SUU Macroblog - A Living Textbook

GDP Update

2012-02-29T22:10:00.001-08:00

Real growth in the 4th quarter was revised upward to an annualized rate of 3.0%.

Max

2012-02-29T22:08:00.001-08:00

If you ask a vain professor in class what sort of dog they have, you get a video of his favorite one:

Chinese Reform Blueprint

2012-02-28T21:01:00.001-08:00

A joint report of the World Bank and a division of China’s State Council entitled “China 2030” has been released (468 pages, all required … just kidding;). It is a blueprint for how China might transition from the easily earned high growth rates of a poor country playing catch up to the sustained and reasonable gains that might move it through the middle income range.

The problem is that only about 10% of countries have successfully navigated through that middle income range:

Many other countries that like China had reached so-called middle-income status—which the World Bank defines as annual per capita income of between $1,006 and $12,275—have failed to advance further up the income scale. Of 101 middle-income countries in 1960, only 13 had become high-income by 2008, according to the report.

Excuse the white space in the chart below … I’m working from a PC with a less than ideal suite of software available to me. Anyway, the chart on the right shows the odds aren’t in China’s favor.

China faces two big problems.* The one mentioned by the report is the large proportion of state-owned enterprises.

… The report also recommended "breaking up state monopolies or oligopolies in key industries," including petroleum, chemicals, electricity distribution and telecommunications, and letting private firms compete in some sectors the state deems "strategic."
…
Those recommendations could require big changes by the Communist Party—a subject the report doesn't address. For instance, the party's personnel department now hires and fires managers of state-owned firms, giving it vast power over the direction of the companies. The Politburo Standing Committee, the party's most powerful organization, sets broad monetary policy …

The problem with all this is that China’s economic growth over the last 30 years has been led by the firms that are not state-owned.

Robert Zoellick, a former Bush administration official, World Bank President, and a well-respected policy expert says:

If you ask whether the party can have a meritocracy that produces good leaders, my answer is they haven't done so bad so far.

This is a big deal this year because China is undergoing a scheduled leadership transition. The new guys seem to be on the right page though:

China's leadership transition begins later this year when Vice President Xi Jinping is expected to become the new head of the Communist Party, succeeding Hu Jintao. Mr. Xi has been briefed several times on the recommendations, said individuals involved with the report, while Vice Premier Li Keqiang, who is likely to become premier—China's No. 2 position—endorsed the preparation of the report after Mr. Zoellick proposed it in late 2010.

Another thing that makes me think the China 2030 report is worth taking more seriously is that the unit that co-authored it reports to the highest levels of the government, but the guy whose signature is on it, Li Wei, doesn’t even have a Wikipedia page. To me, this means this job wasn’t pawned off on some prima donna with their own agenda; if they take this seriously, and it works, the top brass can claim all the credit, and if they fail they can suppress the whole thing.

Read the whole thing, entitled “Blueprint of China Reforms Leaves Role of Party Vague” and “New Push for Reform In China” in The Wall Street Journal.

* A second is one observed by Paul Krugman about 20 years ago in a piece entitled “The Myth of Asia’s Miracle”: most growth in Asian tigers has come from a transition from inefficiency to efficiency, not because of any special improvements in productivity. This issue is mentioned in Supporting Report 2 of China 2030.

Understatement of Real Wages

2012-02-23T18:15:00.001-08:00

Economists generally understand that what we use as real wage data understates the improvements in real wages that have occurred through time. Out in the Wal-Mart parking lot, people like to deny this.

David Henderson at EconLog goes over three reasons:

The CPI overstates inflation, because it can’t completely account for people switching towards cheaper products.
We get a lot more, and better, health care as part of our compensation.
Working conditions have improved just about everywhere.
The risk of death on the job, which has a monetary value, is down across the board.

P.S. The next time someone bemoans the “fact” that women get paid less, remind them that death rates for “male” jobs are several times higher than for “female” jobs. That requires extra compensation for the living who undertake those risks.

Greece Downgraded Because of the New Plan

2012-02-22T06:06:00.001-08:00

A new and improved plan to deal with Greece’s debt problems was signed on Monday.

As a result, Fitch lowered their rating on Greece on Tuesday.

Politicians and the legacy media think plans and agreements are a big deal. Investors know that following through with them is the real deal.

Employment and Unemployment by Degree

2012-02-21T12:20:00.001-08:00

Here’s an interactive graphic that allows you to plot out unemployment rates by subsets of the population: choose gender, choose race, choose age group, and choose educational level, and it isolates the unemployment rate for that group.

Very cool. Very useful for pointing out stuff like the severe effects on men and the young in the last recession.

This is from a piece in the February 21 issue of The Wall Street Journal entitled “As Job Market Mends, Dropouts Fall Behind”.

Manufacturing and Politics

2012-02-21T11:59:00.001-08:00

As near as I can figure, all the candidates are bending over backwards to “do something” about manufacturing.

A February 21 opinion piece from The Wall Street Journal entitled “Manufacturing Decline” marshals some facts.

The industry-in-crisis narrative usually begins in the aftermath of World War II, when manufacturing accounted for 25.6% of the U.S. economy. This is a less than ideal heyday to begin the time series, given that most of the developed world lay in ruins and their economies would recover. …

The U.S. economy has grown by a little under sevenfold since 1947 …

Manufacturing has retreated as a share of GDP and contributed 11.7% in 2010 …
The manufacturing crisis, if that's the word, has been jobs. Industry employed one of three workers after the war. Today, it's one of eight. Yet this, too, is largely a measure of economic progress—because it is the result of productivity gains …
Real manufacturing output stood at about $35,000 per worker in 1947, in constant dollars. It doubled by 1980 as companies became more efficient. Today this measure is an astonishing $150,000. Manufacturing productivity has increased by 103% since the late 1980s, outpacing every other industry and double the 53% in the larger business economy.
This translates to gains for consumers: Prices for manufactured goods have declined 3% since the 1990s, even as overall prices rose 33%. One reason manufacturing is shrinking as a share of GDP is that its costs are falling—unlike, say, in health care, with its negative productivity rate in the official statistics.

The big problem is that the political talk about helping manufacturing sounds like a substitute for helping housing and construction:

Which brings us to the real manufacturing tragedy, which is Washington's habit of misallocating scarce resources. There is only so much capital in the economy, and growth will be fastest if it is allowed to find its most productive uses. That is rarely the political calculus … Or take another sad case: For decades and especially the last 15 years, the government has been on an epic binge to push resources into housing.
The mortgage interest deduction ensures that a home is the largest investment most individuals make, while multiple home ownership programs compound the incentive. The Federal Reserve's monetary policy in the 2000s and today creates a subsidy for credit, which pushes more resources into finance and real estate in particular. Imagine how this era might have been different had investors in search of yield put their dollars into factories and exports, rather than mortgage-backed securities.

The double tragedy is that the political class seems intent on reviving industrial policy with special subsidies and tax breaks. Mr. Obama's well-worn demand is for more government "investments," especially in faddish manufacturers a la Solyndra, while at the same time he wants to punish multinationals that do business overseas. GM is now his totem, with its $7.6 billion profit for 2011, the auto maker's highest ever. But all that proves is that companies really can turn around when the government gives them $50 billion and uses brute force to reduce their liabilities.

Why Is Macroeconomics So Hard? Misinterpretation of Social Loafing

2012-02-18T09:32:00.001-08:00

This is convoluted; bear with me.

Social loafing is the phenomenon of people exerting less effort to achieve a goal when they work in a group than when they work alone.

Misinterpretation of social loafing is then thinking that someone must be doing something because they are a member of a group.

An example of this is the recent debt ceiling debate.

In this case, both sides agreed that something needed to be done about government finance. Broadly, the Republican position — a very firm line on tax changes — was new. Broadly, the Democratic position — we’ve always increased the debt ceiling when we needed to — was not. I think both sides would agree that the whole debate was largely driven by Republicans defending an updated position. Here’s where the social loafing comes in. Three of the items that make macroeconomics hard are at play: 1) we’ve always raised the debt ceiling so we should this time too, 2) the Republicans have staked out a position to not raise the debt ceiling so being a Democrat means wanting to raise the ceiling, but there is also 3) some degree of social loafing. I believe many Democrats were uninterested in seriously engaging this problem because they were members of a group, and that membership gave them the appearance of doing something when they weren’t really doing anything at all.

There’s actually quite a lot of this around — even outside of macroeconomics — once you know what to look for:

Accusations by the left that Obama is parroting defense policies developed in the Bush administration are an accusation of social loafing, while the acceptance of those policies by most Democrats because Obama is their leader are the misinterpretation.
Being against gay marriage on moral grounds is not social loafing, but many Republicans who flex the party position in public are socially loafing. The misinterpretation shows when that moral flexing becomes a flexible moral position when this issue hits closer to home.

Broadly in macroeconomics, the current dynamic — where most Republicans support tax cuts and most Democrats support spending increases — is social loafing, and the belief that those groups are doing something worthwhile by not doing anything new at all is the misinterpretation.

Technorati Tags: why,macroeconomics,so,hard,misinterpretation,social,loafing

Fed Says Growth Is Not Accelerating

2012-02-16T14:49:00.001-08:00

A summary of the Federal Open Market Committee meeting from about 3 weeks ago indicates that they don’t feel that growth is accelerating.

How Much Would a “Buffet Tax” Raise?

2012-02-16T09:38:00.001-08:00

Obama is pushing for a minimum tax on millionaires*, the so-called Buffet Tax.

He has two goals: 1) raise more revenue, and 2) reduce the perception that the rich don’t pay enough taxes.

But, the tax isn’t predicted to raise much revenue. Here’s Robert Samuelson writing in The Washington Post:

… In September, the Congressional Budget Office estimated the 10-year deficit at $8.5 trillion. The nonpartisan Tax Foundation estimates that a Buffett Tax might now raise $40 billion annually. Citizens for Tax Justice, a liberal group, estimates $50 billion. With economic growth, the 10-year total might optimistically be $600 billion to $700 billion. It would be a tiny help; that’s all. …

Via Greg Mankiw.

* We’ve been down this road before. We’ve had a tax in place, the Alternative Minimum Tax (aka AMT) for about 40 years. It was put in place during the Nixon administration after it became public knowledge that in 1969 over 155 households with real incomes over $1.2M had completely avoided paying any income tax through the legal use of deductions. The AMT is now payed by about 4% of households, and a quarter of AMT payers report less than $200K in income.

Breathtaking Cluelessness

2012-02-09T21:10:00.001-08:00

If Bloomberg Businessweek was a teenager, it would be one of the annoying ones that tries too hard to be noticed by the popular kids.

So, to me, it’s not surprising that they have a piece this week on how much harder the economy has been on Obama now than it was on Reagan 30 years ago.

Arguably, this position is correct, but more reasonably the economy has been lousy for both of them. But they’ve gone way over the top to make their point in “A Tale of Two Election Year Recoveries”. As a student you need to start to recognize gross misinterpretations like this.

… President Barack Obama’s recession is a lot more complicated than the one Reagan tussled with in 1981.
Superficially, their predicaments are similar. Both presided over economic downturns considered to be the worst since the Great Depression.

Not exactly. Reagan had a full-blown recession that started 6 months after he came into office and lasted for 18 more. Obama took office with a recession in its 14th month with only 6 more to go. And, as horrible as that hard slide in 2008-9 was, we saw the first signs of the economy starting to bottom out just before Bush left office.

… They lost congressional support in midterm elections and were presiding over economic recoveries as they geared up for reelection campaigns.

Actually, only Obama’s party lost control of one of the houses of Congress. Reagan dealt with a Democratic House, and lost votes in the midterm elections, but he had a Republican Senate and gained a vote in the midterm election. Obama’s party had control of both houses for 2 years. Reagan never did.

Now the differences. The economy surged under Reagan. Gross domestic product in the final three months of 1983 rose at an annualized 8.5 percent. For Obama, the economic engine is running much more slowly. He narrowly avoided a double-dip recession in mid-2011, and growth accelerated in the fourth quarter to a 2.8 percent rate—the fastest the country experienced in 18 months. The unemployment rate in December 2011 was 8.5 percent, vs. 8.3 percent in December 1983. Yet joblessness 29 years ago dropped 2.5 percentage points in just 12 months, compared with a decline of less than 1 percentage point in 2011.

