Stop Bullshitting About Disability, Conservatives

It’s an icon of faith amongst conservatives that more and more people are claiming disability, and that these “cheaters” are part of the problem with this country.

Give it up. It isn’t true.

Here’s the data from the Social Security Administration:

What is being shown here? It is the contribution to the growth rate of claims by three groups: 1) retirees, 2) their survivors, and 3) the disabled.

For example, claims grew by 2.5% in 2011. Most of that (1.8%) came from retirees, a third came from the disabled (0.8%), and survivors actually decreased a little.

Now, look at that green line. It does spike a bit around the recessions in 2007-9, 2000-1, and 1990-1.

But, the predominant pattern is that it’s been roughly constant since the late 1980’s.

So what’s going on here?

Well, first, retirees are increasing. This has a pretty obvious cause: birth rates declines during bad economic times, and that trough in the mid-90’s is 65 years after the Great Depression. We’re now getting into the baby-boomers claiming social security, and the blue line is trending up.

And secondly, new disability claims have been more or less constant since the late 1980’s. At that time the oldest baby-boomers were in their early 40’s, and the youngest were in their mid 20’s. This is prime working years, where disability often strikes.

Now that some of the baby-boomers are retiring, they will no longer be eligible for disability claims. When we should start to worry is if that green line doesn’t start to drop towards zero a bit — over the next 20 years — as the baby bust of Generation X filters through the economy.

But, claiming that disability claims are somehow out of proportion to their recent history … is just false.

OMG–Would You Look at That

I love these nighttime satellite shots, but this one shows something new:

I was picking out the big cities for fun when I noticed the brand new big city: it’s not that centrally bright, but you can easily see the smudge of oil drilling in North Dakota (at the top center).

Technorati Tags: bakken,shale,fracking,north,dakota,night,lights,satellite

Straight Talk from Paul Krugman

Krugman on the “fiscal cliff":

The point is that when you put Republicans on the spot and demand specifics about how they’re going to make good on their posturing about spending and deficits, they come up empty. There’s no there there.

And there never was. Republicans claim to be for much smaller government, but as a political matter they have always attacked government spending in the abstract, never coming clean with voters about the reality that big cuts in government spending can happen only if we sharply curtail very popular programs. In fact, less than a month ago the Romney/Ryan campaign was attacking Mr. Obama for, yes, cutting Medicare.

He’s right. Grandma’s checks are the problem … and the Republicans are unwilling to stand up and point this out.

Read the whole thing, entitled “The Big Budget Mumble” in the December 3 issue of The New York Times.

Technorati Tags: krugman,republican,fiscal,cliff

Do Tax Breaks Encourage Saving?

America has a lot of quirks in our tax system. Commonly called loopholes, these are special provisions which allow taxes to be reduced because of certain choices made by taxpayers.

More properly, these are called tax expenditures. Some of these are on the table as we approach the “fiscal cliff” — the automatic tax increases set to take place in early 2013 by the debt ceiling compromise of 2011. The biggest tax expenditures are things like the deductibility for firms of health insurance premiums and pension contributions paid on behalf of their employees, and the mortgage interest deduction. Others were covered in this earlier post.

Now, there’s new research showing that at least some of these tax incentives don’t do much good:

… Every dollar …  spent on tax breaks increased total savings by about only one cent. In contrast, policies that automatically saved a portion of a worker’s income increased total savings by a substantial amount.

This suggests that tax incentives for people to save for retirement should be on the chopping block.

Seen In the Parking Lot

It didn’t occur to me to take pictures until it was too late. But … I spotted more than one vehicle in the parking lot at Saturday’s football game with a dealer plate from Williston, North Dakota.

The game was between Southern Utah and New Mexico Highlands U. Both schools are over a thousand miles from the oil fields of the Bakken Shale.

Obama’s Letter Grades

Way back in 2005 I started pushing the idea here at vX that we ought to grade economic growth on a letter grade scale.

I proposed two scales: an “old school” letter grade based on the normal distribution, and a “new school” letter grade scale based on a contemporary distribution across majors from my school.

Here’s collected in one place, are Obama’s letter grades:

Quarter	“Old School”	“New School”
2012 II	C	B
2012 I	C	B
2011 IV	B	A
2011 III	D	C
2011 II	C	B
2011 I	D	C
2010 IV	C	B
2010 III	C	B
2010 II	C	B
2010 I	C	B
2009 IV	B	A
2009 III	D	C
2009 II	F	D
2009 I	F	F

Of course, some claim “it’s all Bush’s fault”. Fair enough.

The table below shows the GPA for Obama using a cumulative sum. This means that entries at the top of the table include only the most recent quarters, while those towards the bottom include progressively more quarters in Obama’s average:

Quarters Included	“Old School”	“New School”
2012 II Only	2.0	3.0
2012 I to 2012 II	2.0	3.0
2011 IV to 2012 II	2.3	3.3
2011 III to 2012 II	2.0	3.0
2011 II to 2012 II	2.0	3.0
2011 I to 2012 II	1.8	2.8
2010 IV to 2012 II	1.9	2.9
2010 III to 2012 II	1.9	2.9
2010 II to 2012 II	1.9	2.9
2010 I to 2012 II	1.9	2.6
2009 IV to 2012 II	2.0	3.0
2009 III to 2012 II	1.9	2.9
2009 II to 2012 II	1.8	2.8
2009 I to 2012 II	1.6	2.6

For the period from 1947-2005, the “old school” GPA for America is 2.5. Obama never reaches that level. Brian Gongol has a graphic showing this.

The “new school” GPA for the same period is 3.25. That matches the average for all matriculated students in all graded classes at my school in 2004-5. In short, it’s what’s normal for today’s student given the grade inflation of the last few decades.

Obama beats that only if your reference set is exceptionally selective, and includes only the last 3 quarters. No more, no less.

I don’t know about hope, but we did get change.

Technorati Tags: obama,letter,grade,gpa,real,gdp,growth,rate

Why Is Macro So Hard: Students May Be Biased About the Data

Why would students be biased about macroeconomic data?

Students are probably biased about the data because it really is worse for them in their local area of knowledge.

When a college student learns about something like the unemployment rate, their reference set is probably their family’s household. But, there are 3 reasons why that family is likely to be worse off than the typical American household.

• he families of students often include younger people who are more likely to be unemployed because they have less stable employment histories, fewer skills, less interest in actively participating in the labor force, and perhaps even unrealistic expectations of their own worth.
• If a student has a sibling that’s unemployed, it’s likely that they may have moved back home.
• If you’re unemployed yourself, it’s likely that you may have gone back to school.

I’ve actually calculated the unemployment rate for the families of students in my principles classes, and it is often several points higher than the local average.

And why might this make a macroeconomics class harder? Well … it can’t be easy to take a class in which you are taught something that is not representative of your personal experience.

How It Was Supposed to Go

The Obama forecast with stimulus, the Obama forecast without stimulus, and the actual performance:

I’d like my stimulus funds back please.

Via Cold Spring Shops via James Pethothoukis.

What You Can Learn In Economics Class

The August 17, 2012 Doonesbury:

In this class last year, during the first week, a student who had read something on this blog outside of class came to class the next day and asked what one of the words I used meant.

I gave him some good advice. Open Google, and type the keyword define and the word you don’t know, and it will give you definitions. He didn’t know this, and he was an A student. Now you know it. Here’s what I got when I looked it up in Google.

N.B.: Fungible has been a word on the move the last 2 decades. When I first heard it perhaps 25 years ago, it wasn’t in even in the first dictionary I looked at. Now, it’s such a useful word for an interesting property that there is a Wikipedia page for fungibility. Even though the word “fungibility” is not in Microsoft’s default dictionary for Windows Live Writer (which I use to write these posts).

BTW: If you find dictionary definitions to dry to be useful, you should try Wordnik, where people can post examples of the actual usage for words. It has a page for both fungible and for fungibility.

FWIW: I don’t use dictionaries any more. I packed up all the ones in the house and office about 2 years ago. They’re in storage, but I haven’t gotten them out once.

A Sign of the Times

Math is a skill not a talent.

You get better at it by having self-respect and not making excuses, and by having others not accept your BS.

National governments are not that different from school kids. Don’t believe it when someone says they aren’t.

Chops to Scott Adams for this August 17, 2012 Dilbert.

