Update on the Scary News

The Economist have been on top of this for about a month.

... But the central bank exaggerates the reserves at its disposal. About $170 billion of its assets sit in two giant wealth funds, the Reserve Fund and the National Wealth Fund (NWF) ...

Cash from the $82 billion NWF is committed to long-term infrastructure projects, says Sergei Guriev of Sciences-Po, a French university. The NWF has also provided money to VEB, the Russian development bank, to finance construction at the Sochi Olympics.

The loans by which it did so have been "restructured" to allow delayed repayment. Mr Guriev says many people believe the money to have been embezzled. The NWF may thus be unable to offer any liquidity to the government.

In terms of money that could actually be put to use, Russia's reserves could be more than $100 billion lower than the headline figures suggest. Mikhail Zadornov, a former finance minister, said in a recent interview with Dozhd, a television channel, that the usable amount could be as low as $200 billion. 

That was published 26 days ago.

We are in the realm of "who the f**k knows" here. But if Russia has been bleeding a few billion in reserves every day for a month, and half the money was already misappropriated ... then we're looking at the likely collapse of the Russian economy before the new year.

The Scariest Tidbit from the Ongoing Russian Currency Crisis

This came through on The Guardian's live blog of the ongoing Russian currency crisis about 7 hours ago:

Timothy Ash, an analyst at Standard Bank, is astonished by the news that the Russian finance ministry will deploy around $7bn of ‘spare’ currency reserves to prop up the rouble (as explained earlier)

Ash says the intervention is “unbelievable stuff”:

“Why, if the central bank has $413bn in reserves, is the ministry of finance being called on to put its hand in its pocket for some small change — they are like checking the back of the sofas at this stage”.

Let me read between the lines for you. Those "spare" reserves are coming from the finance ministry, instead of the Bank of Russia where announced reserves are supposedly held, because those reserves aren't actually there.

The official position of the Bank of Russia is that they had $418B of reserves on November 30. I think it's reasonable to assume that even with the crisis, that Russia has probably used up tens of billions of dollars of reserves over the last 3 weeks, but not hundreds.

So why do they need seven?

I think it's because they're lying.

Currency traders are used to countries lying about their reserves. And what they do when that happens is "attack" that currency. Basically, they try to get out of it as quickly and as "big-ly" as they can. This is what currency crises are all about: investors running for the exits.

So where'd all the money go? They don't call governments like Russia's kleptocracies for nothing.

Bureaucratic Moral Preening During a Crisis

Beware. When bureaucrats start taking moral positions about economic situations they don't approve of ... it's time to start running away faster.

My experience is that this is usually a sign that the bureaucrats 1) are worried about getting fired because things aren't going right, and 2) feel that their policy tools are not up to the task.

This tidbit was reported by on The Guardian's live blog of the ongoing Russian currency crisis on the morning of December 17th.

The Kremlin has been blaming yesterday’s currency turmoil on recklessness and manipulation; one adviser said the “bacchanalia” in the foreign exchange markets must end.

What's a bacchanalia? In ancient Rome this was a festival celebrating the god Bacchus. Bacchus was the god of wine.* A bacchanalia was basically an excuse to get drunk and licentious.

There's no tried and true rule on this, but it's been my experience with studying macroeconomic policy (for going on 35 years now) that this is a bad sign.

* Mind that you don't get all preachy about wine either. Before chlorination of water was introduced about a century ago, anyone who didn't drink wine or beer, or live in a specific geographic context ... ended up dead from fecal pollution.†

† As to the specific geographic context, there are zero historical cases where teetotalling was successful for more than a decade or two without 1) water flowing (downhill) at a high rate of speed, and 2) an absence of non-circulating water in ponds, lakes, or protected bays — basically deserts, mountains, or exposed and stormy coastlines.

This Year’s Crisis

Usually I wait until the advanced macro class starts in January before posting about this year’s macroeconomic hot spot.

But Russia seems to have jumped the gun by a few weeks. The best way to follow this sort of thing is to find a legacy media outlet that is running a live blog of the crisis. Typically, the European newspapers are a good source: here’s the link to The Guardian’s live blog.

The market signals about the Russian economy have been bad since mid-summer: about the time Russia got more serious about supporting separatist rebels in eastern Ukraine … who also happened to shoot down a passenger jet at an altitude that can only be hit with actual Russian military hardware.

So I posted about interest rates on Russian bonds about 60 hours ago.

But the news all day has been the dramatic decline in the value of the ruble today. This sort of thing happens when people and firms who have rubles decide they need to get that wealth into another currency … and find out no one wants the rubles at the current market price.

The Russian central bank tried to combat that by raising interest rates. This is bait to get international investors to choose to buy rubles so as to earn that rate in Russian banks.

As of right now, it seems like they have enticed enough new investors to offset the other people abandoning the currency.

But, at what price? Here in the U.S., we talk about movements of interest rate targets of a quarter or half point, perhaps several times a year. In Russia, they raised the interest rate by over 7% today. So that’s gigantic.

Russia is sitting on a huge amount of foreign reserves. What exactly does that mean? Basically, it’s a big pile of foreign currency that the government has collected through international trade. Russia has about $400B. That is used to keep the value of the ruble from depreciating: if investors are dumping their rubles at low prices on foreign exchange markets, then the Russian government can buy it with the foreign exchange they already own to keep its value up. The problem with this is that doing so makes the big pile smaller. Eventually it may dwindle to nothing, and that’s when the crisis will get far worse. Here’s the chart from Vox:

This number is important, but it’s only measured monthly. There’s so much traffic on the website of the Bank of Russia (looking for better data) that I wasn’t even able to connect.

Backtrack a little though, to where I said “dwindle to nothing”. It doesn’t actually work like that. Instead, the total may start accelerating towards nothing. What happens then is that the government will start to get the message that it’s going to lose it all … and will stop using those reserves. What then? That’s when the real crisis hits, because that policy choice is basically one to screw your own citizens so that you can keep the big pile of cash. That never ends well.

Something to Worry About: Russia

Yes, there are geopolitical reasons to worry about Russia’s behavior.

Yes, obviously, Russia’s economy is heavily dependent on oil production, and it’s possible we’re in for a sustained price drop.

N.B. I’m not sure about that at all, but I keep hearing that when it comes to horizontal drilling (aka fracking) that the simple textbook explanation that the shutdown price is the same as the “open up” price fails badly. Fixed costs are so high in horizontal drilling that the divergence is something like $40/barrel. If this is the case, then the production from horizontal drilling in the U.S., that is pushing down global crude oil prices, is likely to be sustained, since those U.S. producers won’t be the first to shut down.

After all that, here’s the thing. Macroeconomically, what we look at in assessing the stability of a government’s current fiscal situation is the rate at which it can borrow money. Since bond prices are inversely related to rates, when investors accept lower prices to get rid of the bonds they don’t want … interest rates rise. Here are interest rates on 10 year Russian government bonds:

And why have interest rates been generally rising since early in 2013? What happened then?

Ah … that we the financial crisis in Cyprus … when it was revealed that one source of instability in Cyprus was that Russian kleptocrats were depositing huge sums of presumably ill-gotten gains in the poorly structured Cypriot banking system. And most of the “haircut” at the end of that crisis fell on large depositors — mostly Russians.

Since then we’ve had oil pipeline problems with Ukraine, leading to another Ukrainian revolution, the Russian annexation of the Crimea, the Russian paramilitary involvement in eastern Ukraine, the shootdown of a Malaysian passenger jet, and now steeply declining world oil prices.

Keep an eye on this one.

Quantifying Economic Uncertainty

A lot of casual opinion suggests that there’s more economic uncertainty since Obama took office, and that this is influencing managers’ decisions, and may help explain macroeconomic weakness.

