Low Technology

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

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

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.

Why Is Macroeconomics So Hard? The Christina Romer Quote

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

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?

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

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

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

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

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

via chartsbin.com

Federal Non-Defense Spending

Federal non-defense spending as a percentage of GDP:

Via Greg Mankiw.

Clear Thinking On Peak Oil and Macroeconomics

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

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?

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

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

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

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.

Cuts, What Cuts?

Here are the liberals:

Paul Krugman:

It will damage an already depressed economy …

Brad DeLong:

… Come Tuesday I will be forecasting a double-dip. Horrible for the economy. Horrible for America.

Both quotes were drawn from Kids Prefer Cheese. They also link to this chart of projected discretionary federal spending:

Note that this is not adjusted for inflation: it shows nominal growth averaging 1.9%, which beats just about any projection of inflation driven by actual data rather than judgment calls.

Wait a minute, those bars are rising! Spending isn’t being cut at all.  The “cuts” in the deal are only cuts from the CBO “baseline,” which is a Washington construct of ever-rising spending. And even these “cuts” from the baseline include $156 billion of interest savings, which are imaginary because the underlying cuts are imaginary.

No program or agency terminations are identified in the deal. None of the vast armada of federal subsidies are targeted for elimination. Old folks will continue to gorge themselves on inflated benefits paid for by young families and future generations …

From The Economist:

There is no balanced budget amendment, the cuts are less than the rating agencies want to ensure the continuance of AAA status and there is an element of "can-kicking" in the way the cuts are designed. Much is left to 2013, which will be a new Congress (and possibly new President); what one Congress can do, another can undo.

This is what America agonized over for the last 2 months. Spare me.