Correct me if I’m wrong here, but aren’t they saying that “Obama’s recession is a lot more complicated” because he hasn’t gotten the growth that Reagan did?

Most people conclude from this that Reagan had good policies and Obama not-so-good ones. Yet the tone here is that this is a problem that Obama had no hand in.

I’m not too much of an Obama basher, but I don’t think it’s a stretch to reinterpret this as: Obama’s situation is more complicated because he’s screwed it up worse.

Obama has struggled to master a far more complex situation.

I think it’s fair to say he has a different situation. “More complex”? I don’t think so.

… The Reagan recession was sparked by the high inflation of the Jimmy Carter years and the decision by then-Federal Reserve Chairman Paul Volcker to raise interest rates to as high as 20 percent in May 1981 to smother higher prices. Although the high rates caused a lot of pain, they left Volcker with plenty of room to cut until the recession had eased. Rate cuts started in June 1981. By December 1982, rates were down to 8.5 percent. The economy responded quickly to monetary easing. Fed Chairman Ben Bernanke, in contrast, has little room left for cuts; the federal funds rate is close to zero. “When you have a deep financial crisis paired with recession, it’s a completely different animal than a normal recession,” says Kenneth Rogoff, an economics professor at Harvard University. “The one in the Reagan Administration was a more normal one.”

Compared to what? How was Reagan’s recession more normal when Reagan had to deal with the highest inflation we ever had in a recession America? The name for this was stagflation, and it’s wishful thinking to call it normal. Our textbooks still don’t have a policy prescription for stagflation. Telling me that’s not a sign of a complicated situation is a fib.

The presence of so much debt in the economy makes companies and consumers reluctant to borrow and banks reluctant to lend, no matter how low interest rates go. Debt today remains a greater drag on the U.S. than in 1983 …

That is true.

Obama has worked with an economy that was weak even before the recession officially started in December 2007.

Ummm … no. The 2001-7 expansion was one of the longest on record. It was also fairly strong in 2003-6.

The expansion that started in late 2001 under President George W. Bush was among the most lackluster in modern U.S. history, providing little cushion against a possible downturn. By the start of the recession in December 2007, payrolls had grown less than 6 percent during the decade that started in 2000.

In order for payrolls to grow, you either need 1) lots of unemployed to re-employ, or 2) lots of young people entering the work force. The 2000-1 recession was so mild there wasn’t much unemployment, and I’ve already discussed in class that we are in a demographic period when people are leaving the labor force. So, low payroll growth was something most economists expected of Bush after he won the election.

… Payrolls grew 20 percent during the 1980s and 1990s and 27 percent during the 1970s. …

These two periods fit the two criteria I just mentioned for strong job growth.

Many of the jobs generated during the Reagan recovery were well-paid factory work. Although Billy Joel was lamenting the decline of Industrial America in his 1982 hit Allentown, manufacturers maintained considerable might in 1983 and 1984: At the end of 1983, almost a fifth of working Americans—19 percent—labored in manufacturing. Fewer than 9 percent of workers do today. “Back then a larger fraction of the workforce was in manufacturing,” says Soss. “And you hire those people back when business gets better. There’s less of that going on now.”

This is mostly true, although factory workers get paid more now because they are more productive.

“Reagan could talk about morning in America and could come from that perspective,” says Peter D. Hart, who was a pollster for Walter Mondale, Reagan’s Democratic opponent in 1984. “The major difference this time is that Americans are much more likely to believe we are in a long-term decline.”

I think the bigger question is why they might think that at all. Have you checked your closets lately? They’re full of stuff. Have you checked how many hours you spend not working? We have more leisure than ever. Have you checked on all the fun things you can do with your time? Life wasn’t always like this.

Note that I am not claiming that the last 4 years have been any fun economically. I’m just claiming that we should be realistic and recognize that we’re going through a once every generation event. Not a once-in-a-lifetime or once-per-century event.

New Kauffman Report

2012-02-09T12:59:00.001-08:00

The Kauffman Foundation is a right leaning non-profit interested in economics and current issues.

They survey macroeconomists who blog every quarter to get a sense of how they feel about the economy. The participants tend to be right-leaning, but include quite a few solid Democrats.

Their latest quarterly report is out.

Anomaly In the Household Survey

2012-02-09T11:27:00.001-08:00

There’s an anomaly in last month’s labor market data. I don’t know what to make of it; but some conservatives see some sneaky stuff being done to the data. I recommend we keep an eye on these numbers for a few months. Here’s what’s going on.

The Bureau of Labor Statistics determines the unemployment rate from two different surveys. Both survey physical locations.

One surveys households, the other survey “establishments” (basically, employers).

Similar questions are asked of both, but what people in a household consider employment can differ considerably from what a business would. So, the establishment survey is usually thought to be more definitive. On the other hand, it misses a lot of people doing unconventional jobs, particularly early in recoveries: starting businesses, working for new businesses that aren’t in the establishment survey yet, working off the books, and so on.

Normally, population rises every month, and you’d expect employment, unemployment and people classified as not-in-the-labor-force to go up too. Business cycle effects swamp the slow movement of population though. So, right now, you wouldn’t be surprised to find employment rising faster than population, and unemployment dropping. But what of not-in-the-labor-force?

Well … last month, not-in-the-labor-force went up by an extraordinary amount. Why is that so?

It could be that people dropped out of being employed, and decided to retire or otherwise take some time off. Except that unemployment went up, so there’s need to be an even larger group of new quasi-retirees to make the numbers work.

Or it could be that people are getting discouraged with being unemployed and have stopped looking. Except that the change is so large that if we counted all those newly not-in-the-labor-force people as unemployed, the unemployment rate would have gone up to 9.0% last month. The labor market may be soft, but that magnitude of change dwarfs what happened in the fall of 2008 when the economy was in a nosedive. No one is in a panic, so this story can’t work.

Or, it could be that all of a sudden, a huge number of teenagers came of age all in one month, or the armed forces discharged a million soldiers … or … or … a bunch of alien abductees were returned. That last one is no sillier than the first two.

More than likely this is all because of a correction for some past mismeasurement of the numbers. Fair enough: but then how is this revision going to filter into the other numbers? I have no idea: Table B in the technical notes to the news release indicate that about 75% of the increase in not-in-the-labor-force was due to better counting of women who aren’t working.

A Little History to Put Europe In Perspective

2012-02-07T13:12:00.001-08:00

Tom Sargent, last autumn’s Nobel Prize winner in economics, discusses some historical precedents for what Europe is going through in “An American History Lesson for Europe” from the February 3 issue of The Wall Street Journal. Specifically, how our federal government did bail out its states in the 1790’s but did not bail them out in the 1840’s, and what that can tell us about how Europe might like to behave.

Greece’s Numbers Aren’t Funny Enough

2012-02-04T16:43:00.001-08:00

Logan brought up in class on Friday that Greece had fudged its government budget numbers in order to get into the European Union. More than once!

In the course of getting its affairs in order over the last 2 years, Greece brought back the head of the IMF Statistics division to improve the reliability of its data. He is a Greek national who has worked internationally for his career, and is unattached to the cliques that run Greek politics.

He now stands accused of having falsified Greek economic data to make it more favorable to Germany and less favorable to Greece.

He is facing life in prison.

No member of Greece’s government or top political parties has stood up to defend him.

All this despite a public letter from the head of Eurostat that defended Georgiou in no uncertain terms. Eurostat, Walter Radermacher wrote Dec. 1, "refutes all allegations that the deficit of 2009 was overestimated." The compilation of 2009 and 2010 data has been published "without any reservation ... in contrast with previous periods." Radermacher credited Georgiou and his staff with implementing "new and strengthened procedures" and "a high level of professionalism."

Read more here: “Blaming the Messenger”

Unemployment Rate Down

2012-02-03T06:08:00.001-08:00

Down from 8.5% to 8.3% — a 0.2% drop last month.

But, here we go again with this nonsense about broader measures from CNBC:

The so-called real unemployment rate, which measures discouraged workers as well and is referred to as the U-6, nudged lower to 15.1 percent.

This measure isn’t “real” in the sense that we use the adjective real in other areas of macroeconomics.

Nor is the standard unemployment rate somehow now “unreal” or nominal.

The measure U-6 is just broader, and as discussed in the reading posted in the class folder on the G drive, and highly correlated (and therefore not adding much we don’t already know) to the standard unemployment rate.

We’re # 2!

2012-02-02T22:47:00.001-08:00

Criticizing the state of American manufacturing is commonplace.

Except that we’re currently # 2 in the world for expansion prospects:

And, we improved over last month.

Tell me again, why exactly, are we bemoaning the state of manufacturing? Oh yeah … because we have less job security than all the places at the top of the chart.

Read the whole thing, entitled “World’s Factories Pick Up the Pace” in the February 2nd issue of The Wall Street Journal.

Are We Not Returning to the Trend?

2012-02-02T12:45:00.001-08:00

There’s a so-so piece on a problem we’ll be covering over the next month or so in the January 27th issue of The Wall Street Journal. The article is entitled “Recovery Doesn’t Feature Typical Snapback In Growth”, and it contained this graphic:

The issue we’ll be discussing is whether the economy does return to a trend line, and whether or not that question can even be answered.

The article is only so-so because it conflates some issues. For example, towards the top the authors say:

Economists note that while output, adjusted for inflation, is finally back to its pre-recession level, it still falls short if adjusted for population growth.

So, the author is correctly pointing out that if we’re going to feel better about the economy, it’s real growth has to at least cover population growth. But further down the authors note that

Population growth has slowed. And the gradual retirement of the baby boom generation means that the work force is shrinking as a share of the overall population. That will tend to slow the economy's natural rate of growth.

This is an argument for aggregate real growth being lower, but having a lower hurdle to clear because population growth is lower. That isn’t the same thing.

Also, scroll back up and look at the graphic. Note that the vertical axis is not on a log scale. This will tend to accentuate the deviation on the big end.

Further, that deviation on the big end is based on the orange curve, which is a forecast. Note that it isn’t really made clear that it isn’t real data, and we can’t be sure where it actually lies.

All in all, it’s an interesting and worthwhile point, but it’s badly done.

A Test of Keynesian Economics, Perhaps?

2012-02-02T12:29:00.001-08:00

Spain has a lottery: El Gordo. A big, expensive, once-a-year, lottery, that nearly everyone plays.

It works a little bit differently than lotteries in America. Tickets have a small sequence of numbers. All tickets with a specific number are sent to wholesalers who sell them retail. When the winning number is pulled, there are many winning tickets: 1,800 tickets this year, each worth about $520,000.

This year, in a village of 70 households and 250 people, every person but one held a winning ticket.

This is a natural experiment in Keynesian fiscal policy.

Recall the Keynesian fiscal policy story: you dump purchasing power on people, and let the multiplier process spread the wealth. Typically, the government buys something, but you could view the government as buying back peoples’ lottery tickets in this case. Also recall, that in the Keynesian story, what the money is spent on is irrelevant. What’s important is that it is spent.

There has already been a short-term stimulating effect:

The only resident who did not win was Costis Mitsotakis, a Greek filmmaker, who moved to the village for love of a woman. It did not work out. But he still lives here in a barn he is restoring about half a mile outside the village. Somehow, the homemakers had overlooked him this year as they made the rounds.

Mr. Mitsotakis said it would have been nice to win. But he has benefited nonetheless. He had been trying to sell some land without much success. The day after the lottery a neighbor called to say he would buy it. The next day another neighbor called. But Mr. Mitsotakis refused to get into a bidding war.

Low Interest Rates Are the Policy

2012-02-02T06:38:00.003-08:00

A few weeks ago I posted about Ken Kuttner’s research showing that home prices are inelastic with respect to interest rates.

His research is in response to the common claims that maintaining interest rates at a low level for to long during the weak recovery of 2001-3 led to the housing bubble and financial crisis that started in 2007.