Well, if uncertainty is any measure, we’ve been in crisis for 6 years:

In the past, I’ve been non-committal about this issue. But now that I have found this data set, I think it provides fairly concrete evidence that D.C. has created problems for all of us.

Note that the two biggest spikes before the last 6 years are the taller one for 9/11, and the somewhat smaller one leading up to the invasion of Iraq in 2003.

And that hump in the early 1990’s? That the first Persian Gulf War, with a peak in fall 1992 … when it became apparent that the president who’d racked up the highest approval ratings in history was somehow going to lose the election.

Folks, there is no test for causality here, but I’d sure like to see someone in D.C. experiment with reducing the level of uncertainty, and then following up by an examination of productivity several years later.

Why Is Macro So Hard? Is It Important for Understanding Macroeconomics to Recognize How Sh**ty Life Used to Be?

The central fact of macroeconomics is that, without the planning of anyone, human society was able to string together more than three centuries of improved living standards.

This has happened … once. And all of our lives depend crucially on it.

And yet there are many people who are certain that the future will be worse than the past. What gives?

Virginia Postrel has an interesting idea about why people are pessimistic about the future:

The reason mid-20th-century Americans were optimistic about the future wasn’t that science-fiction writers told cool stories about space travel. Science-fiction glamour in fact worked on only a small slice of the public. (Nobody else in my kindergarten was grabbing for "You Will Go to the Moon.") People believed the future would be better than the present because they believed the present was better than the past. They constantly heard stories -- not speculative, futuristic stories but news stories, fashion stories, real-estate stories, medical stories -- that reinforced this belief. They remembered epidemics and rejoiced in vaccines and wonder drugs. They looked back on crowded urban walk-ups and appreciated neat suburban homes. They recalled ironing on sweaty summer days and celebrated air conditioning and wash-and-wear fabrics. They marveled at tiny transistor radios and dreamed of going on airplane trips. [emphasis added]

From my perspective then, macro is hard because people don’t recognize the wonder of it all.

Let me give you some personal experience about what it was like when I took my first and second macro courses in 1981-2.

• This was 6 years before I first used a personal computer. I wrote papers on a typewriter.
• Remember White Out?
• At that time the university library did not have copy machines. I was able to get things copied by taking them to my dad’s office.
• My gosh, I’d received mimeographed handouts within 5 years previous to that time.
• I was the first person in my circle of friends to have portable, personally curated, music. Here’s a picture of it that I found on The Google:
• 
• This was the size of a brick, and weighed as much as a large hardcover book. It did not have Dolby. I got it through mail order, literally from an ad in the back of a magazine. It cost around $150 (about $390 in today’s dollars) in the summer of 1981.
• Any sort of soft tip pen was new within the previous 6-8 years. Rich kids always had felt tip pens. I underlined my texts with pen, and sometimes a ruler. I didn’t get my first highlighter until 1983.
• Textbook resale or buy-back was unheard of back then.
• Our TV had 8 channels. I went to school with many people from the New York City area. This was an amazing thing to them. We were in Buffalo, and we got 3 extra channels because we could bring in the Canadian stations: 2 in Toronto and 1 in Hamilton.
• My father was the first person I knew who had a VCR (a betamax). We got this in early 1982.
• We had many televisions in our house, but only one of them was color.
• At that time, remotes like we’re used to today had to have a physical cable. Our new VCR had one, but our TV did not. You could get remotes for TVs, but they required an actual motor inside the TV to physically turn the knob, and the remote was very big and had large C or D cell batteries to send the signal to it.
• The first front wheel drive cars had just become available. Again, we were the first people to have one. That car sucked.
• Four wheel drive was not something that anyone had who didn’t have a farm, or do serious camping. AWD did not exist.
• My cousin (a sales rep) had air conditioning in his company car. So did some richer people I knew (but not all of them).
• My parents didn’t get a microwave until I bought them one as a gift in the late 1980’s.
• The first thing I bought with my first full time summer job: a turntable. (I still have it. Apparently it’s one of the ones that audiophiles like to get their hands on. I got it out a few years ago to show my kids).
• I had a reel-to-reel tape deck for better quality recording of my musical adventures.

If you’d like to live with any of those … keep telling yourself that the future is going to be worse than the past.

The Fibs Progressive Tell

Oops. The U.S. (arguably) already has the most progressive tax system amongst the rich, developed, countries.

What’s shown below is the share of taxes paid by the richest 10%, their share of income, and the ratio of the two. A ratio higher than one indicates that the richest 10% pay a higher share of taxes than their share of income (which is the desired outcome of any progressive tax system).

I lifted this table shamelessly from this piece:

Table 4.5. Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s
	B. Percentage share of richest decile
	1. Share of taxes of richest decile	2. Share of market income of richest decile	3. Ratio of shares for richest decile (1/2)
Australia	36.8	28.6	1.29
Austria	28.5	26.1	1.10
Belgium	25.4	27.1	0.94
Canada	35.8	29.3	1.22
Czech Republic	34.3	29.4	1.17
Denmark	26.2	25.7	1.02
Finland	32.3	26.9	1.20
France	28.0	25.5	1.10
Germany	31.2	29.2	1.07
Iceland	21.6	24.0	0.90
Ireland	39.1	30.9	1.26
Italy	42.2	35.8	1.18
Japan	28.5	28.1	1.01
Korea	27.4	23.4	1.17
Luxembourg	30.3	26.4	1.15
Netherlands	35.2	27.5	1.28
New Zealand	35.9	30.3	1.19
Norway	27.4	28.9	0.95
Poland	28.3	33.9	0.84
Slovak Republic	32.0	28.0	1.14
Sweden	26.7	26.6	1.00
Switzerland	20.9	23.5	0.89
United Kingdom	38.6	32.3	1.20
United States	45.1	33.5	1.35
OECD-24	31.6	28.4	1.11
Source: Computations based on OECD income distribution questionnaire.

Oops. It seems that the rich in the U.S. already pay more than the rich everywhere else. Pity. I’m not sure what many people would talk about it if they actually knew this.

Read the whole thing.

Via Carpe Diem.

One Reason Why Household Income Is Falling

Median household income is falling. Progressives paint this as a chronic problem with our economic system, and an acute problem associated with the Great Recession.

Then what about this:

There’s certainly a position that could be taken that what we have is one or both earners in two-income houses being pushed out of work.

But I don’t think that’s a very strong position. Instead, look at the ends of the expansions.

The Bush II expansion (2002-7) was a pretty strong one, and two earner households showed no growth during its later stages. There was even a slight decline in no earner households from 2003 to 2007. But one earner households went through the roof. This sounds like a lifestyle choice.

The effect is there too in Clinton’s share of his expansion (1993-1999). Two earner households hold steady (at best), and no earner households decline. Again, the one earner households rise.

Then there’s the Reagan expansion (1983 to 1989). Again, no earner households hold steady, but now two earner households climb steadily. That’s probably baby boomers getting married. It’s also the heydey of yuppies. I’d bet that when the blush wore off, a lot of those couples got divorced, and some of them didn’t remarry.

The absence of any business cycle pattern in one earner households is indicative of an economic symptom without an economic cause. Arguably, it doesn’t require an economic solution either.

Via Carpe Diem.

How Stupid Is Obama?

I have to be rather bald about this. Obama’s response to recent questions about the Keystone XL pipeline make me wonder whether he’s stupid, or whether he’s just pandering to people who are stupid.

FYI: The Keystone XL pipeline is an oil pipeline proposed to run across the plains, primarily for the purpose of bringing oil production from northern Alberta (that’s ramped up over the last 10 years) to refineries and ports along the American Gulf Coast that have been there for decades.