Why the World Seems Like One Big Currency Crisis

It’s all about incentives:

In 1902, European nations responded to a Venezuelan government debt default with military force. German, Italian and British gunboats blockaded ports, seized customs houses and bombarded a Venezuelan fort. Venezuela caved, agreeing to restructure and pay its debts.

These days, when European leaders see Greece and Ireland on the brink of default, they don't send gunboats--they send money.

And that behavior encourages …

I hate to sound unenlightened, and it certainly isn’t nuanced in the 21st century way, but if defaulting countries could be invaded, and have their government officials put in jail where they can’t spend their Swiss banked money, a lot of this would go away.

Schoolshops Not Sweatshops

In Bangladesh, villages that have had textile factories – you know… sweatshops – have had higher percentages of girls in school for over 30 years.

Get the message folks: people who are against sweatshops are prejudiced against girls.

Read “One More Reason Wal-Mart Deserves the Nobel Peace Prize.

How Low Can NPR Go?

Last night at 5, NPR announced that the unemployment rate rose from 8.22 to 8.25%. Note that this went out over the airwaves; their print site does not document this.

I have never heard of such a thing.

I am starting my 24th year as a professional macroeconomist. Before that I was tuned into macroeconomic issues for at least 10 years.

And not once, ever, have I heard a mainstream news organization carry the unemployment rate to the hundredths position. Never!

Of course, I have heard academic macroeconomists carry out the unemployment rate that far. We have the data, and running the calculation is easy. In fact, that’s the source of the number: Alan Krueger, the White House economist.

But, does being able to do something mean that you should do it? Academics tend to know better than to make claims at this level of fineness.

So why now? My guess is because the “rounded” values would be 8.2% and 8.3%, which sounds like a much bigger change, and might decrease Obama’s reelection chances.

Even so, 8.2% and 8.3% are the official unemployment rates. Officially, this number is not carried to the hundredths.

To even get the number to the hundredths spot, you need to dig a bit, and get the actual number of unemployed, and the number in the labor force, and do the division yourself.

Of course, the BLS is not full of stupid Republicans. Instead, they don’t do this for a reason. After the seasonal adjustment process used before those numbers are released, the hundredth digit is not considered accurate enough to announce.

There’s a more practical reason as well. You and I can’t feel a 0.1% change, much less a 0.03% change. I’ve told macroeconomics students for a decade or two that our tolerance for what we can feel is about 0.5% up or down.

To me, as a pretty decent economist, that suggests that we shouldn’t even be worried about the change that did take place. But the Obama administration has to worry about it, because they don’t have any better news to crow about.

Federal Budget Infographic

Here’s a tremendous infographic from The New York Times. It shows the 2011 (and 2010) federal budgets.

The entire set of budget outlays is laid out in blocks. The cabinet level spending amounts are in big rectangles, and the subdivisions of those are the smaller rectangles on the inside.

What I don’t like about this graph is the emphasis. To me, the primary factor is which spending accounts can actually be cut. It is secondary whether programs have gotten bigger or smaller; what good is it to know that something has gotten bigger when you can’t cut it if you want to.

So, for me, the primary thing to look at is found by clicking on the “Hide Mandatory Spending” button. Click that, and most of the chart goes white. This shows that most of the budget is actually untouchable. Click it again, and it all comes back.

Personally, I don’t like the default coloring. It shows which programs are growing (greener) and which are getting smaller (pinker or even marooner). When you click on the button to show the 2010 budget, the shading goes away. Click back on the 2011 budget button, and the shading does accentuate the blocks that have changed. Cool, but this is of secondary importance.

Self-Selection Bias, Residual Puritanism, and Macroeconomic Policies

A perceptive principles of macro student (DN) wondered why so much policy discussion has so little to do with what’s in texts:

It doesn't have a lot to do with macro … People say we should give up things we like in order to live better, or do things in a harder way, but they mean for other people, or people in general, not necessarily themselves.

This is very common. It is a combination of two things: self-selection bias, and what I call "residual puritanism".

Self-selection is the idea that we select which groups we want to join. Self-selection bias is that we tend to see the groups that we join as a moral improvement over the ones we didn't join. Many people interpret membership in the right group as a sufficient reason to claim the moral high ground: the "right" choice is what's important, not the actions you take. Once you make this distinction, it's easy to require a higher level of moral action on the part of people who "failed the first test" by not making the same choice that you did.

Residual puritanism is related to the idea that America's self-image sees us as primarily descendants of the Pilgrims who settled New England, rather than any of the other colonies (English or not). The Puritan movement that birthed those colonies was composed of people who thought the medieval Catholic Church — which featured fun stuff like Inquisitions and the burning of heretics — wasn't eschatologically serious enough. In short ... all the really crazy types emigrated from England to eastern New England, and from there to inland New England and upstate New York. Two parts that this group retained from Catholicism are the middle-eastern belief that asceticism will make you more worthy, and the Benedictine idea that labor is inherently virtuous (which many people extend to viewing toil as inherently virtuous). For people who have been raised in an environment where this is part of family and societal values, it is an easy step to see something bad happen, and to lay blame on someone who hasn't given up enough stuff, or who has too much free time on their hands.

This actually has a huge amount to do with macro, but it isn't politically correct to talk about in class.

Democrats and liberals tend to think "the rich" ought to live more ascetically so that the rest of us can live better. But this tends to apply to people who get rich only through certain avenues — like business — rather than more noble pursuits ... like, say, being a Hollywood star. So, if you're in the right group, the moral problem of being rich is not quite so serious (this is how Bernie Madoff got away with so much ... he was viewed as a "good" person who didn't require monitoring). This is not that much different than the late medieval idea that the newly wealthy craftsmen and merchants simply could not be part of the pre-existing nobility. Today, only some of the rich get a pass from the Democrats.

On the other hand, Republicans and conservatives tend to think that the "less fortunate" get that way by succumbing to vices. If they only gave up more of the things they actually enjoy, they'd have a better life. But again, those things that people are supposed to give up don't include certain things that conservatives self-select for — like riding motorcycles without helmets. And ... since we're talking about morals here ... this is why Republicans and conservatives tend to be caught more often intentionally hiding their vices from others. Contemporary Republicans tend to self-select into groups with 1) tight moral codes, but 2) not necessarily a huge amount of help for people who succumb to life's moral hazards.

When you put this together, you get Democrats being in favor of taxation as a form of punishment, and government spending as a reward for good behavior, while you get Republicans opposing spending that encourages vices and/or the taxation that supports them. Neither of those visions is coming from macroeconomics, but they both end up leading to macroeconomic effects through policy choices.

Technorati Tags: self-selection,bias,residual,puritanism,democrat,republican

Math Atheism

The number of business majors who are math agnostics and atheists never ceases to stun me:

When it comes to macroeconomic policy choices, math atheism is a dangerous thing.

For example, the whole idea that we are running short of “resources” falls apart if you write out the math of growth and compare it to the data about growth. The math says that growth will drop to zero within 2-3 generations if it depends on resources. But the data says we are now 10-15 generations into growth in developed countries. Avoiding the math makes it easy for some people to cling to a Malthusian worldview that fits their personal biases better than it fits the data.

Via applied mathemagics.

Chinese Exceptionalism and American Defeatism

National GDP in developed countries is largely a function of population. GDP per capita is similar across developed countries, so the largest developed economies are those with the biggest populations.

If China develops, it will be the biggest economy in the world. If India develops too, China will fall to # 2.

China is developing, so it’s very likely that it will overtake the U.S. economy in size because it’s population is 4 times larger. This will happen in the next few decades.

But, we have a lot of nonsense floating around the legacy media that this is going to happen in the next few years, or may have happened already. Don’t believe it.

There are a number of problems with this sort of analysis.

• Can Chinese growth numbers be believed?
• How much of Chinese growth is wasteful?
• Will China hit the same roadblock in middle-income that other countries have faced.
• Is China’s growth just from more efficient use of capital, so that growth can’t be sustained once it is all used efficiently?
• How sensitive are these predictions to the way in which we adjust for international price differences?

Lastly, a lot of people worry about economic size because of military concerns: bigger economies win wars, and a bigger China might beat America in a war. Here, it’s instructive to study the economics of World War I. In that case, Germany (and its allies) came close to defeating the smaller economies of the U.K., France, Russia, Italy. But, part of the problem with Germany was that it wasn’t as developed top-to-bottom as the British economy was. And, the large subsistence portions of the German economy, which added up to quite a it in the GDP calculations, were not as readily mobilized for war.

