Private vs. Social Returns: Education vs. Innovation

Fairly early in microeconomics you learn that the problem with externalities is that the marginal social cost and the marginal private cost need not be the same, and this is the source of problems. The same goes for marginal social benefit and marginal private benefit.

The classic example is pollution. Firms empty the dumpsters at the plant because the two costs are the same (and they pass the costs on to buyers of the final product as part of the price). Firms typically don’t adequately deal with smokestack pollution because the two costs diverge, and the buyers may be able to use markets to avoid the higher marginal social cost, so the firm does not pass those along.

But, what about innovation? In this case, the marginal private benefit to an inventor is how much they make from their invention, and the marginal social benefit is how much society gets from their invention. In equilibrium, they’d be the same. But with innovation, there’s usually knowledge spillovers. This is a positive externality to society (e.g., you did not have to invent Snapchat to benefit from it), but it’s a negative to innovators (e.g., Yik Yak, the killer social app for SUU students in Fall 2015 never turned a profit before being shut down).

This is a big deal in macroeconomics: technological progress is the key to improved living standards, and it won’t happen if too much of the marginal benefit is shifted from the innovator to society.† This is why economists think patents are a good thing: although the optimal length is poorly understood, patents help push marginal private benefit up towards marginal social benefit.

But, what about education. Here’s Bryan Caplan:

When we look at countries around the world, a year of education appears to raise an individual’s income by 8 to 11 percent. By contrast, increasing education across a country’s population by an average of one year per person raises the national income by only 1 to 3 percent. In other words, education enriches individuals much more than it enriches nations.

How is this possible? Credential inflation: As the average level of education rises, you need more education to convince employers you’re worthy of any specific job.

So, what’s the implication? Students like you want more invested in education because you’re the primary beneficiary. But society should not buy into that argument because their rates of return on that investment are not that high.

† This is a measurable problem with the appropriate data, and a subject of some research in macroeconomics.

Why Is Macro So Hard? A General Absence of People Who Are Smart Enough

This is from Patrick McKenzie’s twitter thread, where he mostly talks about high tech insights:

There is no hidden reserve of smart people who know what they're doing, anywhere. Not in government, not in science, not in tech, not at AppAmaGooBookSoft, nowhere. The world exists in the same glorious imperfection that it presents with.

Stop voting for, say, Clinton, because you believe she had a hidden reserve of smart people.

Stop voting for, say, Trump, because he has a different/better hidden reserve of smart people.

The world is a statistically noisy place, and it’s too big for even smart people to fathom completely. Stop pretending that they can, and stop believing them when they say they do.

In macro, there are no hard answers. Just heuristics. Get used to it.

Technorati Tags: why,is,macro,so,hard,smart,people,absence

You Can Start Disbelieving the Nonsense About the 1% Getting Richer

In the U.S., the 1% are getting richer, and no one else is. Right? That, at least, has been the narrative over the last fifteen years or so. The first pass research on this, by Piketty and Saez in 2003, helped make them famous.

The evidence for that has been based on individual tax returns. But tax rates change through the years. Looking at tax returns without considering the underlying rates (and how they might change behavior) is called the unadjusted approach. It shows the 1% getting much richer.

So what needs to be adjusted for?

• The biggest tax reform of the last 50 years in 1986
• Corporate profits, that are paid out as dividends at different rates depending on tax rates.
• Value of employer provided health insurance.
• Smaller household sizes, and lower marriage rates.
• Government transfer payments

Now the tax experts have incorporated corrections for all of those. The big ones are that the treatment of corporate profits that were not paid out (but that rich people had access to, say, through corporate owned vacation property) was much larger in 1960, while it turns out that now the top 1% is actually supporting a bigger group of unreported dependents (rich families aren’t the ones getting smaller).

Piketty and Saez reported that the share of income taken in by the top 1% doubled since 1960. The new research by Auten and Splinter find that over 90% of Piketty and Saez’s increase is there because they didn’t adjust for that stuff. Basically, the 1% are a tiny bit richer. Not enough to worry about.

One thing that both studies find is that the share of the top 1% dropped significantly in the 1970’s. So their share is U-shaped. This is consistent with tons of evidence that business cycles hit the income of the rich the hardest, and there were 4 recessions in a 13 year period centered on the 70’s.

Over the last couple years, it’s also become common to remark that the share of income paid out to individuals has fallen, and that the share going to profits, interest, and rent has gone up. The adjusted “broad income” in this chart shows that’s not the case:

What the new research corrects for is that about half of income is now coming from stuff other than wages and salaries:

Piketty and Saez were looking mostly as the center section.

This points to a good convention when thinking about news reports about inequality: if they focus on wages and salaries, they’re cherry-picking.

Second of Two Pieces on Income

Martin Feldstein is a macroeconomist from Harvard (probably their oldest). He’s been well-known since before I started college (he was one of Reagan’s economic advisors in the early 80’s).

In a September 8 op-ed piece in The Wall Street Journal entitled “We’re Richer Than We Realize” he argues that real GDP (and its growth rates) are understated.

The common assertion that middle-class households have seen no increase in real incomes for 30 years is simply not true. And contrary to a common fear, most members of the younger generation will have higher real incomes as adults than their parents had at the same age.

There are two reasons for this, and he argues that both of them are getting more severe.

First, government statisticians grossly understate the value of improvements in the quality of existing goods and services. More important, the government doesn’t even try to measure the full contribution of new goods and services.

On the first count, the government is basically “old school”. They view quality improvements as largely proportional to costs. This might make sense for home construction, but not so much for smartphones.

… In reality companies improve products in ways that don’t cost more to produce and may even cost less. That’s been true over the years for familiar products like television sets and audio speakers. The government therefore doesn’t really measure the value to consumers of the improved product, only the cost of the increased inputs. …

The official estimates of quality change are therefore mislabeled and misinterpreted. When it comes to quality change, what is called the growth of real output is really the growth of real inputs.

The second issue is about the introduction of new products. We’re OK at counting the value of the new products, but we don’t make much of an attempt to figure out how much richer we are from mitigating the problem the new product solved:

Think about statins, the remarkable class of drugs that lower cholesterol and reduce deaths from heart attacks. By 2003 statins were the best-selling pharmaceutical product in history. The total dollar amount of statin sales was counted in GDP, but the government’s measure of real income never included anything for improvements in health that resulted from statins—such as a one-third decrease in the death rate from heart disease among those over 65 between 2000 and 2007.

Think about that: one third of deaths from the biggest killer eliminated in 7 years. That’s a ridiculous improvement to leave unmeasured. But, of course, the techniques for counting GDP were developed before things like this happened regularly.

It is impossible to know how much the official statistics understate the true growth of real incomes. My own judgment is that the true annual growth rate could exceed the official figure by two percentage points or more, implying that the true annual rate of real per capita income growth during the past two decades has been much more than double the official 1.3%.