I don’t really think that was an issue, but some people do.

Now, the Federal Reserve is planning on pursuing exactly the same sort of policy. The current plan is to keep rates low for the next 2-3 years.

Moving Laterally In Europe

2012-02-02T06:38:00.001-08:00

The European Union still hasn’t figured out what to do about Greece.

But, they have spent their time coming up with new guidelines for the size of government deficits and debts.

My guess is that this is just all BS.

Most of the countries are already in violation of the debt target (on the right). And … in order to avoid getting worse on the debt, you (more or less)* need to keep your deficit above zero (on the left). But the target on the left is actually in negative territory, permitting a country to be passing on that count but making the other one worse.

Having said that, I have no problem with a country running a deficit or having some debt. I have a lot of problem with a country using deficits and debts as ways to avoid politically painful decisions.

Taken from “Europe Tightens Fiscal Ties” in the January 31st issue of The Wall Street Journal.

* Keep in mind that because this is a ratio, making sweeping claims is problematic: both numbers could go up while their ratio goes down, and vice versa.

Downgrade Graphics

2012-02-02T06:37:00.007-08:00

You know the story of last month’s rating downgrades. This graphic may make the idea a bit stickier:

Here’s the source article entitled "Downgrade Hurts Euro Rescue Fund" from the January 14th issue of The Wall Street Journal.

Here’s an awesome interactive graphic with a chloropleth map from the same day from a piece entitled “Europe Hit By Downgrades.” Additionally, this shows all 3 rating agencies ratings for each country, side by side.

Lastly, here’s a completely different interactive graphic. This one shows the amounts that different countries are supposed to contribute to the EFSF. That emphasizes why the downgrade of France was such a problem: they are giving the second most money.

One thing to note from that last graphic: Greece is rated lower than Portugal, but Portugal is paying higher rates. This is a bit odd. What it reflects is that Portugal’s ability to repay their debt isn’t great, but they are not swamped with it, so it’s at least possible. Greece has so much debt that it probably isn’t possible at this point. What investors are thinking is that if they get in now (which drives the price up and the rates down), they may be part of bailout deal which will erase some of that risk.

The Jobs Picture

2012-02-02T06:37:00.005-08:00

Ed Lazear, an economics professor who teaches at Stanford’s business school, had an op-ed in the January 20th issue of The Wall Street Journal entitled “The Jobs Picture Is Still Far From Rosy”.

… An improving situation isn't the same as a good situation. The labor market is still very depressed and is likely to remain so for quite some time. …
… Hires need to increase by over 30% to get back to 2007 peak levels.
…

There is one other troublesome factor. The labor market is fluid, and each month about as many workers are hired as are separated from their previous jobs. The hiring that occurs to replace lost workers is called churn. As James Spletzer of the Bureau of Labor Statistics and I show in a forthcoming article in the American Economic Review, churn hiring accounts for about two-thirds of all hiring. Churn is generally good for workers and good for the economy because workers move to better, higher-paying jobs where they are more productive. The typical wage increase when moving to a new job is around 8%. But churn is down by over 35% from the pre-recession level during the last quarter of 2007.
This means that even people with jobs aren't doing as well as they should be. Because of the slack labor market, many are stuck in their current jobs, earning less than they would in a vibrant economy.

These are similar conclusions to the powerpoint presentation on JOLTS data I’ll cover in class.

Other Credit Ratings

2012-02-02T06:37:00.003-08:00

Just some trivia for perspective on discussions about credit ratings.

1) What state has the lowest credit rating? You might think California, but it’s actually Illinois.

2) Does anyone’s rating ever improve? Yes. Indonesia’s rating just went up.

FWIW: Illinois is still 7 notches higher than Indonesia.

Oops

2012-02-02T06:37:00.001-08:00

I discussed in class that the European Financial Stability Facility (EFSF) might be downgraded.

The EFSF was downgraded, to the same level as France, on January 16, and I missed it.

This was the Monday after the big announcement of 9 downgrades on the previous Friday. My guess is that they split the news into two parts so as not to roil markets too much,

4th Quarter Real GDP Growth

2012-01-27T07:18:00.001-08:00

The advance announcement (the rough draft) of the real GDP growth rate for the 4th quarter of 2011 came out this morning, at an annualized rate of 2.8%.

How should we interpret this number?

How about with a letter grade?

If we assign letter grades “on a curve” this means assuming that they follow a normal distribution. When doing this, above the mean is a “B” in the 50th through 83rd percentiles, and below the mean in the 17th through 49th percentiles is a “C”, with other letter grades further out in the tails. Done this way, the range for a “C” is 1.6% to 3.5%, putting 4th quarter growth in the top half of the “C’s”.

But … you may have noticed that school is not like that in real life: grade inflation has made the idea that a “C” is “average” quaint at best, and as near as I can figure offensive to students with more self-esteem than ability.

Anyway, several years ago I obtained the grade distribution for all grades assigned at SUU for an entire semester. On this scale, the A’s extend much lower than the 84th percentile, and the B’s much lower than the 50th percentile. In fact, the range for a “B” for real GDP growth, if they are assigned in the same proportion as grades at SUU is 1.6% to 3.2%, making 4th quarter growth a high “B”.

What Did the Top 1% Major In?

2012-01-25T06:15:00.001-08:00

Via Newmark’s Door:

What did the infamous top 1% major in?

According to the Census Bureau’s 2010 American Community Survey, the majors that give you the best chance of reaching the 1 percent are pre-med, economics, biochemistry, zoology and, yes, biology, in that order.

Not bad: I teach economics, and the vXwife teaches biology (and specializes in anatomy and physiology required for pre-meds).

Technorati Tags: degree,top,1%,99,ows

The MIT Family Tree

2012-01-24T21:41:00.001-08:00

Learning some macroeconomics means learning some names, and how they are connected together. Here’s a chart from Bloomberg Businessweek showing some of the famous macroeconomists associated with MIT and how they are connected:

I have no connections to any of these people (although I did to a senior paper on some of Modigliani’s research).

Wow

2012-01-23T21:31:00.001-08:00

The New Yorker has obtained a 57 page “memo” written by Larry Summers in December 2008.

Summers, a very well-known Harvard economist, former Clinton administration Secretary of the Treasury, and President of Harvard University, was part of Obama’s transition team before becoming the White House’s most trusted economic advisor.

And the memo says …

Mr Summers told the president that it would be hard to spend more than $300bn on government investment and anything above that would have to come from transfers to the states and tax cuts. He also said that a giant stimulus of more than $1,000bn aimed at rapidly reducing the unemployment rate “would likely not accomplish the goal because of the impact it would have on markets”.

… It suggests that Mr Obama’s economic advisers recognised that the economy needed a bigger boost, but did not think they could design one and feared a backlash from bond markets.

“While the most effective stimulus is government investment, it is difficult to identify feasible spending projects on the scale that is needed to stabilise the macroeconomy,” Mr Summers wrote. “To get the package to the requisite size, and also to address other problems, we recommend combining it with substantial state fiscal relief and tax cuts for individuals and businesses.”

Read the whole thing.

This is confirmation of what has been broadly suspected: that the final $800 billion stimulus package was mostly political pork barrel to reward loyal constituents.

That supposition has been a topic of discussion in ECON 3020 every spring semester since the Obama administration took office.

Best Performing Cities

2012-01-23T11:26:00.001-08:00

Logan brought this to my attention because of my post last week on city performance. Three Utah cities are in Forbes list of 25 best-performing cities. The link is to Ogden; you’ll have to click through to higher rankings to see Provo and Salt Lake.

Double Taxation (and More)

2012-01-22T22:02:00.001-08:00

Floyd Norris’ column in Friday’s issue of The New York Times, entitled“Unearned, and Taxed Unequally”, covers a lot of interesting topics … and leaves out one glaring detail.

The interesting stuff is about forms of investment income, past tax policies, problems with having different items taxed at different rates, and so on. There is even some discussion of double taxation.

The glaring omission is that the entire piece discusses income various investment sources, and whether it should be taxed … and misses that all investments, by definition, were taxed before they were invested.

Initially, all saving must come out of income. But that income was taxed (at least if it was earned within the last century or so). So, the saving was taxed. Then it was invested. If it earns income, there is an ethical issue about whether taxing it a second time should even be on the table. Norris ignores this point.

Unemployment

2012-01-22T21:54:00.001-08:00

New claims for unemployment have been trending down for 4 months now. These numbers are still high, but this trend is a big improvement over the previous 3 years.

A Critical Factoid for Comparing Well-Being and Household Cash Flow in America

2012-01-22T09:23:00.001-08:00

Many people say that incomes are stagnating. They are partially right. Take-home pay is stagnating.

But, compensation is not stagnating. Here’s where all the money is going:

Had health care costs tracked the rise in the Consumer Price Index, rather than outpacing it, an average American family would have had an additional $450 per month—more than $5,000 per year—to spend on other priorities.

That’s a payment on an additional, fairly nice, new car for every family in America.

This does not cover a huge amount of time … only 1999 to 2009. The amount lost over the last several decades would be several times this (most people don’t know that the worst decade for healthcare price inflation was … the 80s).

Even worse, in our system, while much of the money for this extravagance comes from the middle-aged and seniors, almost all of it is spent on seniors.

Via Marginal Revolution via Timothy Taylor.

Why Is Macro So Hard: What Passes for Expertise

2012-01-22T09:20:00.000-08:00

One reason that macroeconomics is hard is because everyone has an opinion (which is OK), but sometimes those opinions are supported by credentials which encourage people to stop asking tough questions.

Here’s what a Republican got away with:

Dave Spence is a Republican running for governor in Missouri. He has gone around the state for weeks on end, talking about his economics degree and how he’s a perfect fit as governor because he’ll know how to tackle the state’s budget woes. He’s Dave Spence, economics degree holder, and he’ll fix your fiscal insolvency!
Oops.
Poor Dave, he’s not an economics degree holder, he’s a degree holder in HOME economics.

To be even-handed, the Democrats got away with appointing Jared Bernstein as Chief Economist and Economic Policy Adviser to Vice President Biden. Bernstein’s qualifications were his degrees in Fine Arts, Social Work, and Social Policy.

To be fair, Bernstein has some interesting ideas, and his stuff is worth reading. I can’t speak for Spence.

P.S. I am not advocating credentialism here, but rather better investigative work on all sides.

Labor Market Recovery, City by City

2012-01-19T12:08:00.001-08:00

Here’s an interesting graphic showing when cities are expected to recover from the 2007-9 recession.

The legend didn’t come through in the graphic: the 4 degrees of shading correspond to 2010-11, 2012, 2013-5, and 2016 or later (the lightest).

So, Texas is clearly doing very well, and really so are all the Plains states. Also, while the contraction hit hard along a diagonal from Wisconsin to Florida, there also seems to be some reasonable recovery in that region.

I also thought this was interesting because it included St. George as a major city worth plotting. That’s the first time I’ve ever seen that other than on the weather map in USA Today.

Having said that, one problem with this map is that it doesn’t seem to make any allowances for whether the job market was lousy in a location before the recession started. I mean, it’s grand that, say, Syracuse has already recovered, but how far could they have fallen in the first place*? So, to say that St. George won’t recover until 2016 is also saying that it won’t recover to the amazingly, smokin’ hot, labor market that it had in 2006-7. Well … is it reasonable to expect it to? Especially if other places aren’t like that?

This came from the piece entitled ”Few Cities Have Regained Jobs They Lost, Report Finds” in the January 18 issue of The New York Times.

* I grew up in the suburbs of Buffalo. I’m not an expert on Syracuse, but I can tell you that it hasn’t had a hoppin’ job market in my lifetime.

Is the Recovery Jobless?

2012-01-17T11:09:00.001-08:00

Well … it’s not literally jobless … but job growth is pretty low.

Having said that, the narrative you hear commonly amounts to nothing deeper than “corporations are big meanies who are doing this … on purpose”.