China’s Data Problems

China’s real GDP growth has been a hot topic for the last 20 years.

Take China seriously: they are going to be the biggest economy in the world in your lifetime, and probably will fall to second place by the time you retire.

Having said that, it’s macroeconomically prudent to not take their growth numbers very seriously, and to push that forecast of being #1 off a few decades.

Most developed economies are relatively open. Measuring GDP in them is difficult, but fairly accurate. This is not the case in more secretive or disorganized economies. China is both.

Historical perspective is useful here. The Soviet Union claimed high growth rates as well. These were taken at face value by both Soviet leaders and western analysts: the top selling textbook in economics through the 20th century (Samuelson’s) repeatedly predicted the Soviet Union would overtake the U.S. in GDP. This was a mistake. When the Soviet Union collapsed it became apparent that the size of their economy was perhaps one fifth of what they claimed.

Unlike the Soviets, the Chinese have a pattern of learning from the mistakes of others, and they are aware that they have a data measurement problem. Here’s the guy who is likely to be leading China until 2022:

The figures that go into China’s gross domestic product are “man-made” and “for reference only,” warned Chinese politician Li Keqiang back in 2007. The comments by the then-regional party head, who is expected to become premier next spring, were revealed in a diplomatic cable published by WikiLeaks in late 2010.

Here’s an example of a discrepancy:

Growth in electricity consumption has slowed much faster than growth in official GDP (dropping to about 4 percent growth in June, according to Chinese media) when usually they move more in tandem.

The fibbing is a systemic problem:

One legacy of the planned economy is that bureaucrats are given targets by the central government for everything from steel production to harvests and local GDP. These same officials traditionally have been promoted on their success in making their numbers. “We have a saying in China: The cadres produce the data, and data produces the cadres,” says Jin Yongjin, a professor of statistics at Renmin University.

What other data could we look to for clues:

Investment banks have searched for the indicator that will predict an economic turning point. Standard Chartered looked at sales of earth-moving equipment before deciding it was a lagging rather than a leading indicator. Bank loans, as well as electricity consumption and rail cargo volume, all cited by Li Keqiang as more reliable than GDP, are still a good proxy for economic activity, says Green. UBS Securities has informally surveyed local developers to get a handle on real estate trends. Perhaps the most ambitious effort is the recently launched China Beige Book, a quarterly survey of some 2,000 bankers and company executives, modeled on the U.S. Federal Reserve’s Beige Book. It measures growth in eight key industries across China’s major regions, says Leland Miller, president of CBB International, which publishes the book.

But, we still have the problem of all secretive societies:

China still tends to treat its data gathering as a national secret, says Anne Stevenson-Yang, co-founder of Beijing-based equities analysis firm J Capital Research. She cites the government’s refusal to release the weighting of goods tracked to compile its consumer price inflation index. “Why would you ever lift the hood and show people how you do it? That only reduces your ability to change numbers if you need to,” she says

Read the whole article, entitled “China Seeks Better Data” in the July 16-22, 2012 print edition of Bloomberg Businessweek.

Spain’s Failed Infrastructure “Investments”

Like China, Spain took the Keynesian policy prescription to heart over the last couple of decades: increase government spending, but follow Keynes by making expenditures on items that are autonomous of income.

In China, this has taken the form of building cities whether there is anyone to live in them or not.

In Spain, it was grandiose public works. Here’s Alex Tabarrok of Marginal Revolution with a review of some of these.

I tend to agree with this comment that Alex makes towards the end:

My view is that rather than causing a crisis, bad investments are mostly masked by a boom and revealed by a crisis. Still, “infrastructure spending” doesn’t always create jobs …

In this sense, I view government boondoggles as similar to corporate fraud: no one notices it during the boom periods, but it becomes very obvious when cash flows get tighter around recessions.

The message here is not that Keynes was wrong.* There’s nothing wrong with expenditures that are autonomous of income to boost the economy. But, we’re now at the stage where politicians are confusing “spending that is unrelated to income because no one would be dumb enough to spend their income on that” with “spending that is unrelated to income because it’s necessary and we should find some way to do it”. The latter was Keynes vision.

* Remember that my takeaway for all students is not that Keynes was wrong, but that he was right about a much smaller portion of the economy than anyone imagined.

Where the Unemployed Are

This is not a rate or a percentage, so that patterns you see tell you more about where total population is, rather than where unemployment is bad. Nonetheless, it’s pretty cool:

Via I Love Charts.

Understanding Where Bureaucrats Go Wrong

I don’t think bureaucrats and politicians are bad or dumb people.

But, I do think that many people misinterpret where bureaucrats and politicians go wrong.

This video is illustrating a point made by Adam Smith, but it’s also the central point that Robert Lucas made in pioneering the new-classical revolution in macroeconomics in the 1970’s (for which he won the 1995 Nobel Prize).

Smith called figures like the robot in this video “man of system”. Too many of our bureaucrats and politicians behave the same way: if all of us pieces on their gameboard would just stop moving, all their plans would work.*

* I saw an interesting example of this several years ago, that I wish I had on video. We had two big three year-old hound dogs, and we got a terrier puppy. The big dogs got along well with the puppy. But when he would get too rambunctious, the big hound dogs were kind of at a loss as to what to do: they wanted the piece on their board to stop moving when they wanted it to. How does an adult dog deal with this (when biting will get them in trouble)? It tries to sit on the puppy to make it stay still. Really. Now, think about bureaucrats and politicians. In many cases, is their behavior when the pieces on the board won’t sit still to enact rules and legislation to keep them from moving so much? This is what immigration law is about. And think about the bipartisan push of the last few decades to encourage home ownership: a scheme with the side effect of reducing movement.

Tsunamis, Growth, Stocks and Flows, and the Broken Window Fallacy

Just a great piece by Ryan Young in The American Spectator entitled “A Tsunami of Bad Economics”:

Japan was hit by a tsunami last year on March 11. …  What’s the upside to this natural disaster? I’ll be blunt. There isn’t one. But some economists think there is.

To come to such an inhumane conclusion is to forget the economic discipline’s most fundamental lessons. … As it turns out, Japan’s GDP is growing twice as fast as America’s. 

This is a simple mistake to make if the Keynesian model is the basis for your thinking about macroeconomics: higher employment is always good.

But, this goes back to Bastiat’s broken window fallacy: you shouldn’t conclude that breaking a window is a good thing because it creates work when it is fixed.

The reason people get to this point is that they are only thinking about flow variables (current work) not stock variables (past work embodied in current capital). Accountants are very careful about this: that’s why they use balance sheets and income statements. Public policymakers … not so much.

Think about it: we run our macroeconomies based on GDP. This is a flow variable. Where’s the stock variable? We simply don’t think about it much in macroeconomics. Mostly we do this because national wealth is difficult to measure. That’s a reason for being careful, not a reason for ignoring stock variables.

Imagine for a minute that the tsunami never happened. Japan’s GDP growth would probably be slower; Krugman is almost certainly correct on that. And yet, a tsunami-less Japan would be better off. …

As far as the economy goes, all that reconstruction spending would instead go to creating brand new wealth, as opposed to merely replacing what people already had to begin with. It is better to build than to rebuild.

This sort of mistake simply doesn’t happen if you’re using a growth model as the basis for your thinking. In that model, 1) a reduction in capital (from, say, a tsunami) clearly makes you worse off because it leads to lower output and per capita income, and 2) it also will lead to a higher growth rate because it takes you further away from the steady state. But, there isn’t any way you’d view that as a good thing because # 1 clearly causes # 2 in the growth model.

Via Cafe Hayek.

Tim Worstall Nails the Problem with Keynesian Macro

Tim:

… It’s the politics of Keynesianism that clearly does not work. Doesn’t in fact matter whether it actually works as economics, the incentives to politicians mean that it never will work in practice. [emphasis added]

I’ve been making bits and pieces of this point for 20 years.*

Today, I have lots of students who come in to class with a predisposition to believing that there is no truth at all to the Keynesian paradigm. I think the work of new classical economists over the last 40 years has established that while the Keynesian prescription is not particularly powerful, it’s effects in practice are not zero. But probably not large enough to seriously worry about either.