I don’t know if I’d go that high, but I wouldn’t even debate a 1% mismeasurement.

First of Two Pieces on Income

The Census Bureau reports this week that real median household income hit a record high.

There’s been quite a bit in the news over the last decade or so about stagnating incomes. This is the piece of evidence that is primarily used to justify that position. In this case, real median income for households just passed the previous peak from 1999. The implication is that incomes fell and recovered in that intervening period:

The discontinuity towards the right notes a change in how the data was measured.

Data like this is used to justify the position that the economy is weak.

That may be, but it’s also important to consider what the data is missing. In this case, it’s the definition of a household. We’re in the midst of a multi-decade phase of people living in smaller households: parents have fewer kids, couples get divorced more, and it’s quite a bit less likely for working adults who are not related (as in TV shows like Two Broke Girls) to live together than it used to be.

If households are getting smaller with the passage of time, this means that the data in the graph above is understating growth in the data, and that understatement gets more severe as you go to the right.

Officially, the Census Bureau does not make that adjustment. But it’s fairly easy to find on the internet (here’s an article from Forbes from a few years back). It combines it with a second adjustment for the price index used to deflate nominal incomes (they advocate using the PCE).

While the Census Bureau estimates suggest that median household income rose by just 10 percent from 1969 to 2013, when the PCE is used for inflation adjustment and incomes are adjusted for the number of adults in a household, the increase was 30 percent. The 10 percent rise the Census Bureau estimates translates into a $4,800 increase. A 30 percent rise in unadjusted terms would amount to $14,400—quite a difference.

These issues are not hidden. But they are on the difficult side.

An appropriate interpretation is that the Census Bureau is providing a first pass estimate that indicates there may be a problem. Dig a little deeper, and the second pass says we should worry less. That part doesn’t get covered in the legacy media enough.

Optional: Traditional (Illiquid) Asset Tokenization

Have you heard of Bitcoin? If not, you should have.

Bitcoin is the best known application of a far more important technical advance called  blockchain.

A blockchain is a secure way to store and update a database.That database might hold the information on something of value. That value can be broken up into little pieces called tokens. Bitcoin is a currency that is not backed by government fiat, and whose tokens (called bitcoins) have value.

The more secure the blockchain, the easier it is to trade the tokens because their value is clear.

So … what if the something of value was an expensive asset that isn’t liquid … and you put its ownership in a blockchain … and then sold the tokens? For example, you might have just created fractional ownership of something like an artwork, or a building, or a ….

This is where the world is heading. It’s not clear how this will impact macroeconomics.

One More Explanation for Increasing Wage Inequality

Wage inequality is increasing.

In America, contemporary discussion often presents this is in political and social terms: market-oriented policies pushed by Republicans (and some Democrats) over the last 35 years have increased inequality.

This argument has a serious weakness, that is well-known outside the realm of politicians and pundits. This is that wage inequality is getting worse in many countries around the globe, particularly in the developed ones. It’s difficult to see how market-oriented policies within the U.S. could have produced that result outside the country.

There’s new evidence from Sweden that it’s about higher pay for non-cognitive skills.

Cognitive tasks are technical and/or quantitative. Think math. Non-cognitive skills are sometimes called soft skills or people skills.

The theory is that we are offloading cognitive tasks onto computers, making those skills less valuable. So demand for cognitive skills is shifting left, freeing up funds for a shift in the demand for non-cognitive skills to the right, increasing their price.

This increase occurred primarily in the private sector, among white-collar workers, and at the upper-end of the wage distribution.

…

… Workers with an abundance of non-cognitive skill were increasingly sorted into occupations that were intensive in: cognitive skill; as well as abstract, nonroutine, social, non-automatable and offshorable tasks. Such occupations were also the types of occupations which saw greater increases in the relative return to non-cognitive skill. This suggests sorting on comparative advantage …

Via Marginal Revolution.

Evidence Piling Up that Might Explain Sustained Low Growth In the U.S.

Let me state out front that I do not have a predisposition to believe this set of arguments. But I’m watching the evidence pile up higher.

First, growth rates in the U.S. have not been as good as we might like for about 40 years.

Second, there are theories in which growth can be stifled by monopolies accumulating profits that they use to stifle more efficient entrants.

And third, we’re starting to get some evidence pointing to this being the case. Noahopinion summarizes:

... I see the case of the Market Power Story - or any big economic story like this - as detective work. We're collecting circumstantial evidence, and while no piece of evidence is a smoking gun, each adds to the overall picture. IF the economy were being throttled by increased market power, we'd expect to see:

1. Increased market concentration (Check! See Autor et al.)

2. Increased markups (Check! See De Loecker and Eeckhout)

3. Increased profits (Check! See Barkai)

4. Decreased investment (Check! See Gutierrez and Philippon)

5. Increased prices following mergers (Probably check! See Blonigen and Pierce)

6. Weakened antitrust enforcement (Check! See Kwoka)

7. Decreased output (Not sure yet)

So, as I see it, the evidence is piling up from a number of sides here. Economists need to investigate the question of whether output has been restricted.

Now, do note that there are many other papers that could be cited under each number, and many criticisms of each one. But there’s a story building up here that’s getting hard to ignore. More importantly, the criticisms are piecemeal — there doesn’t seem to be a a small set of arguments that take down that whole list.

How does he suggest we test # 7:

I think the answer is that it's very hard to know a counterfactual. How many more airline tickets would people be buying if the industry had more competition? How much more broadband would we consume? How many more bottles of shampoo would we buy? How many more miles would we drive? It's hard to know these things.

Still, I think this question could and should be addressed with some event studies. Did big mega-mergers change output trends in their industries? That's a research project waiting to be done.

If you’re thinking about graduate school in economics, this is going to be a hot topic over the next few years. As I write this, the cite in # 2 is just out, so there’s a lot of talk amongst economists that’s reminiscent of paleontological searches for missing links.

Fakers? Not All of Them

It’s a common thing to view welfare recipients as unmotivated. (Personally, I don’t hold that view, but it’s common enough for me to put it in the title of this post).

That has some overlap with lazy, but it isn’t quite the same thing: you could be one without the other, or both.

However, unmotivated could also be a function of background or environment. So it’s possible that if a welfare recipient is unmotivated to get a job, it’s because they were previously unmotivated to get the skills to be gainfully employed.

Whatever. Can we test for this with data from the real world? Manal Dashpande, a recent Ph.D. student from MIT, now on the faculty at the University of Chicago, has been researching this (here is an older draft of her paper, and here is a summary more accessible to undergraduates).