Here goes:

Understand what this project is: It is providing the ability of Canada to pump their oil, send it through our land, down to the Gulf, where it will be sold everywhere else. It doesn’t have an impact on U.S. gas prices …

Where do I begin?

• Is Canada our friend or not? Do we help friends? In this case, private U.S. firms want to help Canadians, and the U.S. government is blocking that.
• Why single out oil? I know, it’s the Keystone XL pipeline that’s in question here, but I really can’t imagine him saying this about Canadian water?
• Whose oil will it be when it crosses “our land”? Is Obama also against Canadian storage tanks in Houston, or are those not necessary? My guess is that the Canadians sell their oil to the American owners of the pipeline as soon as it crosses the border. It seems to me that he’s actually against our oil, and is using the Canadians as a punching bag (see the first point).
• Why is adding “the Gulf” necessary? Would Obama be in favor of this if the pipeline went to the Pacific Ocean? My guess is that this is to attract the attention of people who are worried about oil spills in the Gulf specifically in the wake of the BP Horizon spill. If I’m right, Obama hopes that listeners suffer from availability bias. If I’m wrong, then I think Obama suffers from it. Note that my position is not in favor of spills: I’m just pointing out that they can happen anywhere but that referring to a place where they recently did happen should make you suspicious of manipulation.
• Why bring the oil to the Gulf at all. Oh yes … because the refineries are already there. Note that Obama is not suggesting the we build new refineries closer to where the oil comes out of the ground. Heck, he could even offer to build refineries for Canada to just keep the oil away. But he didn’t. Instead he rather specifically wants oil refineries along the Gulf to not have access to Canadian oil. Why?
• Why would anyone care where the outputs of the refineries, which are for the most part no longer “oil”, are sold? This almost seems like Obama wants a trade restriction on refinery exports. Then why didn’t he just say so? Oh yeah … because restricting exports is usually stupid. Do note that Obama never suggests that we’ll build the pipeline and then throw big, sharp, rocks in the harbors where the resulting products might leave from. Because that would sound stupid. Even though that produces the same outcome of reducing exports.
• And how is this not going to have an effect on U.S. gas prices? This is a President whose policies actually encourage people to import their own pharmaceuticals because they’re cheaper to put pressure on domestic pharmaceutical prices. Apparently gas doesn’t work the same way. It’s not like you can put it in containers and take it with you. Oh … wait … scratch that.

I’m sorry. All Presidents say dumb and bizarre stuff sometimes. But this is by far the most “out there” thing this President has ever said.

P.S. I need to add another point about what will happen to the oil without the pipeline. It will still get to refineries. Maybe even refineries along the Gulf. How do we want it to get there? Tanker truck driving too close behind you on the interstate? Railroad tanker cars snaking through your town? Or in the pipes just like the ones that go everywhere already. If Obama is against the Keystone XL pipeline, is he also against the pipe that carries gas (and perhaps oil) into your home?

(Nominal) Income, Cost-of-Living, and Real Income (by Profession)

Rasmussen College has a great site that allows you to input professions, and then get a ranking of all 50 states by nominal and real income.

The Bill Arrives

With great fanfare last year the EU released updated GDP figures that includes information on prostitution, illegal drug use, and other underground aspects of an economy that were not counted before.

And this year, the EU wants the UK to cough up a bigger contribution because their economy has done better than the average European one … in part because of the bigger numbers from prostitution and drugs.

The payment, described by officials as a “surcharge” follows a change to the way the EU calculates gross national income to include previous hidden service industries, including such prostitution and illegal drugs.

Tim Worstall points out that just because you can count the GDP doesn’t mean you can raise the tax revenue from those sectors.

I’d add that since you probably can’t raise the money from those sectors, this amounts to a higher tax on legal sectors because the UK tried to count the illegal sectors.

This is analogous to taking a family containing a drug abuser, and telling the straight members of the family they have to work harder because one member of the family is having extra fun.

The bureaucrats at the EU have to be have a pretty screwed up worldview not to see that. Or … they just want the cash (and will use whatever excuse is handy).

Misinformation, and the Drive for Income Equality

There’s new and provocative research out of Sweden entitled “Richer (and Holier) Than Thou? The Effect of Relative Income Improvements on Demand for Redistribution”.

… A vast majority of Swedes believe that they are poorer, relative to others, than they actually are. This is true across groups, but younger, poorer, less cognitively able and less educated individuals have perceptions that are further from reality.

To put it more bluntly, people pushing an agenda for income redistribution will have better luck if their target market is young, dumb, and ignorant.

Then the authors try a little social engineering:

… We conduct an experiment by randomly informing a subsample about their true relative income position. Respondents who learn that they are richer than they thought demand less redistribution and increase their support for the Conservative party.

Their evidence of this is based on before and after responses to survey questions, not actual voting records.

Wanna’ Work at Google? (Not Required)

From the Business Insider piece entitled “The One App You Need On Your Résumé If You Want A Job At Google" (read more: http://www.businessinsider.com/matlab-software-skills-needed-for-jobs-at-google-2014-10#ixzz3GniQv7jC).

Google's former svp/product management Jonathan Rosenberg was in London with chairman Eric Schmidt …

… Schmidt had some more down-to-earth advice. Google really needs data analytics people and folks who have studied statistics in college, he said.

Big data — how to create it, manipulate it, and put it to good use — is one of those areas in which Google is really enthusiastic about.

And then Rosenberg said something really interesting. If you want to work at Google, make sure you can use MatLab, he said.

And, who’s the only SUU professor who has experience with Matlab? Yours truly. I gave up trying to get funding to buy Matlab for SUU about 10 years ago … no one had any vision about what it would be used for.

FWIW: I wouldn’t even worry about Matlab just yet. In order to use Matlab you really need to have taken linear algebra. I wouldn’t even worry about linear algebra yet though. In order to take linear algebra, you need two semesters of calculus. And that’s not business calculus, or ECON 2500. So, there’s a plan: Calculus I, Calculus II, Linear Algebra, talk to Tufte about learning Matlab.

This Is What an Expansion Feels Like

Two graphs from the Pew Research Center:

It’s been a long time coming, because, really, that was a very nasty recession a few years back. But … people’s perception of the availability of jobs is back in line with what it was during the middle parts of the Bush expansion (say around 2004), and he unemployment rate is back where it was in the early middle of the Bush expansion (say around 2003).

Via I Love Charts.

Why Is Macro So Hard? “This Is the Worst Thing Ever. And We’re All Going to Die”

David Harsanyi hits a homer with “This Is the Worst Thing Ever. And We’re All Going to Die.” from The Federalist.

Most of this piece isn’t explicitly about macroeconomics. But it gets at the point that one of the things that makes thinking about macroeconomics and policy so hard is the breathless negativity which politicians the legacy media condition us with.

Some African Countries Bump Up Their GDP

I think you have to take this with a grain of salt, but some African countries are improving and revising their GDP numbers, and coming up with results that suggest their economies are a lot bigger than we thought.

Some of this is no doubt political.

But, do keep in mind that GDP is notoriously badly measured in poor countries. So there’s also a big “it’s about time” attitude that we should have towards better numbers.

And also, it’s a very good sign of improved economic activity that the governments of these countries can find the money to even consider doing this. Even if they’re fibbing about some of the numbers, it’s a costly undertaking that they wouldn’t do lightly.

Read the whole thing, entitled “Africa’s GDP Is Bigger Than You Think” in Bloomberg Businessweek.

Dentistry as an Economic Indicator

Bloomberg Businessweek has a piece this week entitled “The Dental Index Suggests Economic Pain Ahead”.

They provide some evidence from data on dental work and dental practices suggesting that the economy may be near its peak.

