems. Especially if we have bankruptcy laws that allow you to keep a house that you’re not making payments on.

So now we have new research in the New England Journal of Medicine — the top medical journal with an absolutely top notch economist (Amy Finkelstein) as an author.And the new number they get is 4% of bankruptcies appear to be the result of medical bills.

Should medical bankruptcies be reduced to zero? Possibly. Is that the same thing as saying that medical bankruptcies are 12 times as common as they are? Hardly. And it’s distinctly possible that we’re spending a lot of money on what is not a primary problem with our healthcare system.

Income Growth, Before and After Taxes

This is based on an interactive graphic. You should go there and play with it. All I show below is screen captures.

The Congressional Budget Office provides non-partisan economic advice for Congress. They’ve put together a cool page on income inequality.

There’s an urban myth that’s been going around that incomes have stagnated over the last 2 generations. There’s a lot of things that suggest this is not the case (vastly improved healthcare, provided as a benefit for 85% of the population), and a lot to suggest that it is the case (wages haven’t moved as much as other forms of compensation).

Their analysis is based on quintiles, and averages. Quintiles are divisions of the population into fifths by income: the top 20%, and so on. Averages of households within quintiles are OK, except when it comes to the top one. In the bottom 4 quintiles, there’s a top and a bottom to the possible values. The average isn’t a great way to summarize the data within a quintile (because it still won’t be symmetric), but it’s OK. It’s a bit worse for the top quintile, because there’s no upper boundary. The real problem is not comparing the top quintile to itself but to the lower quintiles: that comparison can be distorted by Bill Gates.

Anyway, on average, the top quintile earns the most, as shown in this chart.

The distortion is that I wouldn’t use this to say that the typical member of the highest quintile earns 3 times as much as those in the 4th quintile. More is OK, 3 times more is probably too high.

What’s interesting here is that it can be tough to find sources that net out both taxes paid (which reduce your income) but also transfers received (which increase your income). So the purple-ish bars indicate that people actually have. There’s still a lot of inequality, but on net the top 60% help the bottom 40%.

Most of this is done through the progressive tax system, not through the welfare system:

CBO Capture of Income Inequality 1

The first chart is not interactive, but this one is. You may want to go play with it on the site. If you’re the type to be concerned about transfer payments going to the poor, this should help you realize that maybe they’re not that big.

It’s kind of drilled into us that the rich have benefitted the most over the last 50 years. This chart confirms that:

CBO Capture of Income Inequality 2

However, keep in mind that any analysis done this way with the highest quintile will be distorted (the super rich only have to benefit a little to make the average go way up). The rich as a group may have benefitted greatly, we just can’t tell that a typical rich person has benefitted greatly.

Where we can make a more reasonable comparison is between the lowest and middle quintiles. And here we see that the poor are not doing worse.

The story is different if we net out taxes and transfers:

image

This paints a rosier picture of what we do for the poor. But it also tends to confirm the complaints of the middle class that everyone is improving faster than they are.