So, Keynes and Keynesians are, at a minimum, at least a little bit right about the economics.

Now it’s important to put a tiny digression right here: macroeconomists of the last generation have also established the primacy of the “low tech” of culture and social institutions for explaining the lion’s share of individual well-being.

Back to Keynesian macro, and how politicians actually practice it:

Let us, for a moment, accept the basic Keynesian premise, that we should run great big stonking deficits to provide fiscal stimulus in the middle of a recession/depression.

That also means that we should run great big stonking budget surpluses in the middle to end periods of the largest and longest economic booms in advanced country history.

They don’t quite have to be symmetrical …

But there does have to be … some connection between the general size of them.

Now, look around you, we’ve got countries that are, or have been, running deficits of 5, 10, 15% of GDP …

OK, hands up, who can imagine anyone running a 2 or even 3% budget surplus consistently for some years, let alone 5 or 10%?

And that’s the rub: politicians everywhere claim that we are permanently in a position where they can ignore half the theory that’s a little bit correct, and all of the theory that explains the rest.

* Anyone who thinks I’m coming at this from a non-Keynesian perspective ought to go and read my dissertation. It’s pretty pure Keynesianism that I outgrew. Unfortunately, given the revival of stimulus spending, it’s actually started to get cited in the literature again. Pity those poor fools don’t actually call the author; he might tell them the flaws.

Repeat After Me

Every time you hear someone in the legacy media mention that some piece of economic or financial data has hit a new record, run it through this mental filter before taking it seriously:

Via applied mathemagics.

Saying something is a new world record will catch your attention, but it doesn’t necessarily make something important.

Technorati Tags: new,world,record,legacy,media

Germans Call It a Bailout, We Call It Missouri

It’s hard in America to understand how screwed up the European Union is.

Part of the reason is that we’re way more of a union than they are.

Derek Thompson at The Atlantic produced this graphic:

This is a bit difficult to understand, so let me walk you through it.

• The first row of numbers is the share of the economy for states. The last entry on the right is 5 big states combined together.
• The bars in the chart are the ratio of federal outlays paid out to a state divided by federal revenues that come in from a state. So, Missouri gets a lot more than it pays for.
• The bottom row of numbers does the same thing for Europe. Portugal and Greece are “states” that are about the same relative size as Missouri and Tennessee.

The U.S. makes places like Missouri work by supporting them. Essentially this is welfare for states.

Thompson’s position, is that if bigger European economies did this for Greece and others, the problems might go away.

I don’t think that follows, but it is a useful idea to carry forward.

Via I Love Charts.

Hayek On Exhaustible Resources

The ultimate resource is human ingenuity:*

The "fixed" character of minerals has been a siren song to economists who saw less when there was really more. The mineral economist should never forget that what resources come from the ground ultimately depend on the resources in the mind.

Hayek via Bradley via David Henderson of EconLog.

* This is why Paul Romer made the point that 40,000 years ago we were painting (cave walls) with iron oxides, while today we are painting (hard drives) with iron oxides. The capital in the raw material is the same, but technology has augmented the productivity we get out of it.

Is Education About Learning or Signaling?

What is the point of education, college or otherwise?

This is related to a discussion we had back in March. At the time I tabled it pending coverage of some growth theory.

We hear a lot that education, as a cultural phenomenon, is important for growth. The macroeconomic evidence on this is actually fairly weak. There is a positive effect, but it isn’t big.

And, of course, you’ve all heard people complain about the weak K-12 educational system in America, and how this will lead to the sky falling, cats living with dogs, and so on.

Macroeconomists are not sure what to make of this. Broadly, the relative unimportance of education in growth accounting is similar to what happens with other variables we think are important: growth seems to be inelastic with respect to most of them.

This relates back to the underlying problem that we really don’t know what people do or should get out of school.

Is it learning new stuff? In favor of this position is the observation that people who know more tend to make more money, and regions where average education is higher tend to have higher earnings. Against this is the common observation of cramming, and the well-known fact that most of us forget what we “learn” shortly after the class ends.

Alternatively, some view education as mostly about signaling. Taking classes signals to employers that you may be more productive than your peers. Actually finishing classes (and degrees) sends an even stronger signal. In favor of this view is the observation that income tends to be more highly correlated with completing degrees rather than what you actually majored in. You have a lot of experiences with this in a business school: accounting majors have better job opportunities, but don’t end up getting paid more on average. Against this common observation is that if it’s all about signaling, why does anyone learn anything at all? Couldn’t we just signal our conformity and ability to finish tasks by, say, doing volunteer work?

The signaling view is really difficult to reconcile with the folktale we tell each other that more education is always a good thing.

But, here’s a thought for you. If learning is so important, why are incomes higher for people who take classes, get grades, and forget everything later on than for people who never took the classes at all?

It gets worse! Market outcomes suggest that it is worse to take a class and fail than to never take the class at all. How can that be so if education is about learning?

These arguments make it hard to visualize where education falls in a growth model, and how we should measure it. If we can’t figure out what it is, we probably can’t measure it, and if we can’t measure it we won’t be able to figure out if it’s important. In practice, what we do now is include variables like average years of schooling into our growth accounting. Obviously, that’s missing a lot.

It’s not even easy to see where education would fit in the growth model if we could measure it.

If education is about learning, then it is probably a form of capital. Certainly what we know seems to depreciate like capital does.

But, if education is about signaling our ability to conform, follow directions, and finish tasks, then it is more like a technology. So, society improves when it accumulates a bigger stock of people who get things done.

One thing we do know is that the plausible size of exponents in a simple production function, like the Cobb-Douglas, suggest that technology is a lot more important to well-being than capital is.

But, that’s probably personally discomfiting: the typical contribution of an individual to the well-being of us all is then to be less like an individual and more like an automoton that finishes what it starts.

I bet you didn’t think that this is the sort of thing you’d end up having to think about when you started this macroeconomics class.

If you want to learn more about this, and follow the debates, you should read the stuff that Bryan Caplan writes at EconLog. Here’s a bunch to start out with for your summer reading.

Increasing Income Inequality, the Great Moderation, and the Great Recession

You all know what the “Great Recession” is.

The “Great Moderation” is what people were calling the 25 years right before that … basically right until the recession started. The reason is that we’d had 3 strong expansions and 2 moderate recessions in the 1983 to 2007 period. Really, this was a period to rival any other in our macroeconomic history.

But, there the inequality problem. It’s an axiom of Democratic political belief that inequality has gotten worse over that period. This is true, but as shown in earlier posts, it’s true of all developed countries … including many that did not share America’s generally conservative policies in that period. And the progressive position has been that this is a problem that we need to do something about. That’s more of a political than an economic position, so I’ll just set it out there and leave it alone.

The problem here is that casual observation of life in America should suggest that the lives of the poor have gotten a lot better over the last generation. Think about it: most of you students are officially poor. And yet you have snowboards. And cars. And air conditioning. And x-boxes. I think I’ve made my point: there’s an inconsistency between what people say about the lifestyles of the poor and the reality on the ground.

Economically, a lot of research has been done on this, and the leaders in this field are Piketty and Saez. They are featured in a front page article in The New York Times on April 17 entitled “French Duo See (Well) Past Tax Rise for the Richest.”

“The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of wonder. “People say that reducing inequality is radical. I think that tolerating the level of inequality the United States tolerates is radical.”

As much as Mr. Piketty’s and Mr. Saez’s work has informed the national debate over earnings and fairness, their proposed corrective remains far outside the bounds of polite political conversation: much, much higher top marginal tax rates on the rich, up to 50 percent, or 70 percent or even 90 percent, from the current top rate of 35 percent.

Trust me on this … go to an HSS professor and ask them to name some current economics researchers, and Piketty and Saez will be the first ones off their lips.

… Mr. Obama’s election, brought the issue back to the fore. Peter R. Orszag, the former Obama budget director, has said the Piketty-Saez work “helped to point the way for the administration in its pledge to rebalance the tax code.”

The problem, for me as a macroeconomist, is that Piketty and Saez’s work is pretty good stuff. I can take some shots at it, but I have trouble denying that there’s not a kernel of truth in there.

The problem for the broader profession, including people who specialize in this stuff, is how do they get their numbers (which seem to be done correctly) when the evidence you obtain by just looking around seems to contradict it.