Of course, you always need to keep in mind that the problem with forecasting turning points if false positives, so this may not turn out to be anything.

How Technology Makes More Effective Labor

In growth theory, we learn that labor is the hours we put in. Capital is the depreciable tools that make those hours more productive. Technology is the non-depreciable ideas that make us act like we have more virtual hours than actual hours.

This is effective labor. One way technology does this is by allowing us to control more pieces of capital at the same time.

Consider this video about how the desktop has evolved over the last 30 years:

What Is Value? What Is Production? Do We Even Know Any More? Can We Even Know Any More?

GDP has always been flawed. It’s missing home production, and underground production, and leisure, and the flow of environmental services.

But, our hope has always been that what it’s missing is roughly in proportion to what it measures. If this is true, then GDP is still a good measure of overall value.

Except for consumer surplus. GDP has always missed consumer surplus, And this didn’t seem to matter much … until the internet started turning lots of measurable GDP into not-so-measurable consumer surplus.

Think about a music file that you obtain for something less than its retail price. The value to you is the same, but almost all of that value is now surplus instead of revenue for the music industry. This means GDP actually falls when you pirate a song.

And yet the well-being that GDP is supposed to measure actually goes up when society pirates songs. The reason is that as price falls, we move down along the demand curve. Yes, we’re reducing measurable revenue to the industry, but we’re increasing the triangle of consumer surplus in two dimensions: both the price we would pay but no longer do, and the number of people who find it in their interest to obtain and enjoy the song at the lower price.

N.B. I do recognize that there is a broken window fallacy that’s also involved with pirating music, but that’s not my concern here.

Anyway, I think I’ve got you convinced that there’s something new going on with consumer surplus. Now consider this video. This is a serious short film, and I’m sure the creators thought nothing of what it says for macroeconomics.

ASPIRATIONAL from Matthew Frost on Vimeo.

Did the two girls get something of value? Yes, I think it’s obvious they did. Does it enter into GDP? Of course not. That’s problem one.

But there’s a second bigger problem. How did they produce that value?

Hmmm. Let’s play macroeconomist. The girls combined labor, capital and technology to create value. What’s the labor? I suppose it’s the girls’ time (posing, clicking, tagging, texting, and harvesting the enjoyment that follows) and the time Kirsten Dunst is actually being photographed.* But what about the rest? The phones and the internet are capital. Now, there’s technology involved in both of those too, but it’s sort of boring for my purposes because it’s extant technology.

But what about Kirsten Dunst? Is there more to her than labor? If so, is she capital or technology? I think she’s a little bit of both, perhaps even quite a bit of both, since she’s a lot more important to producing this bit of value than anything else.

She’s definitely capital in that she’s productive, and her productivity will depreciate if not cared for. A name will help with this idea; how about “Dunstware”. I think it is fair to say that an actress like this would be very concerned about the potentially rapid depreciation of her Dunstware.

But she’s also technology: a productive, non-rivalrous idea, that can be used repeatedly without being consumed. Call this “Dunstfulness”. This picks up the idea that you’re never going to be in a photo with Kirsten Dunst unless she brings her Dunstfulness with her; photoshopping is still possible, but then it’s really a form of technological spillover in which someone can use Dunstfulness without necessarily having permission to do so.

That’s mind blowing. Could you, just a few minutes ago, have conceived of a person’s … personness … as a form of technology?†

It’s get’s better. Dunstfulness is a technology for which there are network externalities that aren’t even based on production. Consider a theorem. Yes, it has network externalities because it can be used repeatedly to create new value. Dunstfulness is better than that: she can repeatedly create value (in the girls’ friends) without be used at all.

So, Dunstfulness is a technology that should be measured with our national wealth. And, it’s capable of helping to produce something valuable that should be measured in our GDP.

Further, our GDP, which does measure all the production values that go into creating Dunstware, and is clearly not going to measure the long-term investment made in creating Dunstfulness. And yet, no doubt, a lot of people along the line involved in that no doubt envisioned their work as an investment in Dunstware or Dunstfulness.

Whoa.

* Can we even use the word “photographed” for what happens in the video?

† Yes, I had to use a website that collects suffixes to come up with these names.

What Is Value? What Is Production? Do We Even Know Any More? Can We Even Know Any More?

GDP has always been flawed. It’s missing home production, and underground production, and leisure, and the flow of environmental services.

But, our hope has always been that what it’s missing is roughly in proportion to what it measures. If this is true, then GDP is still a good measure of overall value.

Except for consumer surplus. GDP has always missed consumer surplus, And this didn’t seem to matter much … until the internet started turning lots of measurable GDP into not-so-measurable consumer surplus.

Think about a music file that you obtain for something less than its retail price. The value to you is the same, but almost all of that value is now surplus instead of revenue for the music industry. This means GDP actually falls when you pirate a song.

And yet the well-being that GDP is supposed to measure actually goes up when society pirates songs. The reason is that as price falls, we move down along the demand curve. Yes, we’re reducing measurable revenue to the industry, but we’re increasing the triangle of consumer surplus in two dimensions: both the price we would pay but no longer do, and the number of people who find it in their interest to obtain and enjoy the song at the lower price.

N.B. I do recognize that there is a broken window fallacy that’s also involved with pirating music, but that’s not my concern here.

Anyway, I think I’ve got you convinced that there’s something new going on with consumer surplus. Now consider this video. This is a serious short film, and I’m sure the creators thought nothing of what it says for macroeconomics.

ASPIRATIONAL from Matthew Frost on Vimeo.

Did the two girls get something of value? Yes, I think it’s obvious they did. Does it enter into GDP? Of course not. That’s problem one.

But there’s a second bigger problem. How did they produce that value?

Hmmm. Let’s play macroeconomist. The girls combined labor, capital and technology to create value. What’s the labor? I suppose it’s the girls’ time (posing, clicking, tagging, texting, and harvesting the enjoyment that follows) and the time Kirsten Dunst is actually being photographed.* But what about the rest? The phones and the internet are capital. Now, there’s technology involved in both of those too, but it’s sort of boring for my purposes because it’s extant technology. But what about Kirsten Dunst? Is there more to her than labor? If so, is she capital or technology? I think she’s a little bit of both. She’s definitely capital in that she’s productive, and her productivity will depreciate if not cared for. But she’s also technology: a productive, non-rivalrous idea, that can be used repeatedly without being consumed.

That’s mind blowing. Could you, just a few minutes ago, have conceived of a person’s … personness … as a form of technology?

It’s get’s better. Kirsten Dunst is a technology for which there are network externalities that aren’t even based on production. Consider a theorem. Yes, it has network externalities because it can be used repeatedly to create new value. Kirsten Dunst is better than that: she can repeatedly create value (in the girls’ friends) without be used at all.

So, “Kirsten Dunst-ness” is a technology (let’s just call it Dunstness) that should be measured with our national wealth. And, it’s capable of producing something valuable that should be measured in our GDP.

Further, our GDP, which does measure all the production values that go into creating a Kirsten Dunst, is clearly not going to measure the long-term investment made in creating Dunstness. And yet, no doubt, a lot of people along the line envisioned their work as an investment in Kirsten Dunst to create Dunstness.

Whoa.

* Can we even use the word “photographed” for what happens in the video?

Fixing Social Security

Our Social Security system is insolvent: the present value of expected future contributions is not large enough to cover the present value of expected future benefits.

This needs to be fixed, or resources from other parts of the budget will have to be permanently diverted to make social security payments.

Macroeconomically, this is a problem that is readily fixable. This interactive webpage from The Committee for Responsible Federal Budget shows the possible policy combinations, and allows you to choose a plan to fix the problem.