To do work like this, you look for a “natural experiment”. In short, this means that somehow the circumstances of the people you’re interested were changed, and they had to respond to this change, but they weren’t capable of influencing how or when their circumstances were changed.

Deshpande looked at the change in welfare in 1996. There was a “bright line” cutoff that made the natural experiment possible: children were treated differently based on whether or not they turned 18 before or after August 22, 1996. For a particular form of welfare (SSI), prior to that cutoff, if you got it before the cutoff you automatically got it afterwards. After that cutoff, if you got that form of welfare as a child, you had to be reevaluated when you turned 18. About 40% of childhood recipients were denied as adults. The motivation for that was that some conditions, say mild mental retardation, may incur extra expenses in childhood, but don’t affect a person’s ability to get and hold a job.

One comparison Deshpande made was the income performance of people whose benefits were removed at 18 versus three other groups. One was those who stayed on SSI after age 18 (they were not denied benefits at 18). A second were those who applied for the first time as adults but who were denied (you might call those “fakers”). The third were children whose families had received AFDC (that program was replaced by TANF, which we still have), a program targeted at low income families rather than disabled children (you might call these “poor yet able”). Here’s a chart of their income performance:

The “poor yet able” are the red points: their income rose through time. The “fakers” are the purple points: their incomes also rose. In both cases the rise was up to an average of about $15,000 per year in income. That’s not a lot, but since it’s an average, it indicates that some portion of them were able to do better than minimum wage employment.

The people who were retained on SSI are the dark blue dots at the bottom. Their incomes outside of welfare stayed close to zero, but were supplemented by those continued welfare payments.

The light blue dots indicate that welfare reform may have been to aggressive. Children who were denied benefits when they turned 18, on average, had income that never approached those of more advantaged youth. Deshpande estimated the present value of their income loss at $76,000 over the ages of 18 to 34.

Basically, welfare reform was a big tax on some low income people.

Via Marginal Revolution.

Will Fiscal Policy “Fight the Last War”?

Fighting the last war is a metaphor for doing what used to work even though times have changed. For example, French generals in 1940 expected World War II to be like World War I, so they ended up fighting German tanks with French foot soldiers inside forts.

I have been worried about this with U.S. fiscal policy for the last 20 years or so. And it turned out badly in 2007-9, and I think it might turn out worse the next time around. Scott Sumner, writing at EconLog feels the same way.

Because the U.S. is a federalized government, a significant amount of government spending is done at the state and local levels. And, while we don’t stress this detail too much any more, the basis for Keynesian fiscal policy being effective starts with the government actually buying goods and services, not with sending checks to people. So, while a lot of funding for state and local expenditures actually passes through the federal government, its sent right on as a check to the state and local governments. They spend between half and 2/3 of the government spending in this country that goes to goods and services. So, if Keynesian fiscal policy has any relevance in the 21st century, it’s because of spending a that level.

Which scares the crap out of me.

The reason is that at the state and local level, fiscal policy has been taken over (for a few decades), by both Republicans and Democrats, who view balanced budgets as the way to go.

The problem with this is when a recession hits: your tax revenue goes down, and your spending requirements (for welfare and so on) go up. If you have to balance the budget this means you have to raise taxes and cut spending actively, because to offset the passive movements in the other direction from the business cycle.

Here’s how Sumner sees this panning out:

I don't have much confidence in the Keynesian view that the stance of fiscal policy has a big impact on the business cycle. But let's say I'm wrong. Here's what I expect to happen:

1. The President and Congress will enact deep tax cuts and increases in military spending, which will cause the deficit to balloon. Entitlement spending will also rise as boomers retire.

2. The deficit will rise to unsustainable levels, with the national debt steadily increasing as a share of GDP.

3. By the time the next recession is on the horizon, there will be a political backlash against expansionary fiscal policy. Policy will tighten and become effectively pro-cyclical.

I hope that I am wrong, but this is the danger I see from running a series of large budget deficits when the unemployment rate is 4.5%. What will we do if unemployment rises to 7.5%?

I agree. And I have some hard-ish evidence to support this. In 2009 I got a call from a member of the Utah Legislature from this region. They wanted to know if this was a good time to start spending out of their Rainy Day Fund. I was flabbergasted. If the worst recession in a generation isn’t a time to spend your rainy day fund, when is?

Why Macro Is So Hard: What Passes for an Expert

This is actually an addendum to a topic that’s already part of the canon (here’s an example, and it’s been in the principles lecture on this topic for years).

So, here’s Deadspin’s headline from another example:

Florida's Go-To Stadium Economist Is A Hack,
A Shill, And Also Not An Economist

Everyone should know by now that sports stadiums and arenas are a very bad investment for their communities (and everyone around SUU should absolutely know this, given how much Berri, Price, and I repeat it).

In this particular case, Tampa is building a stadium for a team that doesn’t even have Tampa in its name.

Wha, wha, what?

Tampa is building a stadium for the Toronto Blue Jays to use for spring training.

(Now, if you’ve never been to spring training, it is a thing, but not a big thing. We’re talking about 15 or so games, held over 5 weeks, that average about 5K fans a piece.)

For perspective, Tampa is spending 4 times on this stadium what SUU is spending on new business building.

Maybe one reason is they hired a consultant who produced an economic report indicating that it was a good way to spend their money:

If Bonn’s studies don’t sound very economically robust, perhaps it is because Bonn isn’t actually an economist! He is a professor at FSU’s school of hospitality, where he teaches marketing and wine-tasting, and his degree is in resource development.

Which doesn’t necessarily mean Bonn can’t do the economic work; I also do not have a degree in economics. Then again, I don’t charge $23,000 for economic impact studies …

For clarity, Bonn wrote the report, and the “I” in the quote is the author of the linked piece on Deadspin.

Paying for Healthcare

In tandem with the previous post, now that healthcare is a major macroeconomic policy issue, it’s useful to think about why people won’t pay for their own healthcare, and should the government?

America is a useful example for the rest of the world. We are rich, so more people here can afford healthcare. Yet we also have a somewhat open market in which a lot of people choose not to buy health insurance. Why is that?

Finkelstein, Hendren and Shepard have new research on that. This is a working paper, but given the lead author and topic, I expect it will come out in a top 5 peer reviewed journal in the next year or so.*

People who don’t buy health insurance often make quite clear that they feel it is not a good way to spend their money. Finkelstein et al. don’t look at that. Instead they estimate what people are willing to pay from the choices they make. The result is startling: willingness-to-pay (WTP) is about a quarter of expected health care costs. This is not saying people can’t afford health insurance. Instead, it’s saying that they won’t pay for it even it’s a breakeven proposition for them.

Further, they estimate that even if you subsidize 90% of people’s healthcare costs, 20% of them still would not pay the remaining bit out-of-pocket.