Now, there’s new and improved research. What Piketty and Saez did was create new and comprehensive data sets to establish their point. Now, Richard Burkhauser from Cornell has created a new data set that encompasses the Piketty and Saez data set. This is good because he should be able to match their results, and perhaps add new ones.

This he does.

It turns out that Piketty and Saez’s results depend on 4 features of the unit whose income they are measuring. First, they are measuring units that pay taxes: basically, households. Second, they are measuring income pre-tax. Third, they are measuring income pre-transfers. Fourth, they are not counting in-kind payments of health insurance.

Burkhauser’s data allows them to group data by those 4 measures. Or not.

And the not case is interesting. It turns out that all 4 of those measures serve to make inequality appear to be worse.

First, tax units. Households have gotten smaller over the last 40 years. A large part of this is the number of adults who live on their own: singles, divorced people, widows and widowers, and college students. Smaller households tend to have less income because they have less people in them. Is that inequality? I don’t think so; my gosh, I think it’s nice that so many people can live on their own rather than having to pool their resources.

Secondly, our tax system is progressive. To the extent that people live in smaller households, the taxes paid by those households go down faster than their income does … leaving more to spend.

Third, transfer payments work in much the same way. These are based on households, and it is possible to split a household that would not be on welfare into two households that would both qualify.

Fourth, obviously, the costs of healthcare have gone up. Most people receive this as a payment in-kind: you get it as part of your job, but you don’t actually see the cash in your paycheck. Again, bigger health costs (and benefits) means … raises your boss can’t afford to give you in cash.

So, what does Burkhauser conclude?

First, that his data supports Piketty and Saez, provided that he matches Piketty and Saez’s assumptions that we should look at pre-tax, pre-transfer, healthcare excluded incomes of tax units. For this data, there has been a 3% increase in income over the last 30 years. That’s stagnation.

Second, once Burkhauser accounts, with the same data, that people are choosing to live in smaller households (and can actually pull this off), that they live in a system with progressive taxes, an ample social safety net, and healthcare primarily provided as a benefit, that incomes are up 36% over the last 30 years. Note that this is not a huge increase. But, it isn’t stagnation. And, it is most directly comparable to per capita real GDP growth (of 1.5% per year, on average) than to aggregate real GDP growth (of 3.5% per year, on average).

The bottom line is that there’s new, strong, evidence that the Republican position that life has been improving for just about everyone over the last generation is not contradicted by the data.

Labor Camps In Hungary?

In class about a month ago, we talked about the idea of requiring national service, or service in exchange for welfare payments. Both policies are commonly mentioned as possibilities in the U.S.

I mentioned briefly that I thought this violated the

• 13th Amendment’s ban on involuntary servitude (because you might be required to do work against your will), and
• 14th Amendment’s ban on unequal treatment (because you might be singled out to do work when others were not).

But, other countries aren’t bound by our laws.

So I also raised the point that local governments are currently doing just this in Hungary: forcing Roma (aka gypsies) to do work assigned by the government, coercively, and often in remote camps:

For the long-term unemployed – a disproportionate number of whom are Roma – this means taking part in the government's new public work programme. According to Jeno Setét, a Roma activist, between 70% and 80% of Hungary's Roma population do not work (the rate for the whole population is around 10%). This scheme aims to get 300,000 people into work by 2014 via a sort of community service scheme for which participants are paid less than the national monthly minimum wage (around 80,000 HUF – £214 – for unskilled workers) but slightly more than they would receive in benefits.

Anyone unemployed for 90 days is offered a place on the programme, which administers projects cleaning streets or sewers, cutting down trees or building football stadiums or dams. Refusal to accept a placement will result in all social security benefits being stopped to the refusenik and family. Gyöngyöspata was chosen last year to run a pilot scheme. Unemployed locals – almost exclusively Roma – were deployed to cut down trees in a nearby wood.

For Setét, the public work scheme is a "smokescreen" that will do little to help Roma get "real" jobs and will reinforce their position at the bottom of Hungarian society. "If people on the scheme were paid properly and trained properly, I'd be all for it," he added. "But they are not. Right now it's a way of humiliating people and paying them a slave wage."

The most controversial aspect of the programme is the introduction of what Roma activists call "labour camps". If there is no suitable project near enough for someone to commute to, they will be offered "accommodation" near or on site, said Kovács. "They are not labour camps," he said. But to the Hungarian Roma, many of whose relatives perished the last time they were sent off to "labour camps", during the Nazi era, the merest whiff of anything similar is spine-chilling, said Gábor Sárközi from the Roma Press Centre: "People are absolutely terrified at the prospect."

You may read more about this in a piece entitled “Poor, abused and second-class: the Roma living in fear in Hungarian village” that appeared in the January 27 issue of the English newspaper The Guardian. This article also links to video of Hungarian paramilitaries wearing Nazi themed outfits.

Why Are Governments of Developing Countries So Hung Up On Oil?

This is a million dollar question that every one should have to answer — because most of the answers floating around out there aren’t very good.

The first wrong answer is that developed economies are oil dependent. This is, at best, partially true. Developed countries use a lot of different energy sources, of which oil is just one. Further, developed country’s economies have also gotten less energy dependent with the passage of time: technology and services just don’t consume that much energy. And then there’s price: as economics majors you should all recognize that if we pay less for gas than we do for bottled water or Starbucks, that it just isn’t that scarce.

The second wrong answer is that oil reserves have made a lot of countries wealthy. Not so. Yes, there are places like Saudi Arabia and Kuwait. But, there are also one like Iraq and Venezuela where oil drilling has been going on for 75-100 years … without too much to show for it. The list of OPEC countries has some names you’ve probably never heard of — like Gabon — and places you wouldn’t normally think of as rich: like Nigeria and Ecuador. At the other end are places like the U.S., the U.K., Norway, and Canada, who are all rich and developed … but not from oil.

Once again, the reason has to do with explaining per capita income differences with capital, high tech, and low tech.

The exponents that the data suggests for the Cobb-Douglas indicate that technology is a lot more important than capital.

And … oil reserves are clearly not technology or labor, so they must be a form of capital.

High tech easily flows across borders, so it explains richness, but doesn’t do a good job explaining variation in richness.

Low tech does not easily flow across borders, and since technology is a bigger component than capital, this ends up being a big determinant of international differences in per capita incomes.

The thing is .. growth in low tech is hard for governments to pull off. Especially if your government is corrupt or authoritarian.

Which leaves capital growth as the way to get improvements in well-being. And what better way to grow your capital stock than to find it under the ground just waiting to be drilled.

So there you have it: the obsession with national oil reserves reflects a substitution away from low tech because the government lacks vision and capability. Many social scientists assert that it is resource exploitation that leads to government corruption. I’d turn that around: corrupt governments choose resource exploitation because it’s the only card they have to play.

One More Tidbit About Argentina and Brazil

Argentina is trying to steal an oil company.

Brazil is threatening one with stiff penalties.

But, even the Brazilians think the Argentinean government is nuts:

“Argentina’s capacity to err seems unlimited,” said Míriam Leitão, one of Brazil’s most influential columnists on economic issues …

…

… “Crazy queen” was how one prominent Brazilian humor columnist described Mrs. Kirchner this week.

In a different tone, Chile’s economy minister, Pablo Longueira, said the nationalization could be harmful for Latin America as a whole, turning it into a “less trustworthy region” compared with Asia. “Capital flows exit to those places where there is more investor confidence,” he told Reuters.

Drawn from an article entitled “In Brazil and Elsewhere, Dismay at Argentina’s Nationalization Move” in the Apirl 16 issue of The New York Times.

South Sudan

The newest country on the globe is South Sudan: it’s been independent for about 10 months.

South Sudan isn’t terribly interesting in and of itself. But it is relevant to class for two reasons: 1) the fixation on oil in developing countries, and 2) this video that I posted last year which is relevant to class discussions of “low tech”.

First, historical some background to help you out as you think about macroeconomics in the future.

Most developing countries do not have logical borders. These borders were set on colonies about a century ago by bureaucrats in European capitals who’d never been to those places or who cared about the facts on the ground. So, South Sudan was carved out of Sudan, which had became independent of the U.K. in 1956, but which had no earlier history as a viable country.