Unfortunately, politically these solutions do not seem possible at this juncture. Note that because of the way the comparative dynamics work, the efficacy of each of these solutions diminishes as we move into the future.

This is ridiculous. Consider the two largest items.

The biggest is indexing payments to the CPI minus 1%. Macroeconomists know that the CPI overstates price inflation, by something in the range of 1%. So, we’ve already been giving seniors a gift every month by indexing to just the CPI.

To draw an analogy, this is like having your parents pay for your gas, and every time the price per gallon goes up by a nickel, they give you a dime to cover it. Last I checked, keeping the change as a habit, and then bitching about it if your parents threaten to ask for it back is something most of outgrew a long time ago.

The second biggest is raising the retirement age immediately (to compensate for it not being raised earlier), and then indexing it to increasing life expectancy in the future. Without doing this, with every passing month we’re offering new retirees funding for a longer expected retirement with each passing month … without them having contributed extra to the system with a longer career.

An analogy for this might be giving a football team 5 downs, or a baseball hitter 4 strikes … after the game has started. Again, excepting things like the Colorado Buffaloes 1990 co-championship, this is something that most people would find unacceptable in others.

I hope I don’t offend anyone, but many people say things like the government is broke, when in fact it’s more like grandma just stole all our sh*t.

Is China Stalling?

Many countries grow well when poor. Some continue to grow through the middle-income ranges, and eventually become (fully) developed. Think South Korea. Others stall: think Brazil. The majority of countries hit that brick wall.

The problem in assessing how countries are going to do is to separate out two effects that are jumbled together: better marshaling of resources, and improved productivity.

Once you get those separated adequately, you come to the brick wall that most countries hit: once resources are marshaled efficiently, they cease to be an engine of growth.

So the key to whether or not a country eventually gets (fully) developed is its TFP (total factor productivity). This is a residual that isn’t easy to measure, but we really need to.

And in the case of China, TFP growth doesn’t look that good.

China’s 1% average annual growth in total factor productivity between 1978 and 2012 – a period when average per capita annual incomes rose from $2,000 to $8,000 — compares with 4% annual gains for Japan during its comparable 1950-1970 high-growth period, 3% for Taiwan from 1966-1990 and 2% for South Korea from 1966-1990, he said, when purchasing power in the relative economies is taken into account.

There really is no way to evaluate this other than to wait 20 years and check back on it. See you then.

Via Marginal Revolution.

The Long View on Labor Force Participation

The source here is definitely a conservative website interested in bashing Democrats.

But, they have a good graphic for one of the meme floating around about one symptom of the economy not working too well. Labor force participation is at a 36 year low, but compared to what exactly?

So, somehow we’re on the downside of a 50 year swell in labor force participation. The time frame is the key: 50 years means that this is unlikely to be caused by some sort of policy. Instead, it’s likely to be demographics.

And that’s a point I’ve made many times for students on this blog over the last few years. The baby boomers started working in 1962 (when those born first, in 1946, turned 16), were probably all working by 1994 (when the tailenders born in 1964 hit 30), and started to edge into early retirement starting around 2001 (when the initial group turned 55). And this will continue until the tailenders are 55 to 70 (2019 to 2034) before any other demographic feature is large enough to swamp their effect.

A Culture That Won’t Deliver Growth

A problem of how macroeconomics has developed over the last 30 years is that while most fields are pushing a non-judgmental view of cultures, macro has started from scratch to pile up a bunch of support for the idea that they make a lot of difference in one area: economic growth.

As an example of a culture that is not growth oriented, take this quote:

Then there are those cultural attributes that it is considered impolite to raise. "Somali men are not lazy," protests Mr. Mohamed's No. 2. "We are descendants of Abraham, and if you descend from Abraham you don't do manual labor." When the men are caught loafing, they say they are "planning" …

This quote is from a Somali, living in Kenya, who’s employed locally in the economic development bureaucracy.

Somalis are, of course, one of the poorest ethnic groups in the world.

And … lots of people claim descent from Abraham. It’s just that most of them don’t use that to justify not being productive.

This is from “Book Review: ‘The Idealist’ by Nina Monk” in the September 6, 2013 issue of The Wall Street Journal. Her book is about Jeffrey Sachs, a famous macroeconomist who turned development maven about 15 years ago — and who appears to have evolved towards the view that lack of development is caused by the stinginess of developed countries.

Why Is Macro So Hard? Brandolini’s Law

This comes to us from computer science:

Ordre Spontane has some similar quotes.

Anyway, think about a handful of macro issues:

• Trade restrictions are good.
• The minimum wage is a good way to help the poor and unskilled.
• Predatory pricing is a successful management practice.
• Americans don’t save enough.
• Government needs to subsidize firms before they can thrive.

These are all BS. And yet macroeconomists spend a lot of effort, year in year out, trying to expunge these from informed public discourse.

Via Café Hayek.

The Minimum Wage Doesn’t Really Help the People We Think It Does

Raising the minimum wage nationally has been a hot political subject for a few years now, and many jurisdictions around the country have already raised it locally.

On the pro side, 1) if we take cumulative inflation seriously, then yes it’s probably time to adjust it, and 2) the “common sense” that it reduces employment doesn’t appear to be persuasively supported by the data.

But, here’s an idea familiar to economists that the public just doesn’t talk about much: a plurality of people who earn the minimum wage already live in high income households.

You see, when the minimum wage was first instituted a few generations back, most people who worked at the wage lived in low income households. So a minimum wage certainly helped them make ends meet.

That’s a good thing. I don’t know if the effect was strong enough to counterbalance the theoretical loss of jobs, but it’s close enough that reasonable people fall on both sides.

And that’s the urban myth that continues to be most people’s argument for supporting the minimum wage today.

Except it’s an urban myth because it really isn’t true any more.

These days the typical minimum wage worker is a teenager from a high income household: one with access to job openings, transportation to jobs, and immersed in a culture of employment. This is not your typical poor person in America: without ready access to job openings, often living where transportation to jobs is spotty, and distinctly not immersed in a culture of employment.

[Calculated estimates indicate that] if we were to raise the minimum wage to $10.10 per hour nationally, 18% of the benefits of the higher wages (holding employment fixed) would go to poor families, and 29% would go to families with incomes three times the poverty level or higher.

What about minimum wages as high as $15 an hour? Applying the same calculation as above for a $15 per hour minimum, the share of benefits going to poor families would decline to 12%, and the share to families more than three times the poverty line would increase to 36%. [emphasis via a quote posted at Carpe Diem].

Let me put some perspective on that. A household with income 3 times the poverty level corresponds roughly to that of a married SUU professor, with a spouse who doesn’t work, and two kids … one with a job at McDonald’s.

This is not necessarily a reason to be against a minimum wage increase, because there is still a positive effect on the poor. But, it is an argument that if your motivation for raising the minimum wage is to help the poor, then there are probably other methods you should think about first.

You can read the original here, from David Neumark, a macroeconomist at UC-Irvine.

Putting Absolute Poverty In Perspective

One of the problems in understanding macroeconomic policy in developed countries is the distinction between absolute poverty (someone lacks something) and relative poverty (someone has less of some things than their neighbors).

And in developed countries, activists tend to prefer to talk about relative poverty … because there simply isn’t much absolute poverty.

A further concern, and one that’s a little bit deeper and thus less discussed, is what is the radius used to determine the comparison set when discussing relative poverty. Most activists want to limit that to a few miles. But if we talk about a radius of thousands of miles … there isn’t even any relative poverty in developed countries at all: it’s all in developing countries.

None of this matters though, if we focus primarily on absolute poverty. And really, even if you’re concerned about relative poverty, most would agree that it is a secondary. And, if you’re still concerned about relative poverty, then ask “relative to what?”