Note that paying large subsidies, but requiring some contribution from the recipient,is a key part of Medicare Part D (prescription drug coverage for seniors), the Obamacare exchanges, and CHIP enrollment (in some states).

They also find that adverse selection is not a big driver of this behavior. Adverse selection is the Republican bugbear that people will not buy insurance because they aren’t sick, but will change their minds when they do become sick. Yes, it happens, but it isn’t a big contributor to unwillingness to pay.

So what is? Uncompensated care: that’s when the patient gets the healthcare first and the provider is never (fully) compensated afterwards. In short, people like free stuff.

Of course, it could be that people don’t have the money (that they are liquidity constrained). But if this were the case we’d see both adverse selection, and a tilt towards buying the cheapest possible plan. But that’s not what people do. When the poor do buy health insurance, they often buy the more expensive option.

There could also be a problem with inertia, inattention, or lack of information. They looked at this too. But new purchases of health insurance behave in precisely the same ways as people won don’t buy insurance. Yet they must have overcome inertia (they changed their choice, inattention (they made a choice), or lack of information (which is available freely to people who are interested in making a choice).

So, the authors are back to people like free stuff.

Yes, there’s also moral hazard (you make less healthy choices once you have insurance, to the tune of about a 25% increase in costs). But that would explain only a fraction of the small WTP.

This is where things get nasty. The scale of uncompensated care is large enough to explain the difference between WTP and costs of insurance. Uncompensated care takes two forms, direct and indirect. Direct care that is uncompensated is what most people view as charity, basically, the free clinic, the county hospital, or a religious organization that provides care. Indirect care is both filing bankruptcy to escape your bills, or just not paying them and waiting for the creditors to give up. Can you imagine the sh**storm if politicians proposed getting rid of those so that poor people would accept their Obamacare subsidies?

But this raises a new policy question. Direct costs of uncompensated care are borne by the whole society, and costs indirect care are borne by significant fractions of society, but in both cases the rich provide most of the funds through taxes or charitable contributions. So is there a better way to connect the sources of funds with the recipients by cutting out the intermediaries? The evidence from the earned income tax credit is that just giving money to the poor and trusting that they’ll make decent choices is awfully efficient at improving welfare.

Again, the public perception of such a policy would be a big problem. Can you imagine: oh, hey, you’re poor, here’s $20K, go buy some health insurance? An awful lot of good choices with that sort of windfall would be cancelled by one bad story on the local news at 6.

So, what are we left with? Progressive style ideas that can get enough support from the middle, like Obamacare requirements with subsidies. Or conservative style ideas like rely on our existing network of charity, free stuff, and high legal costs, cross-subsidized through taxes and charity. Or European style ideas of not posting prices or requiring much payment from anyone at all, and hoping you can cover the expenses on the back end.

Lastly, none of those is helped by people who expound the viewpoint that healthcare is a right. That sounds quite nice, but keep in mind that freedom of speech isn’t something you’re expected to pay for at the local free speech clinic. Healthcare is a valuable service, and it would be nice if the people who benefitted from it were the ones who paid for it. But they don’t wanna’.

To me though, this really means that all the details in Obamacare and Trumpcare are secondary. What a country’s political system needs to figure out is where to draw the borderling between two separate but unequal healthcare systems: one in which people pay essentially nothing, and one in which people pay something extra but expect to get more in return. Obamacare was never really about that borderline, but rather about how we run the former system. So maybe we should have worried about it less.

* I would advise against the mistake of viewing these authors are Republican/conservative hacks. Finkelstein is one of the best economists out there: she was a Marshall scholar (like a Rhodes scholar, but that requires brains and athletics), she’s a full professor at MIT (a top 5 school for decades), and a winner of the John Bates Clark Medal (given to the best economist under 40). And, of course, Boston is not exactly a Republican/conservative stronghold. Oh, and she did her dissertation under Jonathan Gruber, who was one of the main economists that designed Obamacare.

UPDATE: I had the additional thought that one could view these results as supportive of the typical pro-government interpretation. This is that if the government is going to engage in programs that are charitable, for practical purposes they need to eliminate the competition from the private sector to promote uptake.

OK. Now They’ve Started Something

With respect to the last post, the Republican House has now passed an update to Obamacare.

And America is unhinged about it.

First off, it’s not a law yet, and it’s not clear it will be.

Second, it’s not a repeal.

If that word is on your lips, you should probably just bite your tongue until the feeling passes. It isn’t a repeal. The thing is, that word is on everyone’s tongue. Unfortunately, like most of the work in Washington, this bill attempts to fix a Frankenstein monster by excising some parts, stapling on some other parts, and coloring over the whole thing with Sharpies. Here’s a summary.

Third, it keeps some of the bad parts.

Get the message: Republicans like helping people with pre-existing conditions, it’s just that Democrats love helping them. Politically, this is a no-brainer for both parties. The thing is, everyone has the good sense to not put up with nonsense like this in other areas of life. Both parties need our help on this one to develop some fortitude (more on this several paragraphs down).

A huge problem with this is the perception, sold through anecdotes, that this is a common problem. It isn’t. Most of what gets labeled as a pre-existing condition issue is just people who won’t/can’t pay their bills. That’s unfortunate, but it is different, and it requires a different solution. The actual proportion of pre-existing-condition-health-insurance-conflicts is about 1 out of every 3,000 people. That is a small problem to address: would you sacrifice 1/3000 of your healthcare to help these people? Of course you would. Who wouldn’t? This could be covered with $10-20 a year from every person insured through their employer. That is chump change comparable to the taxes and fees that anger people on their phone bills. OOH OOH … wait for it … and you already pay something like this with your auto insurance. So it can be done. It isn’t done because when we start substituting feeling for thinking, politicians see opportunities to spend other peoples’ money. We now have a huge bureaucratic edifice built around the public perception that uninsured sick people are a huge problem, while we have zero bureaucratic edifice built around the fact that some drivers on the road are uninsured and the disturbing corollary that they’re not the best drivers. Politicians of all stripes view the solution to the uninsured motorist problem as something they do not want to repeat with healthcare.

A far smaller negative is the continuation of the right to continue to have your kids covered by your family’s health insurance plan through the age of 26. Macroeconomically this is a requirement that everyone’s paycheck be smaller so that some generally healthy people stay covered. It sounds nice, and it is nice. But follow the money: who is helped by allowing parents to continue to have higher premiums withdrawn from their paychecks that really don’t get spent covering people who use the least healthcare? In short, it’s a backdoor transfer to heavier healthcare consumers. It’s weird, and it’s dodgy, and we should know better.

Fourth, here’s the more cosmetic updates.

• Firms are freed up at the low end: they no longer have to offer health insurance.
• Firms are also freed up at the top end: a tax on high end health benefits has been pushed off ten years into the future.