Here’s one take on that story from the January 17 issue of The Wall Street Journal entitled “Man vs. Machine, a Jobless Recovery”. Here’s the chart (the right 6 panels are just the 2 panels on the left enlarged):

There are 3 things to think about: 1) the surface impression we get from the chart, 2) why business would behave that way, and 3) whether or not it’s a good comparison at all.

First, clearly businesses are investing more than in past recessions. That’s good. But, they’re not hiring as fast either. That’s bad. Having said that, they have to have priorities, they can’t do both, and so there must be some shifting going on from investments in labor to investments in capital.

Second, taken at face value, is that such a bad thing? The thing is, investments in capital makes labor more productive. Opposed to that is that if the objective was to make capital more productive you’d add more labor to use it.So, firms are not trying to get more out of the capital they have; rather they are trying to get more out of the labor they have. If all they were concerned about was their machines and how to make them as productive as they could, they’d be hiring like crazy to keep the machines running 24 hours a day. They’re not, so they must be concerned with something else.

Given that firms are not hiring much, they are clearly choosing to improve the workers they have, rather than bring in new people to train. This is a fairly clear statement that, in large, they are happy and supportive of the workers they have, and happy to leave alone the workers they don’t have or want.

So, there’s a very strong statement in this data about people who have jobs versus people that don’t. This isn’t a story you hear much in the legacy media.

But third, to what extent are we being gamed by the reporting in this article? I think we are, but given the data, I don’t have a really good substitute, so it’s possible the reporters are just using the best thing they have.

So, what’s the problem with this data?

Consider the blue line first. To get this, you have to go to your real GDP data.

Remember GDP comes in 3 flavors: expenditures (spending), income, and value-added (in production). The blue line is part of expenditures.

But, it’s not the whole thing. Remember that expenditures come in 4 flavors: private consumption expenditures (household spending, broadly called consumption), gross private domestic investment (firm spending, broadly called investment), government consumption expenditures and gross investment (government spending), and net exports of goods and services. The blue line is part of investment.

But again, it’s not the whole thing. This is divided into fixed investment (buying new stuff) and changes in private inventories (“buying” your own stuff on your books because you haven’t sold it yet). The blue line part of fixed investment.

But, for a third time, it’s not the whole thing. Fixed investment gets split into nonresidental and residential spending. The blue line is part of nonresidential investment.

But, for a 4th time, it’s not the whole thing. Nonresidential fixed investment gets divided into spending on structures and spending on equipment and software.

What the blue line is showing is just growth in the flow of spending on equipment and software.

Nothing I’ve said about the blue line makes it wrong. I’m just emphasizing that they’re tunneling down quite a bit, so we’re definitely skipping past a lot of other stories that the data might tell us to get to a very specific story that the author of the article wants to tell us. If you’re curious, you can find (easier to interpret) indexes that correspond to what’s in the graph by going to the Bureau of Economic Analysis and going to Table 1.1.3, or you can go and see the real/chained dollar values in Table 1.1.6. The latter emphasizes that they’ve tunneled down to focus on growth in about 7% of the economy.

And all this work is then compared to the orange line. This is private-sector jobs. Not jobs in any way related to nonresidential fixed investment in equipment and structures … just … jobs. If you’re curious, you can find this data by going to the Bureau of Labor Statistics page for employment statistics, clicking the green button for “One-Screen Data Search”, and choosing “All Employees”, then “Total Private”, and then clicking “Get Data”. This data isn’t even a flow — it’s a stock variable.

Comparing these is a bit of a stretch. Not a bad one necessarily — it’s just something worth pointing out.

As business students, you should be able to recognize at least part of the problem though. The sort of capital purchase they’re talking about here is something that would be reported as part of cost of goods sold on a firm’s income statement. You would certainly be able to compare this at the firm level to the portion of cost of goods sold that goes to workers; it would be even better to break it down into continuing versus new workers. But, we don’t have that sort of data at the aggregate level. Even so, there isn’t any anecdotal information around about specific firms that are diverting outflows from payroll to equipment purchases.

However, this might point us in a better direction. We could go back to the BEA site, and take a look at Table 1.12 instead. Then we could look at the part of compensation to employees, and then to the portion that is wage and salary accruals (which would miss quite a bit), and then focus on the quaintly named “other”. In this case, “other” is pretty much everything you’d normally think of when envisioning paychecks going out the door of private firms. And here, you see something interesting: “other” is up 6.9%, while government is up by 1.1%. That’s right, all that investment, while not putting wages and salaries through the roof, is pushing them up 6 times faster in the private sector than the public sector. It’s even better if you go down just a bit to Proprietor’s Income, which is up about 20% over this period.

Both of these occurred with very little job growth, so we now get a much better picture that firms are spending a lot on providing their existing employees with a lot of capital to help them do their jobs better, and blowing off hiring from the pool of the unemployed. The big policy question then is, why are those people so unemployable?

N.B. Table 1.12 is not in real terms, so all of what I’ve said above is making the not unreasonable assumption that inflation was pretty close to zero over the period in question.

I Love This Idea

2012-01-16T12:08:00.001-08:00

This isn’t required, but it is food for thought in how we think about macroeconomic policy.

Don Boudreaux of Cafe Hayek points out that generally, influence on policy is not distributed equitably, and specifically that Paul Krugman is a one-percenter in the distribution of influence. Thus, if some are worried about redistributing income and wealth from the top 1%, why not redistribute influence from the top 1% too?

This is really a rather amazing way of looking at things, because we clearly have groups whose influence is out of proportion to their numbers; farmers, for one; ivy league college graduates for another; bankers for a third.

Further, the fact that so many people are interested in redistributing income or wealth, and so few are interested in redistributing influence, really makes me think that all of the redistributive arguments are really driven by the fact that cash is fungible and easy to transfer.

Interest Rates as the Cause of the House Price Bubble? Not So Much

2012-01-15T13:58:00.001-08:00

Ken Kuttner survey the old evidence, adds some new evidence, and concludes that home prices are fairly inelastic with respect to interest rates. Because the effect is weak:

… Making the case that low interest rates cause bubbles would require showing that house prices
tend to overreact to rate reductions. Although the previous decade’s house price boom was out of
proportion to the interest rate decline, there is no evidence that this happens systematically. The
puzzle is why house prices are less sensitive to interest rates than theory says they should be, not
more so.

This suggests that while low interest rates may have been part of the problem with the run-up in house prices from 1995-2007, they were not the major part. This is the position of people (on the left and right) who say the housing bubble was all the fault of Greenspan’s monetary policy when he was in charge of the Fed.

Like most things in macro, my guess is that 10 years from now we’re going to be pointing out that the housing and financial crisis was the result of a lot of little things, not one big thing.

European Sovereign Debt Downgrades

2012-01-15T10:09:00.001-08:00

Not terribly surprising news on Friday evening: S&P downgraded the credit rating of 9 European countries.

This is a prediction of increased future risk, but it is based on negative behavior in the recent past. It’s analogous to admitting your probably going to throw more interceptions because you’ve gotten down by a couple of touchdowns and need to adjust your gameplan to pass the ball more.

I’ll return to the news itself further down, but for right now there are a bunch of details and definitions you’re not likely to pick up all in one place, so here goes. Note that this post is important, but that you shouldn’t judge the importance of my posts by their length. This one just has a lot of details.

The typical exchange in a loan is to give up something of (known present) value today in exchange for a stream of future payments with a larger present value. The big risk in doing this is default: that the borrower will stop paying before the stream of payments is finished.

As a lender, what you’d like to to know is what the chance of that default is before it happens. Estimating such a thing before it has happened is called ex ante. Going back and looking at past data to figure out how often defaults occur is called ex post. Using the football analogy, a coach chooses plays for which the quarterback has a low ex ante probability of throwing an interception, while critics of teams are looking at ex post results to determine which passes should have been thrown. S&P’s ratings are an ex ante measure of default risk.

Ratings can be done by anyone; the question is whether anyone would pay attention to them. Many ratings are done internationally, but in America there are three firms (two big and one small) that do almost all the ratings. Because America is the largest investment market, our rating agencies get a lot more attention than those of other countries. The two big agencies are Standard and Poor’s (aka S&P) and Moody’s, while Fitch is the smaller one.

In America, the ratings agencies are private firms. But, there isn’t really free entry, since the Federal government stipulates that most investors need to be able to show that their investment was rated by one of those three firms. This is a good point to recall that micro theory suggests that 1) limits on free entry lead to products that are sold at a price above marginal cost, and 2) quality of that product is likely to decline through time because there isn’t enough incentive to keep average costs low if you’re making incremental profit on each sale. This is known as the “lazy monopolist” problem, but it applies anywhere incremental margins are positive.

The quality of the product sold by a ratings agency is assessed by examining whether the ratings made ex ante match up with the default rates observed ex post. In the long-run, these will have to match up or the rating agency’s business will go to one of the other raters. But, in the short-run, there can be substantial deviations between the two, which was a major source of criticism in the wake of the breakdown of the market for CDO’s (i.e., bundled mortgages) in the recent financial crisis.

The rating agencies all have different scales for their ratings. Roughly, they follow a few simple rules. First, they’re like letter grades: A is better than B. Second, plus is better than minus. Third, as in baseball leagues, more letters is better than fewer (e.i., AAA beats AA).

To allow some comparison between firms, ratings are described as “notches”. For example, to go down two notches is to go down two ratings in a particular agency’s scale.

Issues of debt are not always required to get a rating from more than one firm, but they often do. A problem in the acute part of the financial crisis in 2008-9 was evidence that the agencies were using each other’s ratings as the basis for their own rating (as a cost saving measure) rather than doing their own due diligence.

A debt issue is called “junk” if it earns a rating that is very low on a firm’s scale. It does not indicate that default is probable, only that it is more likely.

Ratings agencies are not in the business of surprising the borrowers they are rating, or their potential lenders. Borrowers are informed frequently of how their actions are likely to affect their ratings, and when a revision is likely to occur. In addition, when things start to point in one direction, they usually make a press release indicating to investors that a rating change is more likely although not yet probable.

Sovereign debt is the name given to debt issued by the central government of a country. Historically, this is a political distinction: the central government has the ultimate command over the resources used to repay the debt. For trivia, we call it sovereign debt because it used to be debt that was personally owed by the absolute monarch of a country.

We need a new term for what is going on in Europe. Economists like to note that the economics of a situation trumps the politics (even if politicians don’t like to admit this). In practice, when a government is unable or unwilling to marshal the resources to repay debt, it prints currency (which devalues it). The countries of the Euro-zone have given up that ability when they deprecated their local currency in favor of the Euro. But they are acting as if nothing has changed. Journalists and politicians need to stop calling issues within the Euro-zone sovereign debt; “pseudo-sovereign debt” would be better.

Additionally, European governments have spotted a bad thing, and decided it would be cool to copy it. A big problem in the corporate and government world is the creation of financial entities that are off the books. In short, someone has a problem, so they create a second entity, move all the problems over there, shovel some money at it, and then claim they are clean. It’s not a good idea, but it’s very human: parents do this all the time when they stop supporting kids with substance abuse problems. Anyway, European countries have created something called the EFSF (European Financial Stability Facility): the countries that are doing well pour money in, and the EFSF helps manage a turnaround in problem countries. On paper this sounds good, and it avoids national chauvinism. The problem is, can it really have any less chance of default itself than some chance of default that is representative of where its funds are coming from? This was the problem with CDOs (bundled mortgage) in the recent financial crisis: they would bundle two B’s together and call it an A because now it was diversified. Maybe so, but clearly not enough. We have the same problem in Europe now: the EFSF has a separate and better rating than most of its contributors. It’s not an absolute guarantee of a problem, but it sure looks like more smoke and mirrors.

Now that you have some tools, let’s go look at the news.

1) Big financial news is often released early on Friday evening. This is after markets in America have closed for the day, and going into the weekend for global markets. It’s also after the evening news.

2) S&P had sent out a warning about a month ago:

In December, S&P placed the ratings of 15 euro zone countries on credit watch negative — including those of top-rated Germany and France, the region's two biggest economies — and said "systemic stresses" were building up as credit conditions tighten in the 17-nation bloc.

3) Here are the actual moves:

S&P lowered its long-term rating on Cyprus, Italy, Portugal and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia and Slovenia by one notch.