To get this independence, South Sudan fought two civil wars: a failed on from 1955 to 1972, and a successful one that started in 1983.

The reasons for the civil war are geographic, political, demographic, and religious.

The geographic reason is that northern Africa is dominated by the Sahara desert, which ends about 2/3 of the way down Africa’s “top”. Below that is a narrow band of dry grasslands running across the continent called the Sahel. Below that, you start to get into very green, tropical Africa. The Sahel runs across the top of South Sudan, separating the green, tropical, South Sudan, from the arid Sudan.

The political reasons involve the Ottoman Empire. This is the Turkish empire, based in Istanbul (then Constantinople) that dominated the Moslem middle east from the 15th to the early 20th century. The Ottoman Empire didn’t have strong central control. Local, often hereditary governors, called pashas held most of the power. As the Ottoman Empire’s central control weakened, first France, and then the U.K. started to take shots at it: first in Egypt in the 1790’s, then in Greece, later across North Africa. The barbary pirates that America fought in the first decade of the 19th century (famous for the line from the Marine’s Hymn about the “shores of Tripoli”) were breakaway pashas from the Ottoman Empire. At this time, the U.K. and France were the big colonial powers trying to gobble up as much of Africa as they could. The U.K. effectively got Egypt, although there were still Ottomans nominally in charge, and they wanted to claim the entire valley of the Nile River as a British colony. The problem is that no one had ever sailed up the Nile, which is not only long, but has a series of waterfalls (called cataracts on the Nile). In the 1890’s there was a race between the U.K. and France to get to a remote Ottoman army post called Fashoda (now known as Kodok), on the Nile in what is now South Sudan. Whoever got there first would claim east central Africa as their own. The French went up the Congo River from the South Atlantic, portaged into the upper reaches of the Nile Basin, the floated downstream, and made it there first with a small expedition. But, the British built steam gunboats that they could portage around the waterfalls, and showed up with a small fleet a few months later and took over (what could the French do when it would take a year just to call for reinforcements?).* From that claim, the British created their colony of Sudan. What’s important is that what became the country of Sudan was based on geographic and political realities, not demographics.

The demographic problem is that the northern part of Sudan, dominated by the Sahara, has been the land of sparsely populated, richer, “brown” Arab Moslems herders for a thousand years. But, the southern part is dominated by more populous, “black” Africans farmers (basketball players Manute Bol and Luol Deng are from this region). Given the difficulty of communication northwards up the Nile, and the distances involved, the people identify more with neighboring countries to the South — like Kenya, Rwanda, Burundi, and Congo.

Those people in the South also converted readily to Christianity in the 20th century.

But, in 1956, the U.K. set Sudan free with unrealistic borders, and Arab Moslems in charge of more populous, poorer, and remote “black” Christian Africans. As you can imagine, hilarity did not ensue. But, with some western support, the blacks started to win the civil war. A lot of the reason for the current problems in Darfur (in northwestern Sudan) that are so popular with celebrities like George Clooney is that Sudan has created a generation of violent thugs without a lot of central control, and needs something to do with them after South Sudan started winning the civil war about 10 years ago.

It looks like this region is going to heat up again, now that substantial oil reserves have been found in the border region between the two countries. And this war got a lot hotter just today.

Anyway, the refugees in the linked video clip are from South Sudan.

* If you want to read a good history book about this, I highly recommend The Race to Fashoda: European Colonialism and African Resistance in the Scramble for Africa.

The Pace of Technological Improvement

About a month ago you students brought up The Shawshank Redemption, and I brought up an old Looney Tunes cartoon. Neither is required.

The context was the rate of technological change.

I got Shawshank from Netflix and watched it over the weekend. It’s very good, but I don’t know why it’s on so many peoples’ list of their favorite films.

Anyway, it’s relevant here because I remarked that there’s some evidence that the rate of technological change was fastest from 1880 to 1920. The movie features a convict who is paroled after being in prison from 1905 to 1954. He can’t handle the pace of life on the outside and commits suicide.

This is related to the topic we covered last week: that the level of technology is a positive for well-being, but that the growth rate of technology creates problems because it has to be “fed” with more capital.

The Looney Tunes short I mentioned is from 1944 and is entitled “Old Grey Hare”. What interested me about it is that it shows Elmer Fudd falling asleep only to awake in 2000 (other than that, it is clearly not one of Looney Tunes best offerings):

There isn’t too much new high technology shown. It’s interesting that they were familiar enough with television in 1944 to make a joke about it (consumer sets didn’t become common until the late 1940s). I also liked the vision of the city of 1960: it looks a bit like Vegas. And when Elmer wakes up, his rifle has turned into a “Buck Rodgers Lightning Quick Rabbit Killer”.

But, I also found this interesting for this week’s discussion of “low tech”. The vision of 2000 produced in 1944 includes a high tech innovation (the ray gun), but completely misses the possibility of low tech innovation: that rabbit hunting is no longer popular, broadly accepted, or even practiced much.

More On Chevron and Brazil

Brazil doubled the amount it is seeking in fines from Chevron since I last posted on this. They are now looking at $22B.

Refinery margin is the name given to the incremental profit a firm makes between getting the oil out of the ground and selling it to a refinery. It runs about $10/barrel.

So, Brazil is looking for the entire profits on just over 2 billion barrels of oil. Brazil currently produces 2 million barrels a day, so what they are looking for is all the profit from 1,000 day of production. Those numbers are for the country as a whole: to the extent that Chevron in only one player in Brazil, the fine on Chevron will be considerably more than the thousand-day equivalent.

Another way of looking at this is that the projected fine is 4 years of net profit from all of Chevron’s operations.

So … Chevron is clearly guilty of a spill … but what is macroeconomically relevant here is whether or not the scale of this fine amounts to expropriation — just of future profits rather than current assets (as in Argentina or Sakhalin).

More Continental Shelf Drilling Deals

Here’s an example of an offshore drilling deal, much like the one that has gotten Chevron in trouble with Brazil, and Argentina rattling sabers at the U.K.

The risks of fines or expropriation are big enough to still make this sort of deal worthwhile. Shell invested a huge amount in developing fields near Sakhalin that were expropriated by Russia (technically, Shell gave up its ownership of fields in Sakhalin just before they were ready to produce, in exchange for rights to a different undeveloped oil field).

Marginal Product of Labor

The Solow growth model shows us that per capita output depends on per capita capital and aggregate technology.

This means that people can get richer just by moving where the technology is.

The fact that high tech seems to move quickly across borders but low tech does not means that much of the reason for emmigrating has to do with better access to low tech.

So, what should we make of this piece entitled “For Many Immigrants Children, American Dream Lies Abroad”, from the April 16 issue of The New York Times. It’s about how children of immigrants are moving back to the old country. Why?

Their decisions to leave have, in many cases, troubled their immigrant parents. Yet most said they had been pushed by the dismal hiring climate in the United States or pulled by prospects abroad.

“Markets are opening; people are coming up with ideas every day; there’s so much opportunity to mold and create,” said Mr. Kapadia, now a researcher at Gateway House, a new foreign-policy research organization in Mumbai. “People here are running much faster than the people in Washington.”

…

“These are the fleet-footed; they’re the ones who in a sense will follow opportunity,” said Demetrios G. Papademetriou, president of the Migration Policy Institute, a nonprofit group in Washington that studies population movements.

A Conservative Opinion On China

Bret Stephens is one of the most provocative columnists for The Wall Street Journal. Like me, he also sees more than meets the eye:

But a simple murder mystery implicating a senior provincial official should not be enough to shake the foundations of a state as accustomed to violence as China. It should not set rumors flying of a palace coup. It should not prompt urgent warnings from outgoing premier Wen Jiabao of the threat of another Cultural Revolution. It should not lead to an "anti-corruption" campaign that has all the trappings of a factional struggle.

Above all, it should not provoke a highly public re-education campaign within the People's Liberation Army to instruct the ranks on Mr. Bo's "wrong thinking" and secure their fealty to the Communist Party, thereby calling attention to just how attenuated that fealty may have become of late.

Yet Mr. Bo's abrupt downfall caused all of this, and then some. Why?

Perhaps this is all related to institutions and what I’ve called in class: “low tech”:

But even then the scandal wouldn't resonate among Chinese if it were an isolated case. In reality it's the norm.