The above two sound problematic, and they may well prove to be. But be clear-headed about this: it’s a move back to the system that we had from the 1940’s through 2010. For firms, it’s still cheaper to pay employees with healthcare than it is to pay them with cash.

The primary issues with that are not whether or not they want to (Tom Perez notwithstanding). The primary issues are if they can afford to pay their employees at all (you know … staying open, no layoffs, stable hours), and how much latitude they have to deal with your compensation if your productivity doesn’t keep up with the healthcare they promised to pay you with (you know … stay under 50 employees, and keep people under 30 hours).

• Keep your eye on the ball: Obamacare was not really about improving coverage so much as improving the chances that provided services were actually paid for. The new bill pushes more billing back in the direction of consumers (which is a good thing), except that consumers have a poor history of consuming their healthcare first, then maybe sorta’ paying for it later. And yes, the cost is part of that.
• That last one means hospitals are going to be hurt (doctors’ offices have an easier time of avoiding people who are unlikely to pay).
• A corollary to those last two is that Medicaid will shrink a bit. For all the talk about Obamacare improving coverage, on the ground that mostly amounted to pushing people into Medicaid who probably could’ve gotten Medicaid before but were (maybe) too dysfunctional to follow through on that. The problem with this is that Medicaid itself sucks: it does not pay its bills completely or in a timely fashion. All of those stories you hear about doctors not accepting new Medicaid patients, or regions having no Medicaid providers, lead right back to Congress making promises they don’t keep. One wonders how people like Bernie Sanders can even praise Medicaid without breaking out laughing: are they doing it on a dare or something?
• Obamacare’s main source of bleeding is health insurers fleeing the exchanges. Democrats didn’t address this when they had a chance, and Republicans didn’t do anything about it either. I think there’s a big disconnect here between whether these things should or can be fixed. Republicans don’t think they can be, so they’re not trying. Democrats take the view that they should be fixed, but don’t seem to like to address whether they can be fixed at all. That’s not a policy, it’s a wish. The fact that they didn’t fix the exchanges when they had a chance makes me think they knew it wasn’t worth the effort, but didn’t want to take the blame.
• Individuals without employer provided health insurance will face less penalties if they don’t self-insure. That’s what they want as individuals, but it isn’t very good for the system as a whole. The Democrats approach with Obamacare was to push people to buy something they didn’t really want. The Republicans have moved in the direction of pushing less, but encouraging more and cheaper choices. Yes, those could be worse. But in every aspect of life, we seem to like the riding-the-plane-in-coach model better, so why should healthcare be any different?
• The whole debate about pre-existing conditions seems divorced from reality. No one would put up with this nonsense with auto insurance: for one reason or another you are not insured, you didn’t get insured, then you had an accident, and now you want to buy insurance that you didn’t buy just a few minutes ago? With cars, we would label someone who behaved that way as a jerk. And talking about the cost of the insurance is a dodge. The fact is that the accident changed your preference for what you want to spend your money on. But anyway, the Republicans didn’t change Obamacare’s requirement that insurers put up with this crap. What they did do is relax, somewhat, the extra that insurers can charge you for changing your mind. Oh … and they recognized that this is problematic and threw a ton of money out there to help people adjust to this, a move Democrats never considered. How much? Between a third and half of the cost of “The Wall”. Sounds like serious money to me.
• The Obamacare approach to getting the folks from the last two points to buy insurance was to threaten them with a small stick (the modest tax penalty that was rarely enforced). The Republican approach is to give them a carrot with tax credits.
• The Republicans aren’t going to cut people who are currently in Medicaid. But they’re going to keep new people from joining for coverage reasons. That’s probably a good thing, since the political will to make sure Medicaid pays its bills is just not there. But, they merely promised to fix that. Don’t hold out much hope for that. Democrats didn’t fix it either, but I wouldn’t hold that against them. I would point fingers at them for viewing one of the few things we know is not working as the thing that was going to make Obamacare work at all. When Democrats say that Republicans are mean, I think they have a lot to answer for on this one.
• The Republican plan will make old people cough up more money. This is a good thing: they are the richest group in the country, and they consume the most of what they’re going to pay more for. The problem is that they vote. Republicans will get killed on this if they don’t watch out. But they’ve made a big bet on the future by tilting reform towards the young. Democrats are still pissed that Reagan got so many young people on his side.
• States are going to be funding a bigger proportion of healthcare for their residents. But they will get greater flexibility in how to do so. This is a big slam on the grayer populations of the northeast and midwest. But, Republicans are running most of the country at the state and local level, and they want out of the top-down Washington model of how to run their states.

Oh, and Republicans are keeping a good piece of Obamacare: the general trend away from paying for services to paying for outcomes has not been touched. If Obamacare changed the terms of that debate, it is an unalloyed good thing.

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Keep your eye on the ball, folks.

If you need healthcare, on average you’re better off getting it in the U.S. than anywhere else. If that doesn’t change, we’re still on the right path.

But, you get what you pay for: Obamacare is a Cadillac, and Trumpcare is a Lincoln. The similarities are bigger than the differences.

That’s OK too. Top to bottom, we’re the richest country in the world with the highest level of consumption on .. just about everything.

It is a big problem that healthcare is unevenly affordble. Do not mistake uneven affordability with uneven availability: the healthcare that people receive is far more equally distributed than the bills for it are. That’s a good thing. Maybe we can do better. But don’t break availability to fix affordability: this is why you can’t find an obstetrician in Las Vegas if you’re on Medicaid. You should be suspicious that one of the words in the formal title of the act that passed Obamacare is “afforable”.

It’s weird that half the country gets its health insurance through employers. This is a historical relic of World War II that should go away. Let it. Currently, the party that wants to do things (a little) differently is the Republicans. They were not this way before Pelosi, Reid, and Obama. The Democrats are not this way now; when they get their chance it will be nice if they are.

I was watching Bill Maher’s show the other night. He considers himself to be a solid Democrat/Progressive/Liberal. He stated his conception of healthcare provision quite clearly. What he described was a social security system for healthcare. I think a lot of people take that view (and I’m OK with it too). Fair enough. That is not what we have now. Some people do not favor a move towards a social security system for healthcare because we’ve screwed up our social security system for retirement. Again, fair enough. The economics are that social security systems are feasible, practical, and affordable. It’s the politics that goofs them up: people vote themselves out of the paying group and into the receiving group. If you don’t solve that problem first, your social security system for healthcare won’t work. Promise.

Senator Elizabeth Warren was on the same show. She’s presented healthcare as a uniquely American problem. It isn’t. Different countries just paper over the issues differently. Her entire set of positions lacks credibility once you recognize that. She’s a Democrat but there are people on both sides of the aisle that should be tuned out on that basis alone.