…

The credit-rating agency affirmed the current long-term ratings for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands.

4) This may not be the last step:

The credit-rating agency put all [sic] 14 euro-zone nations — Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain — on "negative" outlook for a possible further downgrade.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

A negative outlook indicates that S&P believes there is at least a one-in-three chance that a country's rating will be lowered in 2012 or 2013.

…

said it could also downgrade the euro zone's current bailout fund, the European Financial Stability Facility.

5) Here’s some qualitative comparisons:

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

…

French Finance Minister Francois Baroin, speaking after an emergency meeting with President Nicolas Sarkozy, played down the impact of Europe's second biggest economy being downgraded to AA+ for the first time since 1975.

"This is not a catastrophe. It's an excellent rating. But it's not good news,"…

One would think that a ratings downgrade would affect borrowers rates. But, ratings are “old school”; going back to the period before instant global communication and widespread dissemination of raw data about borrowers. To the extent that lenders are doing their own due diligence, and just attaching a rating because it makes things look official, not much may happen.

It is not clear how far the downgrade will increase France's borrowing costs, since markets have already anticipated the prospect by raising the French risk premium over German Bunds.

"One notch is priced in but not more. The Franco-German spread can widen. It is about 130 basis points for the 10-year bond. …

Unfortunately, many funds that invest on behalf of others are required to divest when ratings agencies make problems “official”:

The downgrade could automatically require some investment funds to sell bonds of affected states, making those countries' borrowing costs rise still further.

"It's been priced in for several weeks, but the market had been lulled into complacency over the holidays …

The bottom line is that this news is quasi-official confirmation that Europe has not gotten its act together, and the situation has gotten harder instead of easier.

The Bottom?

2012-01-13T06:14:00.001-08:00

Via Kids Prefer Cheese.
Ya’ know … I’m wondering … all our theory says that the run-up and the run-down should not be symmetrical. The fact that it’s pretty close makes me think that maybe there wasn’t much of a bubble at all: that it was all a push up and pull down based on fundamentals.

P.S. I had two of these posted. I deleted the earlier one.

Technorati Tags: real,estate,bubble,fundamental

“There Is No Great Stagnation”

2012-01-12T18:29:00.001-08:00

Measurement of real GDP per capita is not easy, but optimists tend to think growth rates have been greatly understated over the last few decades. Here’s Tim Worstall, quoted in full:

So I’m in Dresden overnight for a 6.30 am flight. No way to get from Freiberg to here by that time in the morning.
And having had a look around the area of this cheapo hotel (now’t wrong w’i't, just cheapo) nothing really appeals as a dining venue. Or even a drinking one.
However, there’s a Lidl on the corner. Rye bread, sliced sausage (hey, this is Germany), packet of crispy things and a jar of hot dip, bottle of some odd end of bin red wine.
The red is a whole two years old now, a 2010, from SE Australia. Not prize worthy, no, but entirely drinkable (the hot dip helps).
All of this for under €5.
And as I’m sipping I’ve talked to my wife in Portugal about her and my days, when I’ll arrive so she can pick me up, what we’re going to do tomorrow evening (cost of call on roaming, maybe another €5). And I’m clearly and obviously blogging on my €40 a month German Vodafone mobile access stick.
On a €300 computer.
It’s possible to take this all different ways.
I’m sitting in a foreign city, no previous knowledge of the place, eating a dinner which costs me less than 1 hour of minimum wage labour, a dinner which these days is regarded as hardship, a dinner which 200 years ago would have been exotically expensive (the wine, specifically) for the average Englishman. Bread and meat….it was around but not everyone was eating it.
I’ve had an international phone call where the price, even on a mobile, makes the casual keeping in touch something that you’re weird if you don’t do. I’m old enough to recall when an international phone call was something you thought about. I still work with people of my own age for whom an international phone call was something that the government specifically forbade. And for my parent’s generation, it was something that you saved for and really, really, did not expect to do for mere trivialities like “How are you?”
And this blogging thing? Even mobile telecomms. They’re both younger than I am (as is of course true of an increasing portion of the world).
I’m afraid that, given that I can now do things for trivial cost that I did not dream would be possible in my youth. Heck, things that I did not think would be possible when I met my wife (being with someone for decades, sure, I knew that was possible, being able to chat to them while you’re away at a price you can afford I didn’t).
Given all of that….umm, what is this Great Stagnation that is being talked about?

Pessimists, on the other hand, tend to see life as not having improved much over the decades.

As an optimist, I would add that Tim is a virtual friend of mine — an idea that was unheard of before about 15 years ago, and one that makes us all richer. Tim has also parlayed a middle-class English west country upbringing, and a series of jobs typical of people in their 20s, into an upper middle-class life in Portugal where he trades in rare earth metals and writes opinion columns. This is the sort of life arc people can have in the 21st century, but we have way too many dim bulbs around who can’t see the forest for the trees. As a student, be inspired by Tim, not by the rest of the crowd.

Keynesianism Run Amuck

2012-01-10T19:19:00.001-08:00

Beware of economic data collected by governments …

At least part of the reason for China’s spectacular growth numbers of the last 25 years can be attributed to measuring production and output rather than usefulness and well-being.

Case in point: the ghost cities that China has built, with lots of construction jobs, but with no inhabitants.

Later on in the course we’ll discuss “balanced growth” and why it is preferable to the unbalanced kind shown here.

Demographics of Labor Force Participation

2012-01-10T12:12:00.001-08:00

We’re hearing a lot lately about the weak job market — not just the high unemployment, but also about the declining rate of labor force participation. This was featured in a piece in Monday’s issue of The Wall Street Journal entitled “No Easy Balm for Joblessness Wounds”.

But, note how little business cycle behavior there is in this chart. The recessions before the last one: 2000-1, 1990-1, 1981-2, 1980, 1973-5 are mere hiccups on this chart.

Instead, what this looks like to me is the prime working years of the baby boomers. The oldest ones turned 18 in 1964, right where the upward trend starts. The youngest ones were 35 at the peak: just about the age where even slackers have settled into jobs, and one wouldn’t expect participation to increase further. But, that’s also where the oldest boomers started retiring in serious numbers.

P.S. Originally, I had a chart constructed from the tools available at the Bureau of Labor Statistics posted here. But, it wasn't loading properly, so I substituted the above chart from the article I cited.

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Why Macro Is So Hard: The One Lever Fallacy

2012-01-07T17:32:00.001-08:00

Macroeconomics is hard, in part, because people are always looking for the one magical thing to change to make it all better.

But this is magical thinking.

David Brooks summarizes this nicely, in a piece about our fraying international financial system, and the unwillingness of the political class to wade in to the problems:

Both orthodoxies take a constricted, mechanistic view of the situation. If we’re stuck with these two mentalities, we will be forever presented with proposals that are incommensurate with the problem at hand. Look at the recent Obama stimulus proposal. You may like it or not, but it’s trivial. It’s simply not significant enough to make a difference, given the size of the global mess.

We need an approach that is both grander and more modest. When you are confronted by a complex, emergent problem, don’t try to pick out the one lever that is the key to the whole thing. There is no one lever. You wouldn’t be smart enough to find it even if there was.

Instead, try to reform whole institutions and hope that by getting the long-term fundamentals right you’ll set off a positive cascade to reverse the negative ones. …

I emphasize in my macroeconomics classes that regional business fluctuations (like recessions and financial crises) don’t have one big cause. Instead, they have a laundry list of a few dozen smaller causes. You probably shouldn’t take anyone seriously if they can’t rattle off 10 factors that contributed to the most recent recession.

Our Uneven Economy

2012-01-07T17:08:00.001-08:00

It’s normal for recoveries to be uneven, and the current business cycle is no exception:

Click here to see a larger version.

You can also see a bit of why people were worried about a “double-dip” recession last summer — but note that only some states fit the pattern. The full article is here.

Increasing Economic Entropy

2012-01-07T16:55:00.001-08:00

Hernando de Soto has made a career out researching the unclear legal systems that stifle growth in developing countries.

He claims that the ongoing financial crisis has occurred for much the same reason: we’ve allowed people with in interest in muddying the waters to make our financial facts murkier:

During the second half of the 19th century … creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account … Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded.

It’s an interesting thesis, but I’m not sure how to measure it or test it. But, de Soto is no crank, so it is worth adding to your mental toolkit.

Increasing Economic Entropy

2012-01-07T16:54:00.001-08:00

Hernando de Soto has made a career out researching the unclear legal systems that stifle growth in developing countries.

He claims that the ongoing financial crisis has occurred for much the same reason: we’ve allowed people with in interest in muddying the waters to make our financial facts murkier:

During the second half of the 19th century … creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account … Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded.

Judging Institutions

2012-01-03T22:19:00.001-08:00

From bookofjoe.

The following excerpt from his 1929 book was published in this past weekend's Wall Street Journal:

There exists … a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."...

Some person had some reason for thinking [the gate or fence] would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable … The truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served.

But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion … This principle applies to a thousand things, to trifles as well as true institutions, to convention as well as to conviction.

Read the book in its entirety here.

The original quote is from G. K. Chesterton, a British essayist writing 80 years ago, and not a contemporary macroeconomist.

But, I think Chesterton has hit on one of the finer points of new growth theory: institutions matter, but we’re not quite sure how.

So, something like the Hippocratic oath needs to apply to politicians out to improve the world.

Intellectual Property Feudalism

2012-01-02T09:55:00.001-08:00

This is a new idea that I picked up from Alex Tabarrok.

Intellectual property is a big deal in macroeconomics. We know that growth comes mostly from technological innovation, but we haven’t yet been able to measure the gains from innovation properly enough to figure out how to protect innovators. Obviously, if they don’t get to keep enough gains from their efforts, they won’t innovate. But the flip side is that if they keep too much of their gains, society won’t benefit as much as it might (e.g., a Hellenistic Greek “invented” the steam engine but didn’t have a society where its benefits were seen as useful).

Anyway, Alex is worried that the length of time that some works are now protected is too long: up to 70 years after your death. That’s right: your unborn great-great-great-grandchildren now have a right to earn monopoly profits of your invention.

He calls this “intellectual property feudalism”. In short, your descendents are privileged because of your current position.

More On What Government Actually Does

2012-01-01T13:58:00.001-08:00

I am not a big advocate of the dual positions that 1) our infrastructure is crumbling, and 2) we need to spend more public funds on it.

But, I am cognizant of this fact from Michael Mandel via Arnold Kling at EconLog:

Let me repeat that: Government net investment as a share of net domestic product is at a 40-year low. I had to check this last one a couple of times to make sure it was really true. This is a true failure of national economic policy. Government is punking out, just at the time when a public investment surge is needed to make up for the private investment drought. As a country, we should be investing more, not less.

I see two points here.

First, this is talking about a proportion, so it is not clear that real (gross) government net investment is anywhere near a low.

That may reflect that the government is spending too much on stupid infrastructure, that there is too much nonsense included in the budgets for “infrastructure projects”, or that we are building infrastructure that is luxurious rather than practical (e.g., SUU’s push to build an art gallery before anything else that the campus might need — and I love art galleries and support this one, I’m just grown-up enough to question its priority).

Second, Mandel is emphasizing the point I’ve made in this blog and elsewhere that government has evolved over the last 3 generations or so from an entity that does things to one that sends out checks.

Again, I’m not making a normative judgment about whether that is for better or worse, but a positive statement about the facts.

Quote On How Economists Measure and Compare

2011-12-30T12:53:00.001-08:00

Don Boudreaux quotes David Friedman’s 1996 book Hidden Order:

Economists are often accused of believing that everything – health, happiness, life itself – can be measured in money. What we actually believe is even odder. We believe that everything can be measured in anything.

There you have it: it isn’t about how we measure, it’s about the fact that we measure comparatively: everything is relative.

That actually might be a test for whether someone you’re arguing with is open to the economic way of thinking, or whether that mental door is already closed: do they object to making certain relative valuations?

In a nutshell, that’s the problem with our two measures of poverty: absolute poverty is measured by comparing to a standard of what someone had, while “relative” poverty is measured by comparing only to those we can see right now.

