What I Said About Japan

Last year at this time, everyone was concerned about the aftermath of the tsunami in Japan.

In particular, the damage to a nuclear reactor was a big deal.

I was exceptionally harsh on this view:

Unlike most other colleges, business schools actually make a point of talking about ethics and morals, rather than just baldly assuming that students understand them.

It isn’t often that I get to talk about them in macroeconomics, but here is a golden opportunity.

The distinction between ethics and morals is often lost on students (and it isn’t like philosophers make a tight distinction anyway). Some argue that morals are what individuals believe, and ethics is the study of that set of beliefs. Some argue that morals are personal, and ethics are cultural or societal. Let’s make it simple: morals are micro, and ethics are macro.

Which leads me to legacy media coverage of the ongoing nuclear crisis in Japan. I assert that it may be moral to be concerned about this, but it is unethical for the legacy media to make it even a secondary focus of their concern. This suggests that it may be immoral to be personally swayed by their coverage.

The issue here is that the legacy media coverage is tantamount to equating a potential disaster with an actual one.

A real disaster had happened. Excessive focus on a potential disaster at that time is ethically wrong.

Obviously, I was really “sticking my head through the noose” on this one.

A year later, here’s what we know.

One government survey of 10,468 people from three towns at high risk—Namie, Iitate and Kawamata—was released in late February. Among them, 58% are estimated to have received less than one millisievert of exposure, and 95% less than five millisieverts. Just 23 people, including 13 nuclear workers, were assumed to have been subjected to more than 15 millisieverts.

By comparison, the U.S. Environmental Protection Agency estimates that Americans are exposed, on average, to three millisieverts of radiation per year from natural and man-made sources. Japanese safety rules allow a nuclear worker up to 100 millisieverts a year …

Last time I checked, the 20K people who died in the tsunami are still dead.

Something to Pay Attention to In the Medium-Run

One of the goofed up parts of our government accounting system is that our announced deficits include interest payments to citizens. This is weird because we borrow most of the money from citizens, we repay most of it back to them, and we tax them in order to do so. It’s a wash, but counting makes the deficit seem bigger than it is.

So, I don’t think this is a huge deal, but because we count this way this could be a big deal when interest rates go up in a few years. It also is a big reason for policy pressure to keep interest rates abnormally low:

What we pay is the green line. We pay that for two reasons. One is the red line, and the other is the interest rate paid on each individual government bond.

The red line is going up because of Obama’s budget policies. The green line is holding steady because interest rates are abnormally low.

When interest rates go up in the future, and they probably must because we do believe there is mean reversion in interest rates, that green line is going to go through the roof.

When that happens, politicians will panic: everything will be on the chopping block, and they will be looking to increase every tax. It won’t be pretty.

Read the whole editorial, entitled “Uncle Sam’s Teaser Rate” in the March 12 issue of The Wall Street Journal.

Something’s (Still Up) with the Unemployment Numbers

About a month ago I posted that something was goofy with the latest employment numbers. Others have caught on.

Using Okun’s Law, here’s what The Wall Street Journal came up with:

The top left shows the plain scatterplot, the top right adds a regression line capturing Okun’s Law, and the bottom panel shows the size of the residual (the vertical distance to the line, not the whole red dashed line).

The conclusion; somehow we’ve gotten too much decline in the unemployment rate to be plausibly explained by the real GDP growth we’ve experienced.

I’ve never liked Okun’s Law much: it’s too flexible to be a “law”.

Anyway, what we’re seeing here isn’t impossible … just worthy of attention.

Okun’s Law also got goofy on the way up:

Christina Romer, President Barack Obama's former chief economic adviser, is watching this very closely. That is because Okun's Law also broke down in the other direction a few years ago when she was head of Mr. Obama's Council of Economic Advisers. She predicted the unemployment rate would rise to a little less than 8%, but instead it went to 10%. Some of the miss was because the downturn turned out worse than expected and much of it was because unemployment rose more than Okun's Law predicted.