All of which brings me to agricultural subsidies in developed countries. You see, there’s a standard metric for the poorest of the absolute poor: those who live on $2/day or less. That covers over a billion people on the globe.

And in places like the EU, they pay cows more than that. Of course, the cows don’t get the cash themselves, to blow on smokes and forties. Instead, the farmers collect the income that (at least conceptually) is paid to the cows.

So, here’s an idea. The next time someone you know starts to grouse about poverty, suggest that we remove the agricultural supports for American farmers, and instead pay that money out to someone in absolute poverty in a developing country.

More than Corporate Arm Candy?

All the big, famous, firms have to have one these days: a chief economist.

That’s the dream of the new tech company chief economist: Become indispensable, by using your employer’s data to create something the market didn’t know it needed.

Purchasing Power

Here’s a chloropleth from the Tax Foundation showing how much $100 buys:

The data here is something like the inverse of a price index (which takes low values where prices are lower).

N.B. Normally, you might see something like this with “heat map” shading. The problem with that is that the color blind have difficulty with that choice of colors. The use of blue-to-yellow here may not seem that comfortable, but it has the virtue that even the color blind can readily see the differences.

Anyway, blues are bad: stuff is expensive there and $100 doesn’t go as far. Yellows are better: your $100 will buy more there. The biggest difference, going from Mississippi to D.C., is 37%. So at the store, you’d walk out with a third more loot.

Is Tax Complexity Discriminating Against Dumber People?

New research out of Harvard that is very disturbing (although probably not surprising).

• To control for the weirdness of the real world, they did this as a lab experiment. In these experiments, subjects enter for free and play for real money that is proportional to their performance.
• They simulated taxes. Subjects got to keep the after-tax money they earned.
• They did this with the same people in two environments: one in which taxes were simpler (had less rules to follow) and one in which they were more complex (had more rules to follow). The subjects’ outcomes would be the same across the two environments if they were able to follow all the rules.
• They found that subjects behavior was closer to optimal when the tax system was simpler. Basically, subjects left money on the table when the tax system was too complex.
• It gets worse. Then they added an identical rule to each tax system — making each setup a little more complex — and had the subjects play again. Now, put on your thinking caps: in the simpler system, the marginal increase in complexity from an identical change will plausibly be larger. What they did was actually go from 2 to 3 tax rules, and from 22 to 23 tax rules, so this seems like a plausible conclusion. What they found was that performance went down under both systems, which isn’t very surprising. What is surprising is that they found that 1) performance got “more worse” (I know that sounds kludgy) with the complex system, 2) poorer performance was concentrated in the people who performed worse before the change, and 3) the measured decision-making time of those people didn’t change much.

The authors conclude from this that they were able to isolate subjects who found the complex system to be beyond their cognitive ability, and that when confronted with a rule change that made that problem worse, these people shut down and ignored the change.

This is a strong case that a complex tax system discriminates against people on the lower end of the intelligence spectrum.

That’s a bombshell: politicians, in collusion with bureaucrats, accountants and lawyers, may have set up systems that discriminate against people who aren’t as smart as they are.

Keep this research in mind the next time someone tells you that a flat tax system is bad, or that a progressive tax system is better.

BTW: In perusing the reference list, I conclude that the strain of literature these authors are targeting is liberal rather than conservative: it falls in the Elizabeth Warren, Cass Sunstein orbit of the Democratic party.

The Future You

Macroeconomics can be mind-bending.

I turned 50 the day I wrote this post. One of the things you need to take away from an advanced macroeconomics class is some sense of how things might be different 50 years out into the future, when you’re 70 or 75, and your grandchildren or great-grandchildren are taking a class like this.

I bring up that I turned 50 to make a point. When I took my first advanced macro class (Spring 1982), we didn’t think enough about the future. Let me give you an example. At that time no one imagined that (recorded) music, not just any music but the music you wanted to hear at the moment, would be free. The thing is, it was free to the tech savvy within 17 years (I should know, I downloaded a lot of it).

Going further though, let me tell you about 1998. At that time, very few understood that (recorded) music was going to be free. I saw the handwriting on the wall around 1990, and got myself pretty tech-savvy. When I found out about downloadable MP3s in October 1998, no one I knew could believe it when I showed it to them. And yet, by late 1999 many people started using Napster. That name probably sounds ancient to you. The recorded music supply chain industry should’ve seen that coming, but they had no clue. Thus all the lawsuits of the early oughties; those too are ancient history.

Alright, enough about me. My point is that whole categories of industry and employment disappear very quickly, without anyone seeing it coming, over the course of a couple of decades. So how will employment look when you’re old? Take a look at this video:

This sounds very disheartening about anyone’s specific career choices. On the other hand, it sounds very good generally: everyone will have more stuff and more time to enjoy it.

What I worry about is the choices of policymakers. They have no clue. They think people like to work (note their unemployment rate fetish). They think people’s consumption choices are the problem (not Obamacare’s focus on limiting consumers of healthcare, rather than producers of it). I could go on.

Instead let me focus on what you need to think about. For example, how are you going to convert the leisure you consume in your driverless car into productivity that gets you more or better stuff? Or will you just lay there like a slug? Try thinking about that, while also thinking about the video’s focus on people in transportation losing their jobs. Oops. Maybe the video got a big picture, but missed the bigger picture.

Now I need to go on one step about policymakers. How are they going to react when the “old school” GDP numbers suggest things are getting worse (because of all the drivers pushed out of those jobs), when they don’t have “new school” numbers to tell them that the rest of us just got all their income transferred to us in the form of consumer surplus?

One way to think about this is that Obama may be the biggest dead wood, dinosaur, who just doesn’t get it, President we’ve ever had. Until the next one.

This may be a good time to go back and look at two older posts on this blog.

First, there’s this one from Spring 2014 on what’s wrong with America. Pay particular attention to the Thanksgiving dinner analogy in the middle. What’s wrong may very well be that we have a fetish for our jobs.

Second, there’s this one that I first discussed in Spring 2011 on what the world is going to look like if growth accelerates (not the growth the government can measure, but the stuff that you and I actually enjoy).

Back to me being 50. When I was born in 1964, people imagined many things about the future. But their view of daily life was a bit skewed. No one envisioned the amount of time spent on Facebook. How about drones? How about drones that deliver stuff from Amazon on the day you order it? How about computers that grade papers (used by me, in class, this past summer)? Did they imagine that income inequality would matter to some people even when so many things are free? Or that most of our debates about healthcare would be about how to get someone else to pay for the portion we consume?

I hope you think back on your advanced macro class at SUU in 50 years. You may have heard it here first.

An Obvious Point that Isn’t Repeated Enough

Economists talk about traded and non-traded goods. By this they mean traded across borders.

So cars are traded, and haircuts are not. Typically, goods are very easy to trade, and services are harder to trade.

Now, add a second thought: trade (at least the voluntary kind) is beneficial to both parties. In particular, for the argument I’m making, trade benefits buyers by reducing prices.

Now the third thought. Who spends a greater portion of their income on traded goods? The answer is probably the poor.

That might not be immediately obvious. But, if you think about it, there’s a lot more inequality in spending on goods and services than there is in spending on goods alone. The reason is that for many goods, your utility diminishes very quickly. For example, there’s only so many Chilean grapes you can eat. But, services on the other hand, include things like personal shoppers, concierge services, legal and accounting services, and live entertainment. As people get richer, the consumption of all of those continues to rise long after our consumption of goods plateaus.

Which brings me to a quick quote posted at Marginal Revolution. As an economist, it made immediate sense to me, but to my readers … I felt the explanation might be necessary:

…trade typically favors the poor, who concentrate spending in more traded sectors.