In a nutshell, it also addresses the political problem about how to interpret the scale of Obama’s stimulus package. Is it large relative to some standard stimulus package. Yes, so the Republicans are pushing something analogous to absolute poverty. But, Is the Obama stimulus large relative to recently observed stimulus packages (like Bush’s). Not so much. Thus, the Democrats position is more akin to relative poverty measurement.

Does America Tax the Poor Too Much?

2011-12-28T12:14:00.001-08:00

Relative to other rich countries, the answer is no.

Not surprisingly, America taxes both the rich and poor less than other countries.*

The green panel on the left shows that America takes less from someone making $25K than any other G-8 country except Japan, and the difference there is $50 per year.

The panel on the right shows that America does not tax the rich as much as other countries.

You can also get some interesting information about progressivity from the two charts. A rough measure of that is the difference in the (average) tax rate shown on the two charts. A bigger difference shows a more progressive tax system:

U.K.: 22.3%
Italy: 21.1%
America: 20.7%
Canada: 20.1%
Japan: 18.8%
Germany: 16.6%
France: 16.2%
Russia: 0%

Not surprisingly, England tops the list: that’s why all their rock, movie, and sports stars live in other countries.

The original source data is here, and here’s the table of all 19 countries surveyed:

* This chart shows strictly income taxes. In Europe, the wide use of VATs changes the picture, while the wide use of sales taxes in the U.S. will do the same. Also, international comparisons like this are always fraught with problems because of the relatively larger burden placed by states in America, which if often not included in international comparisons.

Do the Rich Pay More Taxes?*

2011-12-28T10:33:00.001-08:00

In America, yes they do.

And compared to other developed countries, the rich pay a bigger share here.

The chart on the left shows the proportions of taxes paid by each quintile of the income distribution: the share paid by the rich has always been big, and is getting bigger. This is mostly by reducing the share of taxes paid by those in the 20th to 60th percentiles: the lower middle-class.

The chart in the middle shows the share of pretax income by quintile. Yes, there is a moderate trend of the rich getting richer, but it is not as big a trend as that of “the taxed getting taxer” or … um … something catchier than that. There aren’t any big losers in income, but the biggest is the middle fifth of the population.

Those two charts establish my first statement. The chart on the right addresses the second statement. When we divide the share of taxes paid by a quintile by the share of income that it brings home, we see that the taxes are more disproportionately paid be the rich in America.

* There are a couple of caveats to this. First off, this is only income taxes. The rich pay a lot of other taxes too, but they also get their cash flow from a lot of other sources that aren’t taxed as income. Even so, most of our discussions about “making the rich pay their fair share” focus on income rather than cash flow. Second, this ignores that most of what makes the tax burden in America heavier on the poor is that our FICA is taken out of (primarily paycheck) income and has a cutoff in the low 6 figures.

Why Is Macro So Hard: The Bait and Switch About What Government Does

2011-12-28T09:31:00.001-08:00

One of the big problems in 1) understanding macroeconomics, and 2) understanding politics, is getting a handle on the magnitude of the bait and switch going on.

More than ever government claims that it is “doing something”. But, more than ever that claim is just a fib: most of what our government does is send out checks to people.

This is drawn from David Wessel’s column in The Wall Street Journal entitled “Two GOP Leaders Differ on Spending to Fund Research”, but you shouldn’t regard the whole article as required reading.

Why Is Macro So Hard: Do Policymakers Care That They May Not Know What They’re Doing?

2011-12-23T12:26:00.001-08:00

Karl Smith, writing at Modeled Behavior:

… Because, I am a soulless technician who will faithfully advise anyone and everyone who asks I see the back rooms of opposing lobbyists all the time.

Here at the state level I can safely say that virtually no one has any idea what they are doing. That is, for the most part the lobbyist do not know and indeed are not particularly interested in what is in the best interest of their clients.

Further, this seems to stem from the fact that the clients are not particularly interested in what is in their best interests.

What they are very interested in is whether legislation is pro them or anti them. However, if you begin to talk about the economy as a complex system full of unintended consequences where anti legislation could be in their best interests their eyes glaze over.

Moreover, a very large number of business lobbyists are not even that interested in efforts that are pro or anti their business. They are more interested in legislation that is pro-business in general and that they perceive as being fair.

There are some notable exceptions but I will not name names.

My sense is that there is a huge but odd policy lesson here. I am still working to untangle what it is.

I like to think of this as the favorite team effect. For many people, correct and incorrect are not important when it comes to their favorite team: think about how Americans feel about their own Olympic sports teams.

In policymaking, what be most important to the positions people hold is whether they are perceived as being pro or con. Once the evidence, as perceived, starts to tilt towards the pro side, the task becomes to accentuate the pros and diminish the cons.

Thus, Republicans come to be in favor of essentially all tax cuts. And Democrats come to be in favor of essentially all social programs.

Why Is Macro So Hard: What Passes for Expert Advice

2011-12-22T14:08:00.001-08:00

I am not making this up.

After a marathon session of decorating cutouts for Christmas, my family — covered with specks of frosting and and stray jimmies — went to McDonald’s to scarf dinner. Because we were exhausted and surly we were blankly watching the TV news programs.*

Anderson Cooper 360 was on. This is, allegedly, a serious cable news magazine.

They were discussing the troubles Republicans and Democrats are having over extending the payroll tax holiday.†

So, they turned for expert advice to … wait for it … John Paul DeJoria … the man most people think of as “Paul Mitchell” after his haircare products.‡

And my wife blurts out … in McDonald’s … in front of the kids … “Are you f***ing sh***ing me!”

She has never taken a macroeconomics class, but is certainly aware that if you want expert advice on macroeconomic policy, you should probably talk to a macroeconomist or policy advisor first.

* I can see why the news is always on in airport concourses, but of all places, why is the news always on in McDonald’s?

† Macroeconomically, the payroll tax holiday is … kind of stupid. What are we most worried about: people who don’t have jobs or people who do? Most people say the former. And what do we think is the cause of people being without jobs: because no one is hiring, or because most people don’t want to work? Again, it’s the former. The payroll tax holiday addresses neither of those problems. It is a holiday on the collection of some taxes that are withdrawn from paychecks. So, it is only available to people who work, and then helps most the people who get their income primarily from salary and wages (which are the only kinds of income from which these taxes are collected) rather than net business income. So, it’s a tax that is labeled as helping everyone, when in fact it is a tax targeted to help people who already have jobs but who’s primary focus is not employing others. In sum, it’s a double fail. Having said that, like most tax cuts, I think the money is probably better spent by households than by government, so there are some positives to it. Interestingly, when the payroll tax holiday was originally proposed by macroeconomists, it was a tax break on the contributions that employers make on behalf of their workers, and it would have helped the two groups in trouble from the top of this paragraph. But, the idea has been perverted.

‡ In his defense, Mr. DeJoria is an extremely successful businessman, who has been trying to garner media attention as someone whose life experiences are indicative of someone whose perspectives and opinions should be taken seriously. Fair enough. I think he should be trying to get on Anderson Cooper 360. I just wish the show’s producers took their jobs more seriously.

European Debt and GDP Infographic

2011-12-22T10:25:00.001-08:00

This graphic is easy to figure out, but the colors bug me (click it to enlarge).

Countries are ordered from smallest to largest, with the blue square indicating the size of the countries GDP.

The countries debt/GDP ratio* is then plotted as a red square, who’s area is the country’s ratio times its GDP. Orange blocks indicate countries who’s debt/GDP ratio exceeds 100%.

This does a good job of highlighting why Greece and Italy are problems. Portugal too. It’s not so good on Ireland (which has gotten better), Spain (which has also gotten better, but not that much), and Belgium (which isn’t really on anyone’s radar screen yet).

Belgium is an interesting story. Maybe they should be a problem that people talk about. But they’ve had an interesting problem: they have a parliamentary government, had an election, no one could form a majority coalition, and they went without a ruling party for almost 2 years. This makes me wonder if no one is worried about Belgium because there was no Belgian government to whine about how awful things were. That’s a scary thought.

* The debt/GDP ratio is a popular, but problematic, measure. National debt is like the balance on your credit card or mortgage. GDP is like the size of your paycheck. You’d never compare the two for a household because the one is a stock variable and the other is a flow variable. For example, my debt/GDP ratio is much higher than the typical student’s because I have a mortgage on a house big enough for a family. It’s better to do a stock to a stock comparison (like debt to assets on a balance sheet) or a flow to a flow as on income statements (like debt payments to GDP). If you dig through the news, the details are always about Greece’s or Italy’s debt payments that are coming due.

By Severino, via Information Is Beautiful.

The Eurozone Bubble

2011-12-22T09:51:00.001-08:00

This tool is more fun than informative. It shows every country in the Eurozone as a “water balloon”, and the Eurozone itself as a box. Bigger bubbles indicate countries with more debt for their size.

When you push the small water balloons with your mouse, not much happens. Now try pushing Greece.

Via Information Is Beautiful.

Slide Show Explaining the Ongoing European Crisis

2011-12-22T09:44:00.001-08:00

This is from The Financial Times: it’s a brief slide show explaining why we’re so worried about Greece.

Interactive Debt Crisis Chart

2011-12-21T21:14:00.001-08:00

You have to click through to play with this one from Krist at the University of Maryland.

Krist is a computer science major, so this is heavy on programming difficulty, but a bit lighter on economics.

The chart shows three variables: debt/GDP on the horizontal axis, deficit/GDP on the vertical axis, and real per capita GDP by the size of the bubble. All of those are explained below the chart, but not too clearly.

If you click on either a flag or a bubble, the chart maps out the movement of the country through the years.

Alternatively, you can use the slider at the top to play a movie.

This year’s problem countries are Greece and Italy, and it’s pretty easy to see that they are away from the pack of other countries. The problem countries of previous years: Spain, Portugal, and Ireland have at least toyed with being part of the pack.

In a nutshell, the current problems in Europe is that the countries in the pack are having enough trouble managing their own fiscal problems, but they are tied to countries that are trying to play by different rules, and this isn’t helping.

Economically, I think the vertical axis variable is fine.

The horizontal axis variable is popular, but not one of my favorites. It actually shows something like a household’s credit card balance divided by paycheck size. That’s interesting, but not as useful as credit card payment divided by paycheck size. For Greece, the problem since summer has been the size of their payments, not the size of their debt (even though the latter isn’t good).

The bubble size is also somewhat misleading in that Luxembourg has the highest value (the biggest bubble). Technically, this is true, but that is mostly because of rich French and German citizens parking their money just over the border.

Via Information Is Beautiful.

PIGS Corruption

2011-12-18T12:57:00.001-08:00

The PIGS are Portugal, Italy, Greece, and Spain.*

You can spot the PIGS on this map of corruption perceptions.

* If you see a second i as in PIIGS, they are including Ireland. This was in vogue in 2008-9 when Ireland was in the same sort of trouble, but is out of vogue now that Ireland seems to have made good choices which have led to good results.

“Economics Is Organized Common Sense”

2011-12-18T12:16:00.001-08:00

That’s a quote from Jerry Kenley, the TA who inspired this year’s Nobel Prize co-recipient Tom Sargent as an undergraduate at Berkeley.

Scott Sumner Uses the Asymmetry Argument

2011-12-17T10:16:00.001-08:00

Chris Fawson at Utah State convinced me several years ago that taking two sides of an argument that are symmetric, and claiming they are asymmetric is both a common failure and a common justification for bad policy analysis.

Scott Sumner makes precisely this point about the (largely private)financial crisis in America and the (largely public) sovereign debt crisis in Europe.

Banks pour huge amounts of money into one particular asset class. They are encouraged to do this by public policymakers, although there is some dispute about whether that was the main reason for their decisions. These assets have a long tradition of doing well, although a close look at the evidence would have raised red flags. The asset market in question suddenly takes a big dive as default risk increases sharply. This drags down many large banks, forcing policymakers to provide assistance.

What have I just described? The sub-prime fiasco or the PIGS sovereign debt fiasco? I’d say both. I’d say these two crises are essentially identical. (I should clarify that by “essentially identical” I mean in essence, not in every detail.)