…

All this suggests that the Chinese aren't politically quiescent. They're furious. And their leaders—otherwise busy jockeying and horse-trading for position in the next government—need to figure out how they can allay that fury without also whetting it.

In the case of Mr. Bo and his wife, the regime will probably manage it: Show trials are, after all, a Communist specialty. …

But patterns of authoritarian behavior—particularly nepotism, corruption and rent-seeking—are hard to put down in the absence of the accountability mechanisms China so notably lacks: a vigorous free media, periodic elections, economic competition, a bias toward transparency, the rule of law. Instead, the only mechanism the regime has is the purge. It may work in the short-term …

Meantime, China's economy is slowing as income inequality grows—historically an explosive combination. … Wealthy Chinese are leaving the country in growing numbers, a de facto vote of no-confidence in an economy whose prospects are supposedly limitless.

Read the whole thing, entitled “The China Myth Unravels” in the April 17 issue of The Wall Street Journal.

The Latest On China

N.B. I updated the post on the Chinese political crisis with some graphics that might help you keep track of the names and political alliances.

It turns out that Bo Xilai, the purged Communist governor of Chongqing was … a Keynesian.

It seems he spent a lot of government money on big projects:

The moves signal a challenge to an opaque state-guided economic model—reliant on heavy injections of finance, showcase infrastructure projects and huge social-housing developments—that Mr. Bo was championing in the southwestern city.

Sounds like Obama, eh?

The popularity of Mr. Bo's programs had raised the prospect such policies could gain traction nationwide, which could have clouded prospects for what economists say are needed reforms in China.

These reforms were covered in the earlier post on the China 2030 report put out by the World Bank. My post on the crisis explored how the designated incoming leader Xi is politically related to the now-disgraced Bo:

… Perhaps the most pressing task for leader-designate Xi Jinping is rebalancing the country's economy away from debt-fueled state investment, as exemplified in Chongqing, toward private consumption.

That will involve raising households' incomes and helping small and midsize businesses, which would mean directing funds away from the type of state-owned enterprises that Mr. Bo favored. Critics of Mr. Bo say that under his watch, private entrepreneurs—the real drivers of a consumer economy—were forced to pay for some of the excesses of government-directed spending, in some cases through outright expropriation.

Funny how what is probably a new word to most of your, expropriation, can come up twice in one week. Hmmm. Isn’t that also part of the constitutionality problem with Obamacare: whether some of your income can be expropriated by the government to fund national healthcare?

And then this sounds like the way America privately financed many of its mortgages and then shifted the risk to Fannie Mae (and implicitly, taxpayers):

The Chongqing finance bureau is also looking into developments funded upfront by banks or other investors, then sold to the government upon completion …

Please keep in mind that I’m not stating categorically that any of this is a problem. What I am stating is that there are disturbing similarities.

But, the test of whether or not those are important is the behavior of prices out in the market. For Chongqing, the message from the markets sounds like the same one that the PIIGS are getting in Europe:

Think about how bad this really is: Chongqing, which has some ability to expropriate funds to make its interest payments, is not thought as likely to make repayments as private firms that don’t have that ability.

Whatever faults you find with former President Clinton, he was known to complain that bond markets limited his ability to pursue projects that he wanted, but based on his advice from Treasury Secretary Robert Rubin, he deferred to bond markets when rising interest rates showed him that investors were unhappy. And … it isn’t even a contest for who produced the best results between Clinton, W, and Obama.

Read the whole thing entitled “Chinese Investigate Spending in Scandal ” in the April 19 issue of The Wall Street Journal.

The Latest on Argentina

Argentina has decided to nationalize and/or partially expropriate the national oil company.

Argentina is the macroeconomists best example of how not to choose appropriate macroeconomic policies.

Argentina used to be a top 10 country in terms of per capita real GDP (our best proxy for well-being).

But, for 90 years, they’ve had generally bad leaders and bad policies.

After experimenting with freer markets in the late 80’s and 90’s, Argentina’s political system collapsed early last decade. First, the defaulted on their international debt. Then power was taken over by a provincial governor, Nestor Kirchner. He groomed his wife to succeed him (given this inheritance, you may call them King Nestor and Queen Christina if you like … more people probably should).

As part of those reforms from a generation ago, the state oil company was privatized. Until last week, the majority owner was a Spanish firm, Respol.

The government of Argentina took over executive control of the company earlier this week.

They are claiming they will pay a fair price for those shares. If they do, this is called a nationalization. This is akin to eminent domain.

The government doesn’t have much money to do this. So, if they pay nothing for the firm’s shares, this is called an expropriation. This is akin to theft.

This move is no doubt part of the same strategy of claiming the Falkland Islands for their oil resources.

Both moves buy time for an autocratic government that is not making life better for its citizens.

Read about it in the article entitled “Argentina to Seize Control of Nation’s Biggest Oil Firm” in the April 17 issue of The Wall Street Journal, and “Argentina’s Oil Raid Can Only End Badly” in the April 18 issue of The Financial Times.

I Told You So (and Yes, a Lot of Other People Told You So Too)

The Euro rescue plan … is already running out of money.

The good news is that this took months instead of weeks or days.

The bad news is that this was so easily predictable.

In theory, lending the local banks money they could in turn lend to the government at a profit buys time for the governments to enact overhauls that can lure back foreign investors.

That is essential: Both the Spanish and Italian economies run deficits with the rest of the world; their businesses and citizens don't generate enough surpluses on their own to finance the government.

But enticing foreigners has proved hard. Spain has relaxed its fiscal targets amid worries about the effect of austerity on its economy, and the International Monetary Fund projected Tuesday that Italy wouldn't meet its 2012 deficit target.

This isn’t hard. In a nutshell, here’s what the plan was:

… Banks' borrowing from the ECB in order to lend to their governments …

Umm … where did the European Central Bank (ECB) get the money? From governments.

This is childish.

Here’s what happens in my household: I control most of the earning power, my wife controls most of the spending. Typical, right? So, if I say the family needs to cut back because short on money, my kids volunteer to do extra chores (for which my wife would pay them), and then offer to contribute it to me to pay for, say, a vacation.

Obviously, this sounds like a good plan to a kid, but the flaws to an adult are fairly easy to spot.

But, this is exactly what Europe is doing: the government of, say, Spain is me, the ECB is my wife, and the private banks are my kids. The analogy seems to be lost on politicians.

You might add the detail that Germany is a rich relative. Then the analogy is that the rich relative refuses to loan any more money to me because I’m irresponsible, so they loan to my wife instead.

And then they wonder why their problems don’t go away. Solving this sort of problem isn’t rocket science; failing to address it in this particular way is … fraud.

Read the whole thing, entitled “Europe’s Rescue Plan Falters” in the April 18 issue of The Wall Street Journal.

China

UPDATED around 12:45 on Monday.

Do you like movies or books about political intrigue?

It’s going on right now, live, big time, in China.

This is going almost uncovered in the American legacy media. Remember the point from my Why Is Macroeconomics So Hard? lecture that journalists are availability entrepreneurs? They want to make the most about developing the stories that are available. And hard news out of China is just not that available. So, this has been in the front section of the big national newspapers the last week or so, but it was spotty before then. A lot of information is leaking from microbloggers* inside China.

Is this relevant to our macroeconomics class? Who knows. So this is mostly optional: expect for 1 softball question on the exam on this topic to keep you honest.

But, might it be relevant to macro in the future, and this class next year? I’ll have to post this now, and wait and see.

The reason to watch this is that the desire for political liberalization doesn’t strike most populations until the per capita income gets high enough: in the $5-10K range. It is no mistake that the Arab Spring started in Tunisia last year: the non-oil-producing Arab country with the highest per capita income: economists had actually been watching places like Tunisia and Morocco, rather than places like Egypt or Syria — the revolution might end in Syria but it wouldn’t start there.

And, China is just below that threshold where economic well-being starts to translate into political unrest. Economists have been watching China too: this is why I posted about the World Bank’s China 2030 report in February.

So, what’s going on? Well, there’s a lot of background, so here goes.

Formal Political Background

China is not run by a dictator, it’s more of a junta: a small collection of men who collude politically. Microeconomics teaches us that collusive arrangements are not stable.

Junta’s usually break down around the time that power has to be transferred from one person or sub-group, to another. This is why it is important for successors to be clearly designated, and given a big enough power base to defend themselves.