This is from an NBER working paper by Pablo D. Fajgelbaum and Amit K. Khandelwal.

Why Government Can’t Do Much

It’s a continuing problem with students: they either believe the government can do a lot more than it does, or they believe that it does too many things.

Neither is true … and those beliefs are shockingly “old school” for college students who pride themselves on bringing a breath of fresh air to stodgy adults.

In the U.S., and generally in developed countries, governments have evolved (mostly over the last 50 years) from institutions that have free cash flow to spend on desirable projects (or alternatively, to return to taxpayers), into institutions in which spending and spending increases are on “autopilot”, and consequently no longer under the control of legislative bodies.

Don’t believe me? Here’s a chart of the Fiscal Democracy Index:

This shows the percentage of federal government spending which is discretionary: that members of Congress can actually control with their votes.

Most interestingly for students in conservative Utah, this is a metric developed at The Urban Institute. That’s a think tank that’s generally regarded as left of the center of the Democratic party. And they have developed a metric of how strictly the hands are tied of people who might actually approve progressive spending ideas.

And this is going to get worse. The real problem is Medicare (the one that pays for the care of seniors), and not Social Security (or disability), Medicaid (the poor), unemployment benefits, corporate welfare, defense spending, or foreign aid. The problem with Medicare is that it’s an open-ended promise to pay for medical care. But, because medical care extends life, it also extends payments.

(Physical) Capital Is Basically Working at Capacity

There’s an unemployment rate for labor. Round it to 6%. That implies there’s also an employment rate for labor that must be 94%.

We measure the same thing for physical capital. But here, the primary measure is called “capacity utilization”, and it’s roughly comparable to the employment rate. Except for one thing: machines don’t starve if they’re not used, so typically the economy gets away with a much lower capacity utilization rate than employment rate.

And right now, capacity utilization is certainly about where it should be in mid-expansion, and approaching the level that we only see near a business cycle peak:

This is from The New York Times. The columnist takes a pro-Democratic position that this suggests that it’s time for firms to start investing in more capital because we’re using everything we’ve got. I can’t disagree with that, although I will note that Democrats in D.C. have been crowing for years about firms needing to invest more, without addressing the question of whether or not they just don’t want to invest because they don’t trust the Democrats to not screw things up. At least that’s what owners and managers say, and I don’t see any reason to disrespect them on this.

Whatever. The chart does show that this expansion is pretty much as good as it gets, and we should stop complaining about it.

Are We At Full Employment?

Republicans would never admit to this.

Democrats would like to believe it’s true.

I’ve made the case repeatedly in this blog that a lot of what we’re seeing right now is that the baby boomers are now in late middle age or the early years of retirement.

Here’s a workup from Idiosyncratic Whisk about what would happen if you adjusted JOLTS data for how demographics have changed since the turn of the millennium due to the aging of the baby boomers.

JOLTS data is a more detailed look at the data than is provided by the commonly trumpeted unemployment rates, labor force participation rates, and raw numbers of the disabled and otherwise out of work. It tracks separate series on the rates of things like quits, layoffs, openings, hires, and separations (a collective measure of people leaving jobs for any reason).

You don’t have to think too deeply to figure out what would happen as people age: quits goes down. Without quits, there aren’t as many openings. Without openings, there aren’t that many hires, and so on.

The point Idiosyncratic Whisk is making is that the economy of 2015 will be one in which the median baby boomer is 60, while the economy of the last great boom we had (in the late 90’s) was one in which the oldest baby boomers were in their early 50’s (and the youngest, like me, didn’t even have kids yet).

What’s the conclusion?

So, the measures, demographically adjusted to compare to the previous recession, give us a picture where Openings and Quits suggest that Unemployment should be nearly 1% lower than it is.  I have separately estimated that about 1.2% of the labor force remain drawn into unemployment because of the unprecedented generosity of Emergency Unemployment Insurance (EUI).

…

The net result may be that we have a labor market that, for the most part, is operating at full employment.

In sum, the vast majority of the working age population is operating in a full employment economy. But, we add in a small minority that have been offered long-term benefits for being unemployed, and that boosts the rate.

So, for students, if you feel like there aren’t any jobs, it isn’t because the economy sucks. It’s because it’s operating at full capacity.

Is the Fed Contributing to a Stock Market Bubble?

Former student PA brought this article from The Motley Fool to my attention: “Is the Federal Reserve Fueling the Greatest Stock Market Bubble In History?”

The conclusion of the article is that no it isn’t, mainly because the author doesn’t consider us to be in a bubble. I’d agree with that.

But, here’s some thoughts about the rest of the article:

1. The chart stinks: the data a) isn’t logged or b) the vertical axis isn't log scale, or c) reported as growth rates. A stock index can reasonably be expected to grow through compounding. I would be immediately suspicious of anyone presenting a position that doesn't do that (although I will cut people some slack because many people aren't aware they should do that).
2. Other issues with the chart: a) the S&P has been around for a long time — what position is being pushed by focusing on only its recent behavior, b) the vertical scale does not have a zero even though the S&P is ratio data, c) red explosion graphics — spare me, d) compared to what — why is this bad, is it worse than some other investment?
3. Do bubbles happen? Yes. Should we worry about them? Yes. Can anyone predict them? Not really ... if you check their records.
4. Can the Fed cause bubbles through monetary policy? Hmmm. The jury is still out on that, and we've done a lot of research on this over the last 40 years. Does the Fed get blamed anyway? Yes.
5. The whole part about low interest rates leading to rational price inflation rather than an irrational bubbles is spot on.

In sum, I think the presentation of the article is overwrought, but the conclusion is OK.

GDPNow

GDPNow is the new thing from the economic forecasters at the Federal Reserve Bank of Atlanta. It’s a real time forecast of real GDP that’s continuously updated (well, as continuously as new data announcements … so pretty much daily).

This gives it a big lead time over — several weeks — over the federal government, whose preliminary estimate comes out 4 weeks after the end of the quarter.

Here’s the forecast for 2014 II as of July 10:

It’s still 3 weeks until the official number comes out.

Baby Boom Population Cohorts

This is somewhat different than some of my other posts about demographics and labor force participation. This merely shows the population of people with the same age.

But … you can distinctly see that the baby boomers … the generation that started being the major support for the economy in the 70’s is starting peaked out half-way through the Bush administration.

Fascinating Infographic for Students (Not Required)

The possibilities from this are astounding.

The infographic on this site (it’s interactive so you must click through) allows you to:

• Select a state (or the whole country).

What shows up is a rectangle, divided into smaller rectangles, divided into even smaller rectangles. The area of the rectangles corresponds to the proportion of people working in a particular job description in that state.

Then you can:

• Choose a point on the income slider

The graphic then shades only the rectangles of those professions where median income is higher than what you selected.

Then:

• Mouseover any rectangle to get the both the median salary for that profession, and the number of people working in that profession in the state.

Most of you are young enough to have a good deal of control of where you end up. Dovetail this with the recent publication indicating that the current income required for “The American Dream” is about $130K per year. The number of professions in Utah that make that possible on one income is very small; the number of professions that can get you half of that (so your spouse can pick up the other half) is still pretty small.

Economics of the Undead

On sale, starting tomorrow:

Chapter 6, entitled “What Happens Next? Endgames of a Zombie Apocalypse” is by myself, my wife Mary Jo Tufte, and SUU’s internationally known pop culture expert Kyle Bishop. Click here for an excerpt.

The book also has a website with a course guide and blog.