Macroeconomically, all countries suffer from the same problem. Data shows that every consumer treats healthcare as a luxury. Denying that is not helpful. This means they spend more on it as they get richer. So economic growth means a greater proportion of an economy devoted to healthcare. Except data shows that healthcare is not a dynamic, productive sector. That’s a problem. But there’s a really obvious implication: don’t bind it up even tighter (with regulatory and bureaucratic systems).

Once again, politicians have completely avoided the one simple way to make healthcare cheaper: shift supply to the right. That’s economist lingo for educate more doctors, nurses, and so on. It seems like everyone wants to go into healthcare because those are “good jobs”. If one industry/sector has “gooder” jobs, that imbalance isn’t sustainable. Unless, of course, the political system is preventing that. Get the message: Republicans and Democrats are prejudiced against all the people who don’t have an MD or RN after their names.

But, of course, doctors and nurses say that their pay isn’t enough to compensate them for all the hassles. Don’t make it harder for them. Again, D.C. seems to have real problems with this. Start by turning Medicaid into a program that pays its bills.

I’ve Been Biting My Tongue All Semester

The class has gone through the first semester under President Trump (the legacy media, with their attraction to creating milestones where there are none, is noting it as the first 100 days).

So why didn’t we cover Trump much at all this semester?

Honestly, because I had a suspicion that seemed too unusual to voice openly. Macroeconomically, I thought all the bluster (from both sides) would turn out to be just one big nothingburger.

And I think I was right …

• Repeal Obamacare? Yeah, right.
• Reform Obamacare? Nope.
• Tax reform? Just getting that onto the table.
• A wall? As a construction project this was never going to happen overnight anyway.
• Trade wars? Any decent economist knows that trade is between people and firms, not countries.
• Gorsuch or Garland? For better or worse, this is something. But it’s not macroeconomics.

I could go on.

The Democrats are ungrounded, unmoored, and unhinged in various proportions.

The Republicans need to go back to high school English classes and learn the importance of a dramatic foil for understanding how the story unfolds … and that they are not in high school English any more.

The Trump administration needs to get someone on its side. It isn’t that they have too many chiefs (although they may). It’s that they don’t have enough Indians. Heck, they don’t seem to have any Indians at all.†

And everyone thinking about fiscal policy needs to revisit the word ossify. Here, let me us a variation in a sentence. Governments of developed countries are so ossified that it isn’t much use paying attention to fiscal policy.

† Excuse the political incorrectness — whose apocryphal source described a genuine decision-making problem for 19th century Native Americans.

New-ish Country Groupings

Chapter VI in the Handbook seems out of place sometimes (someone even asked this semester if it would be tested on, since I don’t cover it much).

The thing is, when you go out and start reading the news, or researching issues, people group countries based on the similarity of their economies currently. This is a cross-sectional approach, which is why it appears before we start time series in the Handbook.

The reason for these groupings is because, while residents regard countries as similar, how different are they on the ground? For example, foreign tourists have trouble differentiating the U.S. and Canada, but not the U.S. and Mexico.

Anyway, the IMF has created some new designations that need to get in the next revision of the Handbook. Here’s a chart from Visual News:

Some of the grouping are obvious, some not so much:

• LAC is Latin American Countries
• Advanced is the 40 or so “rich” countries
• Emerging Europe is mostly eastern European countries, most of which were dominated by the Soviet Union for 50 years or so. We now recognize that they were also held back economically.
• E.D. Asia is Emerging and Developing Asia; pretty much everything along the south rim of Asia from India eastwards, and along the east rim from Vietnam northwards, that is not already classified as Advanced
• Com. Of Ind. States is the former Soviet Union
• Sub-Saharan Africa is self-explanatory, although you might want to look at a physcial map
• MENAP is Middle Eastern and North African nations, Afghanistan and Pakistan; this is not exclusively Moslem, nor do all Moslems live there, but this is what most people think of when they visualize Islamic countries. I made the modification in red after class (and yes, the acronym probably should have two A’s, but I didn’t dream it up).

Everything above here is required.

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Everything below here is optional.

The source article is about energy subsidies. There are two big issues that are glossed over: who is subsidized, and where is it subsidized.

Who is subsidized is an issue we’ve been concerned about in the U.S. because of the large subsidies given by the Obama administration to the solar and wind industries. Most developing countries are doing the same thing.

An argument is often made by those who are in favor of subsidizing these “cleaner” energies that these subsidies are OK because other energy industries are also subsidized. Yes and no.

Subsidies to clean energy industries are typically expicit and on the supply-side. They help defray some costs, essentially shifting the supply to the right, reducing price and increasing quantity. These are labeled as “Pre-tax” in the source article. The chart above shows that most countries outside of the Middle East don’t subsidize energy production at all.

Subsidies to fossil fuel industries are typically implicit and on the demand-side. In these, buying and using those fuels creates external costs that are not internalized. If they were, demand would shift to the left, reducing both price and quantity. These are labeled as “externalities” and “foregone consumption tax revenue” in the source article.

Globally, where energy is subsidized is kind of weird. A minority of countries have significant fossil fuel industries (coal is pretty common, but oil and gas are not). In most of those countries, fossil fuels are extracted by a “company” that is actually part of the government. For political reasons, often in less-developed producers, gasoline (and other fuels) are often sold below cost. This map gives you some idea:

Believe it or not, there are differences of up to 100 to 1; in 2013, gas (if you could get it) sold for 6 cents a gallon in Venezuela. That’s a huge subsidy since supply is shifted to the right. The original source article covers this extensively, but the blog post from Visual News downplays it. The chart at the top shows that the lion’s share of the subsidization of fossil fuel use goes to consumers in Asia who don’t pay for their externalities.

Are American (Non-Rich) Incomes Really Stagnant?

It’s a fact that no one seems to question: incomes of Americans who are not rich have stagnated. The time frame is flexible: 20 years, 40 years, whatever.

Except that you may have noticed that there’s a lot of flexibility in how we measure prices and calculate real values.

There’s new research on this:

The finding of zero growth in American real wages since the 1970s is driven in part by the choice of the CPI-U as the price deflator …

Intermediate students know that the CPI is calculated using the Laspeyres method. This results in substitution bias that makes inflation appear higher than it is and the resulting real values appear lower than they are.

An additional twist here is the U in CPI-U. This is the most popular measure of CPI, but it applies best to urban consumers in only the largest urban areas. If you apply it elsewhere, you are adding a second source of upward bias to inflation. It’s sort of like asserting that “Gee … apartments are getting more expensive in San Francisco, that must really hurt the people living in Beaver.”. Not so.

This is just not that hard to figure out when there’s readily observable evidence like this just laying around:

The number of cars per household with below median income has doubled since 1980 …

Here’s the conclusion:

Meaningful growth in consumption for below median income families has occurred even in a prolonged period of increasing income inequality, increasing consumption inequality and a decreasing share of national income accruing to labor.