Of course the sub-prime crisis came first, so let’s consider the dominant (progressive) narrative of the sub-prime crisis. If you read the mainstream media you will see it described as a sort of morality play; the evils of deregulation, which allowed the greedy big banks to take highly leveraged gambles with other people’s money, and then off-load the risk on to both taxpayers and unsuspecting buyers of MBSs. Or something like that.

Obviously it would be impossible to tell a similar story for the sovereign debt crisis. No regulator in his right mind would ever contemplate telling big banks not to buy European sovereign debt because it’s too risky. Indeed the previous attempt at regulation (Basel II) encouraged banks to put funds into those “safe investments.” Blaming the euro crisis on deregulation doesn’t even pass the laugh test. The criminals were the regulators themselves. Is the term ‘criminal’ hyperbole on my part? Not at all. Suppose Enron executives had used the same accounting techniques as the Greek government. They’d all be in jail. And as for Berlusconi, what can one say about a leader who continually passes laws exempting the Prime Minister from the very crimes he was accused of having committed? As Keynes said:

Words ought to be a little wild, for they are the assaults of thoughts on the unthinking.

So here’s what I wonder. Assume the eurozone crisis was obviously not caused by deregulation and greedy bankers. Then if the sub-prime crisis was basically identical, at least in its essence, how can deregulation be the root cause of the former crisis? I’m not saying it’s logically impossible, but doesn’t it seem much more likely that there’s a deeper systemic problem, which transcends this glib cliche?

To return to Fawson, it’s very unlikely that the solvency problems that are so nearly symmetrical in the two financial situations can be attributed so asymmetrically.

Unless, of course, the morality play is really important to your ulterior motives. Gee … ya’ don’t think.

Hat tip to Café Hayek for publicizing this point.

P.S. Love the Keynes’ quote.

New Unemployment Claims

2011-12-15T08:08:00.001-08:00

As recently as early fall we were hearing a lot of nonsense about a double-dip recession.*

Now, new unemployment claims have started dropping fairly consistently. I know enough not to immediately claim that the job market is going to improve substantially and soon. But, I also know enough to point out that we are in the right range of time since the run-up in claims for there to be substantial and sustained improvement. Check it out:

Hat tip to Angus for the chart.

What I want you to look at is not the height or steepness of the peaks … that’s when we were in panic mode.

Instead, look at the width of the bases of the “mountains”. Here, the most recent recession matches up nicely with the last four recessions, and also with the regional quasi-recession of the mid/late 80’s (not everyone remembers that one, but it was pretty rough from Louisiana up through Idaho for a couple of years there).

I am not a charter! I do not look for patterns and then create explanations. Having said that, there is an explanation laying around that will produce that pattern. There’s good psychological reasons to think that any business fluctuation induced unemployment, by either nominal wage rigidity or zero marginal product, might take a few years to start clearing out as individuals’ self-image adjusts to reality.

* Duh … it can’t be a double-dip if the recession is already over. It might be a second recession close on the heels of the first one … but that’s a lot harder for clueless journalists to state.

Economics (from Despair Inc.)

2011-12-15T07:57:00.001-08:00

And the really good economists gets bitched out for making those explanations even earlier (e.g., Milton Friedman).

Buy the poster and other goodies at Despair Inc.

Technorati Tags: economics,predictions,yesterday,today

Do You Get the Metaphor?

2011-12-12T08:17:00.001-08:00

Does this help you understand the events of the last few months?

You meet an employed professional with a $300,000 house, $100,000 in the bank, a nice car, a few (illiquid) Renaissance paintings, and very nice shoes. His name is Fabio.

He is $60,000 in debt, which is about equal to his yearly income. An unanticipated ARM reset requires him to pay off that debt at a faster pace than expected, which means he must restrict his consumption.

He threatens to mistreat his longstanding girlfriend Angela, unless she works harder to maintain his previous level of consumption. Angela refuses to help much, citing a false economic theory in defense of her position.

Fabio’s brother relentlessly attacks Angela’s false theory. His cousin in Naples claims that Angela is obliged to help because she has benefited from being in the relationship.

Via Marginal Revolution.

How Arnold Kling Became an Austrian*

2011-12-12T07:57:00.001-08:00

Fascinating:

… I did not study the sacred texts [me neither]. I spent the prime of my career outside of the academy, experiencing the behavior of organizations. I saw first-hand the challenge that large organizations have in dealing with innovation. I saw the tenuous grasp that bosses have over their organizations. Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.

I came to Austrian economics because that is how business in the real world felt to me.

I’m not Austrian (yet), but I’d admit to moving in that direction because of – what I view as – an increasingly realistic view of human failings: I like people more, but I trust their decision-making less. That may be why I like them more: they know not what they do.

* Arnold Kling has a Ph.D. in economics from MIT, but didn’t go into academia. He worked on housing research for Freddie Mac before founding an early internet firm.

North Dakota Oil Boom Immigration

2011-11-19T20:20:00.001-08:00

There’s a big oil boom in western North Dakota. Using this interactive map from Forbes.com, I charted immigration into Williston, North Dakota for 2009 (the latest year available).

With it, you can start to see the boom starting to reach out across the country.

I can only imagine what this looks like with 2011 data … considering I have an MBA student blogging about his experiences as a wage migrant to Williston.

Immigration and Emmigration

2011-11-19T20:12:00.001-08:00

Here’s a very cool interactive map at Forbes.com that shows, by county, where immigrants came from (in blue), and where emmigrants went to (in red).

Here’s Iron County in 2005.

You can clearly see the inflows following I-15.

But, here’s 2009 (the latest year available):

What I find interesting is that the only place consistently drawing people from Cedar City is the Wasatch Front.

N.B. Also note the number of people moving to Vernal for the gas boom.

Bad, and Stupid, News

2011-11-13T12:45:00.001-08:00

The European Financial Stability Facility — the organization that is supposed to bail out Greece and others — can’t sell enough bonds on the open market, and has had to buy them itself.

This is a tragedy waiting to happen. You are being warned.

If a private firm was doing this, there would be panic inside that firm, and investors would be bailing out of its equity. Underwriters and investment banks earn their keep, in large, by making sure that this almost never happens.

By contrast, the EFSF — which is only 18 months old, and was created in response to the previous cycle of predatory borrowing in Europe — is an organization that is supposed to prevent this happening for whole countries.

This is analogous to:

Having a friend with an addiction problem,
Getting a group of friends together to help your addicted friend out,
And being so codependent yourselves, that no one will help you,
And then having covered your a**es so well in the first place, that it isn’t news to most people that you’re in trouble too.

Talk about rationalization crossing over from neurosis to psychosis.

Kauffman Report

2011-11-01T08:01:00.001-07:00

Word clouds from the Kaufmman Foundation’s quarterly survey of macroeconomics bloggers, reposted almost completely from Tim Kane’s Growthology.

These are drawn from (open) responses to the same question, asked each of the last six quarters.

Technorati Tags: kauffman,blogger,survey,word,cloud

Inequality

2011-10-31T06:19:00.001-07:00

Political Calculations provides this chart:

It shows inequality as measured by the Gini coefficient for the U.S. Higher is more unequal.

Individuals tend to have far more unequal income than families or households. This is just measuring the obvious truth that one of the reasons for forming families or households is so that individual income can be more unequal: this is what it means to care for someone young, old, or disabled. So, the red line should be at the top. By the same token, households should be more unequal than families because families tend to be more likely to be caring for the young, old, and disabled.

Now, look at the trends. Individual income inequality is improving, family and household inequality is getting worse. How can that be so?

What you’re seeing here is that inequality is about how people form households and families. The people getting paid are more equal than before, but the households and families they live in are more unequal. The reason for this is the agglomeration of richer people together and poorer people together … not the winner-take-all society.

The Romance with Small Business

2011-10-29T13:48:00.001-07:00

Matt Yglesias riffing on Jared Bernstein I think, to me the fact that if small firms were so fantastic Italy and Greece would be the economic superstars of the western world:

The Republicans have had a crush on small business for about 20 years (yes, they always did, but it’s gotten to be an unhealthy crush).

They need to start thinking about this more like the income distribution: there’s probably something wrong with a small business that isn’t a medium-sized business the next time you check up on it.

How Much Is Income Inequality and How Much Is Effort Inequality?

2011-10-27T18:17:00.001-07:00

Mark Perry point out that the rich* bring in 15 times as much income as the poor. But, the rich also have 5 times as many jobs, making the extent to which their income is unequal 3:1 instead of 15:1.

Note that students want a premium for effort included in their grade when it might help them, but that the tax code doesn’t allow households to discount for effort when it might help them.

* The rich are defined by the average household income of the top income quintile, and the poor by the average household income of the bottom income quintile.

Technorati Tags: income,effort,inequality

How Fundamentally Human Are Property Rights?

2011-10-27T17:43:00.001-07:00

How about this: 3 year olds understand property rights.

And not just their own property rights: they apparently understand this it is their duty to protect the property rights of others from abuse.

I argue in my macroeconomics classes that broad societal acknowledgement of this point is one of the things that caused the growth miracle of the last 3 centuries.

Dave Elsewhere 2

2011-10-27T12:34:00.001-07:00

Got an hour? Here's a video of the presentation I did in a Pizza and Politics session for the Leavitt Center. I'm sorry that it is "sideways" ... this was an unofficial video taken by a student in the front row. The topic is the national debt.

Dave Elsewhere 1

2011-10-27T11:11:00.001-07:00

Here’s an op-ed I wrote about the current economic situation for the school paper back in August.

I didn’t formally transfer copyright, so the can sue me ()for reprinting it below.

I’d like to touch on three topics.

First, how is the economy doing? The answer is that it’s OK, but not good.

We had the worst recession in 25 years or more, but it’s over. We’re now into the third recovery in a row that has started out weakly.

How weak? If we grade the U.S. economy with the same grade distribution that SUU students earn, over the last eight quarters the economy’s gotten 3 A’s, 2 B’s, and 3 C’s. If you’d be happy with a 3.0, you should be happy with the economy.

Secondly, if the economy as a whole is doing OK, why is there so much unemployment? Here, we have to delve a little deeper. It turns out that hiring and layoffs were out of balance a few years ago, but are in balance again, and they have been for many months.

So how can unemployment still be high? One part of the answer is that the normal turnover of people leaving for better jobs and creating openings in their old jobs is still below normal. The second part is that the longer a person is unemployed, the harder it is to get them back into a job. Because they haven’t had a job for so long, they may look like trouble to a prospective employer.

If you’re a college student, the message is twofold. If you’re new to the job market, you’re probably in better shape than you think: the jobs are out there, and you have no history of unemployment working against you. But, if you’re not new to the job market, and have been out of work, the going gets tougher. You need to convince prospective employers that you are just as good as someone new to the market. And, your history of unemployment creates a void you have to fill with extra effort.

Finally, let’s talk about the debt scare, and our “toxic” political system.

This is an issue that is all about dealing with our spending commitments. The ugly truth is that politicians really don’t have that much control over their cash inflows from tax revenues and borrowing. There was no serious talk this summer about cash not coming in; rather, it was about knowing all too well how much cash had been promised to go out.

By and large, those commitments were not made by current politicians. They were made by people that were elected in the past, and who are often long gone. But, the key point is that they made commitments that current politicians have to try to honor.

This makes our political problems anything but toxic. These are discussions that should have taken place in the past. They didn’t. That was irresponsible, but it doesn’t make the current situation toxic. These are serious issues that our political parties should disagree about: one side wants to honor past commitments, the other side is worried about further committing future generations that can’t yet vote. Both positions are worth defending.

Technorati Tags: op-ed,suunews,macroeconomy

Bailed Out by the Barbarians

2011-10-25T21:06:00.001-07:00

Today's Frank and Ernest:

Of course, these days it’s the Greeks who are behaving barbarically.

Technorati Tags: frank,ernest,greece,germany

Performance of the Top 100 Metropolitan Areas

2011-10-24T16:40:00.001-07:00

You have to click through to the graphs from this page at the Brookings Institution.