In China, the Communist Party still runs everything, but the party is run by a group of 9 men called the Central Politburo Standing Committee of the Communist Party of China (aka, Standing Committee). A handsome group, eh:

The Politburo is the traditional Soviet name for the guys at the top, and this is 25 men in China. The top 9 are on the standing committee. These are selected by vote, but the only people that get to vote are those at the top of the party — the 371 people on the Central Committee (and most of the voting is by bloc, and is a done deal). Based on that vote, the members are ranked. Most of the people who move up to the top group of 9 were in the second group of 25 beforehand.

The two most powerful of those are Hu Jintao (the President and # 1) and Wen Jiabao (the Premier and # 3).

The former is the big picture guy, and the latter is the day-to-day operations guy. Basically, a Chairman of the Board, and a CEO. Chinese names are expressed with last name first, so hereafter I’ll refer to these guys as Hu and Wen.

The Standing Committee has a mandatory retirement age of 67. Positions are renewed periodically after deaths, purges, and voluntary early retirement.

The term of a particular Standing Committee is 10 years. So, every tenth year they get together and push the old guys out the door, and get some new blood in.

There’s been exactly one peaceful transfer of power this way; the last one in 2002.

And there’s one coming up this fall. So, 7 guys, including the two at the top, are going away soon.

The successors are already nominally in place: current Vice-President Xi (ranked 6th) who will become President and one of the four Vice-Premiers, named Li (ranked 7th) who will become Premier. Maybe.

But, these two guys need to make sure that they get 7 new guys that will support them.

Informal Political Background

There are no independent political parties in China. But, there are factions, and figuring out the factions can give some insight. The problem is that there are two definitions of factions out there.

The first factional definition focuses on power base. The two factions are the “Crown Prince Faction” and the “Communist Youth League Faction”.

The Crown Prince Faction (aka The Princelings) is composed of the children of the old guys who were in power in the 1980s. In turn, those old guys were often generals or top party officials under Mao going back to the 1920s. They fought in the Civil War, World War II, the Revolution, and the Korean War. This faction has used their power base to get filthy rich.

The Communist Youth League Faction is composed of people who joined the party as teenagers, and worked their way up.

The old guys, Hu and Wen, are both from the Communist Youth League Faction. Li is also from the Communist Youth League Faction.

But, Xi is from the Crown Prince Faction.

The Crown Prince Faction is composed of about 250 people, many of whom are on the Central Committee (of 371)

The other way to break down the politics is to focus on the political choices they make: populist or elitist. Again, there are two breakdowns, but they line themselves up a bit differently.

The “Populist Coalition” looks to make overall life better across China, and wants to reduce social unrest. It dominates the interior provinces. This coalition is about 25% of the Central Committee.

The “Elitist Coalition” is based in the richer provinces on the coast. It is focused on exports and making money.

The old guys, Hu and Wen are both populists. So is Li.

But, Xi is an elitist.

Because of these decade long regimes in power, each group is called a generation. The outgoing guys are 4th generation and are populist. The 3rd generation guys were all elitist. The new guys, Xi and Li, are 5th generation. They have split: Xi is part of the Elitist Coalition and the Crown Prince Faction, while Li is part of the Populist Coalition and the Communist Youth League Faction. They may not get along, and Li doesn’t have Hu and Wen to back him up anymore:

The guys in this generation have been jockeying for position for decades and the finish line is in sight. If they screw up now, it may have all been a waste.

On top of all this, there are also regional cliques based around major cities, like Shanghai, or amongst alumni of the same school, as in the Tsinghua University clique.

Regional Background

So, what’s happened?

More details …

Chongqing is one of the largest and poorest cities in China. It was part of Sichuan province: big, poor, and interior. Chongqing is big enough that it was made independent of Sichuan.

Think: Houston and Texas, but Houston got made into its own state.

Chongqing has a lot of corruption. This is where work for the Three Gorges Dam (one of the largest construction projects in world history, and a huge environmental disaster) was based.

A couple of years ago, one of the group of 25, Bo, was put in charge of Chongqing and told to clean it up.

Bo is part of the Crown Prince Faction but is a fencesitter between the Elitist and Populist Coalitions. If you’re cynical, you’d probably think he is populist because it is politically helpful to him, rather than out of any personal affinity to that position.

His methods were brutal even by Chinese standards: mass arrests, torture, and execution.

The dirty work was done by Wang Lijun, Bo’s police chief. But, it’s worked, so Bo was popular. Bo was expected to move up to the top group of 9 this fall.

He is too old to eventually be at the top of the heap, but closer to the top of the pyramid is always better, right?

Bo’s successes have been a big plus for the Crown Prince Faction.

Bo is married to Gu, a lawyer and minor celebrity in China.

She is also from the Crown Prince Faction. Both families are fabulously wealthy … from connections.

And they had a British expatriate named Heywood in their entourage who has been helping them out for about 20 years. He was married to a Chinese woman and had lived in China for most of the last 25 years.

Heywood helped Bo and Gu get their kid into a prestigious English boarding school, and eventually graduate school at Harvard.

Gu also apparently holds a residency card for the UK (a real no-no if you’re part of corrupt operation, because it “gives you an out” that others don’t have). The son, Bo Guagua has not lived permanently in China in 10-15 years (but dated John Huntsman’s daughter when he was in Beijing).

The Blow-Up

Now the gory details.

Two months ago, Bo’s police chief Wang, fled to Chengdu — the capital of Sichuan.

He showed up at the American Consulate and asked for asylum to get away.

This is like fleeing from Houston to Austin, and asking the Canadian Consulate to save your butt.

Wang was chased by 70 police cars, and there was a Mexican standoff outside the American Consulate between the Chongqing police loyal to Bo, the local Sichuan/Chengdu police, and national authorities loyal to the Standing Committee.

Wang spilled all the beans, but was denied asylum because he’s a thug — and how would they get him out of there anyway?

So, the Americans pushed Wang out the door, where he was picked up by the national authorities. He’s disappeared —

out of sight for two months now. He’s undergoing “vacation-style† medical treatment”.

Wang alleged that Gu was nuts, she may have had an affair with Heywood, she put too much pressure on Heywood, he screwed up, and Bo had him poisoned.

Heywood had been found dead in a hotel room in Chongqing last fall, and was cremated without an autopsy. He had warned friends that he was in big trouble, and may have secreted sensitive documents outside China. This did not become news until Wang fled to Chengdu.

No one knows why Wang cracked and fled. But, you’ve got to think that if you’re a nationally known police officer getting chased by guys who are supposed to report to you that he must have feared for his life.

The handwriting was on the wall in February: Bo was in big trouble.

Then last month there were rumors that a coup was suppressed in Beijing. It now appears this may have been true, and put on by supporters of Bo (Princelings?). Other reports suggest that Bo called in his Army friends for his own protection, but was not staging a coup.

Bo has now been removed from power. Bo and Gu have been arrested and charged with murder.

They have not been seen for days.

It looks like the Standing Committee has united and decided that these folks have to be pushed overboard. But, how does that work when Bo has connections?

Oh … and there have been nationwide internet outages sporadically. You don’t think this has to do with information control, do you? Certainly those coup rumors were squashed. Either way, the telecom companies have stated publicly that the outages are not with their equipment.

The bottom line of all of this is that it’s a bit like an auto race when parts start to fly off cars: you know something bigger might happen soon. This may turn out to be nothing. Or maybe not. Stay tuned. Here’s The Financial Times view from just this morning. And don’t forget about what I said: as an economist, you need to watch China as prosperity pushes liberalization.

P.S. The son, Bo Guagua, holed himself up in his $3K/month condo in Boston.

Last Thursday, after reporting that he was under surveillance by unknown Chinese nationals, he was removed by uniformed security to a helicopter. It is believed he may have defected.

* I learned something interesting about China this past month. Microblogging (like Twitter) is a much bigger deal there because the 140 character limit allows for much greater information content when you are choosing from 5K Chinese idiograms than from our 26 letters.

† The comedian George Carlin frequently picked on the usage of euphemisms to cover true meanings. One of the points he made that when you hear the word “style” appended to something, it usually means that the something is actually absent. I’m channeling Carlin here a bit, and he used to swear a lot, so what he would have said is that “vacation-style” means no f***ing vacation.