Do note that those are the big three explanations given on the campaign trail by Clinton, Sanders (and Trump) last year: income ienquality, consumption inequality, and decreasing labor share.

Tim Worstall’s Column for Bangladeshi’s

While in Bangladesh, Worstall was asked to write a column for one of the big newspapers.

It’s pretty basic economics, that some people in the Trump administration would do better to understand. Well, pretty much all U.S. administrations, but they’ve been getting worse since Clinton.

You see, Bangladesh is worried about their trade deficit. One thirtieth the per capita GDP of the U.S., and the government is worrying about the same dang thing. Maybe the problem is the people in government, not trade.

Read the whole thing.

The American Dream Is Alive and Well in Salt Lake (Not Required)

Libertarian-ish Bloomberg columnist and virtual acquaintance Megan McArdle came out to Salt Lake City to figure out how a red state can have the least income inequality, and at least for the last several years, the most income mobility in the country.

There’s no getting around it: For a girl raised on the Upper West Side of Manhattan, Salt Lake City is a very weird place.

I went to Utah precisely because it’s weird. More specifically, because economic data suggest that modest Salt Lake City, population 192,672, does something that the rest of us seem to be struggling with: It helps people move upward from poverty. I went to Utah in search of the American Dream.

Columnists don’t talk as much as they used to about the American Dream. They’re more likely to talk about things like income mobility, income inequality, the Gini coefficient — sanitary, clinical terms. These are easier to quantify than a dream, but also less satisfying. We want money, yes, but we hunger even more deeply for something else: for possibility. It matters to Americans that someone born poor can retire rich. That possibility increasingly seems slimmer and slimmer in most of the nation, but in Utah, it’s still achievable.

The piece is entitled “How Utah Keeps the American Dream Alive”, and it extensively quotes Josh Price’s older brother Joe.

Explaining Dropping Labor Force Participation – Opioid Abuse

Got an email from former student SF yesterday. He’s still reading this blog from the Bay area.

The post about whether the number of ex-felons in the population is affecting labor force participation had caught his eye. I mentioned that I had saved some links to a related issue, so here it is.

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Disclaimer:

Let me step out of my professor role, and note that on a personal level I am not a prude or scold about recreational drug use.

But, professionally, there’s an awful lot of data showing that this time it’s different.

And, it’s Utah in 2017, so personally I have a lot of experience with adults/parents/neighbors who should know better popping these things like candy.

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Labor force participation is down in the U.S. It’s been declining for decades, so there are definitely some long-run things going on. And, the baby boomers are starting to retire, so there’s more people dropping out now than, say, a generation ago. And we had women enter the labor force in large numbers (although that seems to have stabilized about a generation back). And we’re having trouble employing people with less education. And, and, and …

The bottom line is that we’ve looked at a lot of explanations, and the problem seems to be a combination of all of them.

But, even so, there’s still a residual of unexplained dropouts that economists are working on explaining. The acronym for this is NLF, short for Not in the Labor Force. There are lots of reasons to be an NLF. Heck, most of you students are probably NLF’s. What we’re really worried about is men in their prime working years, from ages 25-54, that are NLF.

One think we’re working on is opioid abuse (mostly oxycodones, and hydrocodones, but increasingly fentanyl) affecting both ability and willingness to work, but also likelihood of passing a drug test (if one is required).†

Alan Krueger, one of the best labor economists (and former Obama advisor) notes that half of prime-age male NLFs are taking pain medication daily, and 2/3 of those are taking an opioid (this is a full length academic paper that is not required reading).

Let me put some perspective on that: roughly 1 out of every 50 adult men is both not working and taking an opioid. Quinones reported that in Ohio 1 in 9 people has an opiate prescription (not required). My guess is that, to make the numbers match, a good portion of those 1 in 9 are not taking the pills themselves.

Some of those people have good reasons for not working. And some of the prescriptions are legitimate. But we all know from the accidental overdose data that many of them can’t be.

Even so it’s not unreasonable to make a ballpark estimate that this contributes to a couple of percentage points of the 4% or so drop of the labor force participation rate.

The article that everyone is talking about this past winter is “Our Miserable 21st Century” by Nick Eberstadt. He’s a conservative, and it’s in the pop conservative magazine Commentary, so it’s not unbiased. Even so, Eberstadt has been around for a long time, and most people take him seriously. He makes the point that the election of Trump surprised many people because they are in denial about how lousy life is in much of America. He’s also sympathetic to Trump’s position that “true” unemployment is much higher than what is announced.

BTW: Eberstadt’s Figure 1 does not use logged data for net worth, and his Figure 2 uses a linear deterministic trend (Case 1 from the handbook). I would label those “wrong” if it were me (or you) trying to produce some neutral analysis, but Eberstadt is making a political point so I think it’s tolerable. You should just have a mental filter that adjusts for that.

Note that Eberstadt also discusses the huge number of ex-felons mentioned in Monday’s post: roughly 23 million, or 1 in 8 adults. He adds the interesting point that the federal government doesn’t seem very interested in collecting data on the life outcomes and well-being of these people (former students may note that I mention the avoidance of data collection in the Why Is Macro So Hard? lecture I do in principles classes).

A related article from last winter that people are still talking about is Case and (and 2015 Nobel prize winner) Deaton’s “Rising Morbidity and Mortality In Midlife Among White Non-Hispanic American In the 21st Century” (again, not required). They note that there’s been an unprecedented increase in death rates for middle-aged white Americans. They attribute most of this to opioid abuse:

The CDC estimates that for each prescription painkiller death in 2008, there were 10 treatment admissions for abuse, 32 emergency department visits for misuse or abuse, 130 people who were abusers or dependent, and 825 nonmedical users …

If you tie Krueger, Quinones, Eberstadt and Case and Deaton together, you get a picture of a very unhealthy labor market for a small but sizable fraction of the population.

† Half of all job applicants in the U.S. are now drug tested. Interestingly, drug testing benefits African-Americans the most. This is consistent with ex ante discrimination. In this case, ex ante means after entering the job market but before you have a job (that’s ex post). The interpretation is that potential employers are extrapolating from drug problems being more common among African-Americans to African-Americans should be rejected because they’re likely to have a drug problem. That’s a non sequitar, since it’s a small fraction of any population that has drug problems, and thus discrimination (again, it’s a full article from The Review of Economics and Statistics, and is not required).

Geographic Correlation and Well-Being

Interactive graphics showing the patterns in which we live together are becoming really common. They’re a useful way to think about our world.

This is important in macroeconomics, because we choose to live in places near others, and we agglomerate around areas where living standards are either high or growing quickly.