9-9-9 Would be a Shift to a More Regressive Tax System

2011-10-23T22:10:00.001-07:00

The Tax Policy Center* says that Cain’s 9-9-9 tax proposal will lead to tax increases for almost everyone in the middle and lower classes.

Via Greg Mankiw.

* The Tax Policy Center is a joint effort of the Urban Institute and the Brookings Institution, so it’s safe to say it’s left of Herman Cain.

The Real Bubble

2011-10-23T12:47:00.001-07:00

Mark Steyn:

Whenever the economy goes south, experts talk of the housing "bubble," the tech "bubble," the credit "bubble." But the real bubble is the 1950 "American moment," and our failure to understand that moments are not permanent. The United States emerged from the Second World War as the only industrial power with its factories intact and its cities not reduced to rubble, and assumed that that unprecedented pre-eminence would last forever: We would always be so far ahead and so flush with cash that we could do anything and spend anything, and we would still be No. 1.

Via Cold Spring Shops.

Turning the Solyndra Debacle Upside Down

2011-10-23T12:36:00.001-07:00

The end result of the Obama administration’s gamble on Solyndra, which Monday morning quarterbacks didn’t criticize until it went bad, is that it will make a conservative, reactionary bureaucracy more conservative and reactionary:

The real trouble with bureaucracies is not that they are rash, but the opposite. … they universally show a tendency to “play safe” and become hopelessly conservative. The great danger to be feared from a political control of economic life under ordinary conditions is not a reckless dissipation of the social resources so much as the arrest of progress and the vegetation of life.

This 90 year old quote is from Frank Knight, and I’m requoting from Don Boudreaux.

Kiva Connections

2011-09-02T21:48:00.001-07:00

Kiva is a site for making peer-to-peer microloans. It doesn’t get more new school than that. Check out the video time-series map.

Intercontinental Ballistic Microfinance from Kiva Microfunds on Vimeo.

Economically, what gets me about this is that the funds appear to be going in the theoretically correct direction, based on marginal product: a loan can make the most difference in a place where someone is capital poor.

Yet, one of the big development problems of the last several decades has been the extent to which larger investments tend to move in the other direction: America is a sink, sucking in funds that could better be loaned elsewhere.

Via Marginal Revolution.

Technorati Tags: kiva,p2p,microloan,video

Low Technology

2011-08-28T10:22:00.001-07:00

Growth theory teaches us a few things.

Growth through accumulation of capital is possible, but it has its limits.
Differences in per capita income across regions are too large to result from differences in capital. It must be differences in technology.
What people call high technology (e.g., cellphones) is transmitted easily across borders, and is unlikely to explain differences in per capita income across regions.
This leaves what I call “low technology” — that doesn’t transmit easily — to be the source of differences in per capita income across regions.

But what is low technology? Take a look at this video to get an idea:

This is a professional portrayal of the metaphor I use in class every semester: what would someone from a remote area of a developing region do if they were (benevolently) kidnapped, blindfolded, transported to the center of a Wal-Mart … and then told to shop? Would they even know where to begin? If the answer is no, it’s because of differences in low technology.

Via Kottke.

Pitfall of the Invisible Balance Sheet

2011-08-27T10:07:00.001-07:00

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

I would add that ignoring that balance sheet is also behind a lot of bad thinking about pollution. Pollution does do damage, but it’s to the balance sheet not the income statement (national income and product accounts) of a country. So, environmentalists have a legitimate claim that our economic gains are overstated, but the movement to “improve” GDP by subtracting this damage out is just bad accounting.

Pitfall of the Invisible Balance Sheet

2011-08-27T10:06:00.001-07:00

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

Why Is Macroeconomics So Hard? The Christina Romer Quote

2011-08-21T09:30:00.001-07:00

Stephen Moore:

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics."

Long-Term Unemployment: A Modigliani-Miller Approach

2011-08-20T14:37:00.001-07:00

Mark Perry of Carpe Diem (Via Don Boudreaux of Café Hayek):

The first principle of economics is that we live in a world of scarcity, and the second principle of economics is that individuals have unlimited wants and desires.
Therefore, the second principle of economics: unlimited wants and desires, rules out any long-term problems of unemployment. [emphasis original]

I like this: stark and unrealistic.

Stark is a good way to move the discussion forward, particularly if it yields something unrealistic: because this means that what is included in the stark viewpoint must be relaxed to get something realistic. And the points that are relaxed tell us something about the real world.

The academic finance version of this is the Modigliani-Miller theorem. In short, it states that under certain conditions, the value of a firm is indifferent to the way it is financed. This is unrealistic, so it must be a relaxation of those conditions that leads to finance creating value.

I view Perry’s point in the same way: if long-term unemployment is a problem, it must be because either the problem of scarcity has been mitigated, or the problem of wants has been mitigated.

But … the latter is precisely what governments strive to do. They don’t really get rid of wants, but they clearly spend a lot of time trying to suppress them.

Think about this in terms of something like broadening the taxation of internet transactions. This won’t actually reduce wants, but it will keep people from expressing them quite as freely … you know … by buying stuff. And that will certainly reduce the propensity of employers to hire additional workers, and perhaps lead to more long-term unemployment.

Technorati Tags: long,term,unemployment,scarcity,wants

How Does a Collateralized Debt Obligation (CDO)Work?

2011-08-20T13:21:00.001-07:00

CDO’s were blamed for a lot of the financial crisis in 2008, and the global recession that followed.

At SUU, our finance people don’t do a good job of explaining these instruments.

Here’s a good primer that serves two purposes: 1) it predates the crisis, and yet points out that even then people who should know better were pretending these things were snake oil when their investments didn’t work as planned, and 2) it has a short explanation of how they’re put together.

The Downgrade … A Week Later

2011-08-16T10:21:00.001-07:00

So Fitch is not going to follow suit. There are 3 rating agencies, and institutional investors usually follow the majority. Since Moody’s is not going to downgrade at this juncture, S&P’s move … doesn’t count.

Greg Guttfield nailed it last week:

So, it's hard to judge this downgrade, because it's like getting a report card from a drunk teacher.
I mean - If these agencies were so smart, why didn't they do it sooner?
As Dana Vachon tweeted to me, Where were these "credit agencies" during the housing bubble?
My guess is, hot tubbing.
Can't blame them. Hot tubbing is fun.
Which means the downgrade was not a logical reaction, but a scolding meant to make everyone feel bad. [emphasis added]
Now, irrelevent ninnies like John Kerry are blaming the Tea Party.
But how can you blame them- when they got nothing they wanted?
The debt ceiling debate culminated in the highest debt ceiling bump ever. The spending cuts were like a fat guy forgoing the sprinkles on his half gallon of Chunky Monkey - and calling it a diet.
But I can see why the Tea Party is getting hammered on this.
No one represents them - for they are them.
Let me put it this way: the tea party is a principle, without a person.

What Republicans Want

2011-08-12T10:00:00.001-07:00

Garett Jones:

… The modern GOP is all about preventing current tax increases, not future tax increases. As long as the GOP isn’t in charge the day the tax increase occurs, GOP voters won’t blame Republicans. That means we’ll just have to wait for Democrats to get elected so they can raise taxes to pay for all of the spending programs Republicans (and Democrats) voted for.

I’m Officially the Biggest Producer of Web Content at My School

2011-08-10T14:43:00.001-07:00

According to a report from our university webmaster, I have more files in my website than any other faculty member: 9,822.*

That probably would not surprise a lot of my students.

It probably would surprise a lot of faculty and administration … who don’t seem to believe anything exists that isn’t a hard copy.

* For the most part, all neatly linked and organized too, going back through 21 semesters now, plus stuff from my years at UNO and Tulane.

Technorati Tags: web,content,suu

Interest Rates Around the World

2011-08-07T23:25:00.001-07:00

An interactive chloropleth of central bank (short-term) interest rates by country:

via chartsbin.com

Federal Non-Defense Spending

2011-08-07T09:45:00.001-07:00

Federal non-defense spending as a percentage of GDP:

Via Greg Mankiw.

Clear Thinking On Peak Oil and Macroeconomics

2011-08-05T10:05:00.001-07:00

John Quiggin of Crooked Timber points out that oil per capita peaked out a long time ago, and at current prices at a yearly expenditure of under $500. How then can people decide this is something to worry about?

Via Marginal Revolution.

Subsidizing Seniors

2011-08-04T22:51:00.001-07:00

All of our government’s financing problems (heck — most government financing problems everywhere) are a result of voting for heavier subsidization of senior citizens.

In the U.S., the average payment to a senior is about $14K from social security, and $12K from Medicare.

That’s the equivalent of earning $13 per hour. That’s a decent paying full-time job in many locales … and easily beats what teachers start at around here.

Plus, it’s tax-free. The effective tax rate on someone with that much income would be on the high side of 5%, so roughly $14 per hour is the equivalent for a worker.

Something like 40% of the U.S. population survives on that amount or less. This means that a sizable chunk of the population actually gets richer when they stop working for good.

How’s the Recovery Going?

2011-08-04T22:20:00.001-07:00

Excellent post from Calculated Risk, showing graphs of 4 series as percentages off their historic peak values. The 4 series are the ones the NBER focuses on when dating business cycle peaks and troughs. All show improvement since the trough, and all show that we haven’t returned to pre-recession peaks yet.

What a Difference

2011-08-03T10:04:00.001-07:00

Yes, the budget deal of July 2011 is a step.

Yes, it probably is a step in the right direction.

Is it a big step? It depends on the scale:

I am not a believer that the target should be zero debt, so I am not advocating a policy that takes us to the bar on the right.

But, this does seem to be the desire of many people, so it’s useful to get a sense of scale: clearly the “huge” budget deal is not nearly huge enough.

Via Alex Tabarrok at Marginal Revolution.

Hayek Quote About Economics

2011-08-03T09:36:00.001-07:00

Via Don Boudreaux at Café Hayek:

… It is probably no exaggeration to say that economics developed mainly as the outcome of the investigation and refutation of successive Utopian proposals – if by “Utopian” we mean proposals for the improvement of undesirable effects of the existing system, based upon a complete disregard of those forces which actually enabled it to work.

The cite is also quoted from Boudreaux’s post:

From page 19 of Hayek’s 1933 essay “The Trend of Economic Thinking,” reprinted in F.A. Hayek, The Trend of Economic Thinking: Essays on Political Economists and Economic History (Chicago: University of Chicago Press, 1991), pp. 17-34.

Note that this quote is now nearly 80 years old. That’s how long ago people recognized that the sort of economic nonsense that politicians use to appeal to voters was a problem.

How the Budget Deal Is Like TARP’s Successes and Failures

2011-08-02T08:17:00.001-07:00

Keith Hennessey raises an interesting point: Obama wants liquidity, and fiscal conservatives want solvency.

The Tuesday deadline for budget negotiations is about liquidity (aka funding risk) – will the government have enough cash to pay its bills on time?

The government also faces solvency risk – will policymakers close the large and growing gap between spending and revenues? Will they cut spending and/or raise taxes enough to make the U.S. government a financially sustainable operation?

Both types of risk result from policy decisions made by our elected representatives. The short-term liquidity risk was created by conservative Members of Congress who refused to raise the debt limit without cutting spending. The solvency risk accumulated gradually as officials from both parties promised government benefits in excess of the taxes they were willing to impose.

This is interesting. The budget deal has clearly addressed the liquidity problem, and once again done very little to address the solvency problem.

How is this (broadly) like TARP?

What we wanted in the autumn of 2008 was a program that 1) addressed the immediate liquidity issues of the whole financial system, and 2) addressed the solvency issues of the residential real estate finance subsystem.

What we got was TARP (and other associated programs).

The quick pay off of most TARP money in 2009 showed that we did a good job with # 1.

The fact that Fannie Mae is still hemorrhaging left and right shows our government’s failure to adequately address # 2.

We should not be surprised that we got a lousy budget deal: it’s just more evidence that D.C. is hard-wired to be unable to separate liquidity from solvency issues, and is biased towards ignoring the latter.

Via Cold Spring Shops.