Three Variations on Quotes About Micro and Macro

• From the LSE’s orientation video: “Macroeconomics has all the interesting questions, but no real answers. Microeconomics has all the answers but no interesting questions.”
• Zach Weiner: “Microeconomics successfully describes situations that never occur. Macroeconomics unsuccessfully describes situations that occur constantly.”
• Kevin Grier: “Micro has right answers to the wrong questions, while Macro has wrong answers to the right questions.”

Thinking About Graduate School?

FYI: The Complete Guide to Getting Into an Economics Ph.D. Program (or Finance for that matter).

An Urban Myth: Is It a Problem that 20-Somethings Are Living with Their Parents?

Shout out to CB interning at GS: the Census Bureau officially counts you as a slacker, but the rest of us know better.

You know all that stuff about how bad it is that so many 20-somethings are living at home with their parents? What if it was nonsense?

Check out this piece from The Atlantic entitled “The Misguided Freakout About Basement-Dwelling Millenials”.

It turns out that the Census Bureau counts just about any student living away at college (in the dorms, in student housing, and so on) as living in their parents’ home.

That actually makes some sense: it’s not like most college students have established a permanent residence — for the whole year (since we do most demographics on an annual basis) — from their parents, right?

Here’s the charts to help make sense of what this means in the data. First off, 20-somethings are a lot less likely to be married, but more likely to be living every other way:

Do note that there is definitely an uptick in people living at home with their parents since the Great Recession.

But also this note, showing that most of that is because they’re in college:

Note that this is not graduated-from-college-within-the-last-couple-of-years-and-can’t-find-a-job. That’s the bottom shaded area, and it’s declined over the last generation, and the uptick over the last 10 years is pretty modest.

So … lighten up … and tell the old folks to lighten up too. ;)

Having said that, do note that the center section will also include people staying in college because they can’t or won’t find a job and move out. So the millenials are not completely absolved here, but college towns have been full of “permanent students” for a very long time, and there’s little evidence that his phenomenon has gotten worse. And in fact, most universities are actually pushing students harder to get out the door than ever before.

Cross-posted from SUU Macroblog, which is required reading for my students.

Technorati Tags: twenty,something,millenials,living,at,home,parents,basement

An Urban Myth: Is It a Problem that 20-Somethings Are Living with Their Parents?

You know all that stuff about how bad it is that so many 20-somethings are living at home with their parents? What if it was nonsense?

Check out this piece from The Atlantic entitled “The Misguided Freakout About Basement-Dwelling Millenials”.

It turns out that the Census Bureau counts just about any student living away at college (in the dorms, in student housing, and so on) as living in their parents’ home.

That actually makes some sense: it’s not like most college students have established a permanent residence — for the whole year (since we do most demographics on an annual basis) — from their parents, right?

Here’s the charts to help make sense of what this means in the data. First off, 20-somethings are a lot less likely to be married, but more likely to be living every other way:

Do note that there is definitely an uptick in people living at home with their parents since the Great Recession.

But also this note, showing that most of that is because they’re in college:

Note that this is not graduated-from-college-within-the-last-couple-of-years-and-can’t-find-a-job. That’s the bottom shaded area, and it’s declined over the last generation, and the uptick over the last 10 years is pretty modest.

So … lighten up … and tell the old folks to lighten up too. ;)

Having said that, do note that the center section will also include people staying in college because they can’t or won’t find a job and move out. So the millenials are not completely absolved here, but college towns have been full of “permanent students” for a very long time, and there’s little evidence that his phenomenon has gotten worse. And in fact, most universities are actually pushing students harder to get out the door than ever before.

Why Is Macro So Hard? The Influence of the Book No One Actually Reads

Thomas Piketty’s Capital In the 21st Century has been a bestseller in America since its translation came out in the spring. It’s being widely touted as the most important book in macroeconomics in decades.

It’s arguable that this is all a load of BS. It turns out no one is actually reading it.

Here’s how we know. When someone buys a book for their Kindle, they can highlight passages. Part of what you agree to when you buy a Kindle is that Amazon can keep track of those highlighted passages. The most frequently highlighted passages are actually shown towards the bottom right of a book’s webpage on Amazon.

For most books, these passages occur throughout the book. And a good sign that people finish the book is that there’s a heavily highlighted passage towards the end.

The thing is, of the 5 most heavily highlighted passages in Piketty’s book, the last one occurs on … page 26. Not one of the top 5 passages occurs in the last 670 or so pages.

There’s actually theory in statistics about the distribution of what are called record values. That isn’t applied here, but having some exposure to it, I’d estimate that 99.9% of readers never get past page 50 before abandoning the book. For example, suppose that (way back when) people started recording the time it took to run a mile, and kept track of each successive record: if the record times stopped going down once they hit 7 minutes … you might conclude a lot of things, but a pretty obvious possibility would be that no one is running that distance at all.

Having said that, the author of the article is a professor of mathematics at Wisconsin, and no doubt knows precisely the implication of their work.

In short, we have a hugely influential book, which people are claiming gives them a firmer foundation in macroeconomics to apply to policy questions, that they aren’t actually reading.

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

BTW: At the time that I write this, I am well past page 100 in Piketty. I’ve highlighted many selections on my Kindle.

Below, I’ve cut and pasted what are currently those 5 most heavily cited passages:

1. When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

   4078 Highlighters

2. When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.

   2688 Highlighters

3. Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries.

   2667 Highlighters

4. The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.

   2276 Highlighters

5. Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.

   2273 Highlighters

I have a Kindle 2, in which there are no pages, only locations (these are approximately a longish sentence each). Piketty is 13,605 locations long. A page in the hardcover edition of the book is about 19 to 20 locations; the biggest “page” I can show on my Kindle is about 11 locations.

• # 1 is from location 88 (0.6% of the way through the book, and I have the second half of that quote highlighted)
• # 2 is from location 547 (4.0% of the way through the book, and yes I have that one highlighted)
• # 3 is from location 458 (3.4% of the way through the book, and I don’t have anything on that “page” highlighted
• # 4 is from location 340 (2.5% of the way through the book, and I don’t have anything on that “page” highlighted)
• # 5 is from location 480 (3.5% of the way through the book, and I don’t have that passage highlighted, but I do have two others on that “page”)

To put that in perspective, that’s like getting a text for a class that has they typical 15 chapters in it, and when the books are sold back to the bookstore at the end of the semester, they notice that no one highlighted anything after the first chapter. What would you conclude about a class like that? For my part, I’d conclude that the material wasn’t very interesting, the students weren’t trying hard, and no one was doing quality control to make sure they did.

Currently, I’m at location 1921, and I’ve highlighted 123 passages in the book. And yet I match up with 1.5 out of 5 of the most popular highlighted passages.

It’s a rough conclusion, but an academic macroeconomist, preparing to use the text in an advanced undergraduate class, doesn’t find interesting or worthwhile well over half of what the general reading public does.

I hate to sound elitist, but this doesn’t bode well for the public’s ability to understand macroeconomics even when guided by a book that’s quite readable. I think this is prima facie evidence that the intellectual baggage people bring with them to macroeconomics is huge.

23-Year-Olds In Good Shape

Bloomberg Businessweek has finally listened to macroeconomists. We’ve been saying for years that America is in a long demographic swing which reduces labor force participation. Meanwhile, the legacy media has been blaming Bush or Obama for this problem. Hardly.

Anyway, in “The 23-Year-Olds Will Save America” the magazine notes that the modal age is now 23 in this country. The last time that happened was the early 1980’s.

Currently, unemployment rates for this cohort are in the midst of a 5 year decline, and a 3 year rise in median income.

Unfortunately, Bloomberg Businessweek is not exactly a magazine for the young. So, they’re quick to point out that lifetime taxes from your generation will exceed lifetime transfers by about $200K: someone’s grandmother will enjoy your support. The article has an accompanying image that I’ve linked to here; note the second chart from the left.