I find her explanation plausible:

Ms. Romer has a theory for why the jobless rate rose more than Okun's Law predicted during the recession and why it has fallen more than the law predicted since the recession: She believes that company managers were so shocked by the financial crisis in 2008 and 2009 that they fired workers more aggressively than they would in a conventional downturn.

"Firms were terrified," she says. "We had just had the first financial crisis in 70 years. The world looked like it was falling apart …

But there’s a possible downside:

A less sanguine explanation could be a dangerous productivity slowdown. It might be the case that the workers being hired aren't improving their productivity as much as workers had before. If they aren't as productive, companies need more of them.

The hiring sounds nice, but a productivity slowdown would be bad in the long run for everyone. Less productivity means slower growth in the long run, an economy more susceptible to inflation shocks, slower growth in inflation-adjusted incomes and less government revenue to work down big deficits.

Robert Gordon, a Northwestern University professor who tracks productivity closely, says he sees "clear signs everywhere" that a productivity slowdown is happening. …

Pay attention to Gordon; he’s one of those scary-good people on understanding business cycles.

Read the whole thing, entitled “Piecing Together the Job-Picture Puzzle” in the March 12 issue of The Wall Street Journal.

Job Growth Is Still Solid

February was another good month for employment growth:

Read the whole thing, and check out the interactive graphics, in the piece entitled “Jobs Recovery Gains Momentum” in the March 9 issue of The Wall Street Journal.

Recovery Is Ongoing

You guys already know this, but here are some interactive graphics to prove it.

Read the whole thing by clicking the “Article” tab on the site.

Don’t “Help” Manufacturing! Please!

For decades we’ve wanted the manufacturing sector to be leaner and more efficient, to better compete against foreigners.

This means that manufacturing employment will go down as manufacturing employees become more productive. Just so:

This is a good thing. It’s what we wanted. It’s also a symptom of our past decisions, not a cause for current decisions.

Unless politicians get stupid (or is it stupider ??).

"The trend is increasingly that factories are not assembly lines with lots of people standing around. It's increasingly a lot of machines with fewer workers," said Susan Lund, director of research at the McKinsey Global Institute, the research arm of the consulting firm. "If job creation is your goal, manufacturing is probably not the sector you'd look to."

Multinational companies are increasingly moving production to the U.S., but "the problem is that there are few jobs created by insourcing activity," Wells Fargo Securities Economics Group wrote in an analysis Tuesday.

…

Manufacturing employment also declined from 2000 through 2009 in Germany by 9% and by more in South Korea, the United Kingdom and Japan, according to McKinsey.

… In the U.S., despite the loss of millions of jobs,factories' output—the value of goods produced, adjusted for inflation—was almost the same in 2011 and 2000.

This is all good news, and both Obama and some Republicans (e.g.,  Rick Santorum) want to do something, anything, to change it.

Read the whole thing in the piece entitled “Economists Assail Campaign Proposals to Help Factories” in the March 2 issue of The Wall Street Journal.

Seasonal Variation In Gas Prices

Inflation is high this month.

Most of that comes from gasoline price inflation.

Gas prices inflate every spring. This gives alarmist reporters something to talk about once a year.

There are three reasons for this.

First, gas is refined from crude oil. Refineries are big places with huge economies of scale. Shutting them down is expensive.

Second, governments across much of the country mandate different blends of gas for different times of the year. The whole country changes from a winter to a summer blend twice a year. But, every time they do this, the refineries have to shut down to do the changeover. This always creates price volatility. Further, the summer blend is more expensive.* So, every spring gas prices get pushed up.

Third, we’ve Balkanized our gas production (remember: go to Google and enter “define balkanize). Here’s a map:

This is done by local governments deciding that winter and summer blends aren’t enough for them, and that they need a special blend that no one else has. Each of these colored spots requires its own dedicated refineries. Most refineries only produce one of these colors at a time. This is a big deal because refineries are expensive to switch because of the economies of scale they get only when they’re up and running. In operations research, it’s standard to study how adding constraints to decision-making reduces options and increases prices. Politicians prefer you don’t know this.

* Yes, Obama will be able to deliver declining gas prices just in time for the election: every President is this “lucky”.