Today’s addition to this is that the Bureau of Transportation Statistics (part of the federal Department of Transportation) has produced a map of noise pollution. It’s interactive, so you should click through.

Obviously, most of it is related to airports and roads. But, of course, where do you want to live? Probably within an easy drive of an airport. Here’s a screen capture that readily shows the pattern of where we are living our lives and spending our days in the Great Basin:

Just about every place in the region you’ve ever spent time in is on these orange lines.

Via bookofjoe.

Declining Male Labor Force Participation – “Having a Record”

Why are so many prime age (25 to 54) men not in the labor force? This has gone from 3% to 12% over the last 50 years.

One reason may be jail time. How so?

First off, labor force participation is counting the labor force divided by population. In this case we’re just taking the prime age male subset of that.

Secondly, men in jail won’t affect this number. This is because it is “civilian non-institutional” population that is used for these calculations. Institutions includes prison.

Third, there are a bunch of factors pushing up male non-participation generally across developed countries: job-destroying technological improvements, trade, the internet, and changing life choices. The thing is, these explain why this is going up everywhere, but not why it is worse in the U.S. (click through for the interactive chart).

One factor that is different between the U.S. and other countries is that we have incarcerated a larger share of our population historically, but especially over the last few decades.

So a possibility that economists are actively studying is whether American men are not working has to do with “checking the box” that they are a convicted felon on a job application. If places won’t hire you because you’re a convicted felon, it’s probably easy to just drop out of the labor force. Some states are not waiting for evidence, and have made such checkboxes illegal.

Aren’t We Adorable? (optional)

Tim Worstall quoting me quoting him:

http://www.timworstall.com/2017/03/24/the-lesson-every-college-student-should-know/

http://suumacroblog.blogspot.cz/2017/03/tim-worstall-visits-bangladesh.html

http://www.timworstall.com/2017/02/27/theres-a-paul-krugman-line-about-bangladesh/

This reminds me of the mathemticians joke that George is the first name that never ends: G E … O R … G E .. then what?

What Makes Macro So Hard? Not a Yogi-ism, But Still Good (Optional)

This relates to Aaron’s question from the class quodlibet.

Attributed to Jan L. A. van de Snepscheut:†

In theory, there is no difference between theory and practice. But, in practice, there is.

In a nutshell, this is the problem with teaching macroeconomics. Is there any other field where the theory in texts is more blithely ignored by the practitioners?

Via the comment thread at Newmark’s Door for this post.

† This quote is often mis-attributed to Yogi Berra.

Stephen Ross, R.I.P. (optional)

All finance majors (and most economics majors) should learn about Stephen Ross’ contributions to the field.

He has been on everyone’s short list for a Nobel Prize for years. They are not awarded posthumously, and he passed away suddenly last week.

He did not have a homepage on Google Scholar, but if you search for him you’ll come up with this list of top cited papers. For comparison purposes, at SUU a few thousand cites in your career across all your publications makes you a top researcher in our School of Business. Ross had over a dozen papers that had more than a thousand citations each.

You may have been or will be exposed to Ross’ contributions in Haslem’s FIN 4250 class or FIN 6100. Option pricing using binomials is a topic I covered when I taught each of those classes. Arbitrage pricing theory is something that I helped a lot of students with at my previous school. And the paper by Cox, Ingersoll, and Ross is a big crossover into the macroeconomics taught in graduate programs.

Here’s the obituaries from the Wall Street Journal and The New York Times.

Oil and Gas Infrastructure

One more on infrastructure, this one showing mostly privately owned wells and pipelines, and publicly owned resources. The source for this is the piece entitled “The United States of Oil and Gas” that appeared in February 14 issue of The Washington Post. Click through for many more and better graphics.

The oil is in green and the gas is in purple. In Utah, when we think of oil production we think about Vernal, but note how small that field is compared to other parts of the country.

The trick for a 21st century economy is getting the oil and gas from where it comes out of the ground to where it can be used. The oil and gas pipelines shown pass about 15 miles west of town; you can see them out by the Wecco facility.

It’s hard to tell from the map below, but the gray areas are the earlier gas wells in this area. They did not use horizontal drilling of fracking. Note that they extend into New York. But, for better or worse, New York has largely banned horizontal drilling and fracking, which is why the yellow and red dots pretty much stop at the border.

Part of the reason the estabishment of the Bears Ears National Monument in southeastern Utah is controversial within our state, again right or wrong, is that it’s right in the middle of a large field of relatively unexploited oil (you can see this if you click through to the article). It’s been presented in the media as an issue of Native American rights (and it is), and tourism (and it is), but it’s also about the Obama administrations interests in blocking the oil industry.

More Infrastructure

Electricity generation and transmission is a big part of our infrastructure too. Most people have no idea how it’s generated.

This is another piece that you have to click through to see the interactive graphics. Here’s a non-interactive sample showing where solar power is generated in the U.S.

Solar

Nationwide, most of our electricity still comes from burning coal in large powerplants (like the one outside of Delta, or the smaller one along I-80 on the way from downtown Salt Lake out to the airport). Coal is down to about 1/3 of the total, but in Utah it’s about 80%. This is because of the large coal fields in northeastern Wyoming, and the far better than adequate freight rail network in the intermountain west.

Natural gas also powers about 1/3 of what we do. This is a fairly recent development, mostly related to technological advancements in (primarily) horizontal drilling and (secondarily) fracking. One thing I am curious about, but have not been able to document, is that it seems to me that there must have been excess capacity in gas pipelines before that happened, because it doesn’t seem like they’re building pipelines everywhere.

Nuclear power is next, with about 1/5 of our power generation. This is mostly in the eastern half of the country. Nuclear plants use about twice as much water for cooling as other power plants (although they contaminate none of it, and recycle most of it). There’s a reason the Fukushima plant was hit by a tsunami: they put it on the coast on purpose.

BTW: many people think any cooling tower is a sign of nuclear power, but they can be used for any sort of plant.

Oil is down near the bottom of the list. We use oil for a lot of stuff, but it has transportation costs that are on the high side for electricity generation, so it isn’t used much for that.

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There’s a huge problem with electricity generation infrastructure that is not mentioned in this otherwise useful source. This is that electricity is very hard to store: you generate, and you use it. Generally speaking, batteries are lousy: inefficient, toxic, and not biodegradable. That’s why we use them in our small devices, but not in, say, hairdryers.

The four sources listed above are the ones that can be ramped up and down to satisfy peak demand (late afternoon into late evening, mostly in the summer). The ones below are unlikely to ever fit our usage patterns, unless we figure out better storage solutions (e.g., molten salt, kinetics, flywheels).

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Collectively, wind, solar, and hydro cover about 1/7 of our needs.

Hydro appears to be stuck at current production: no one wants any more dams. And, really big ones, like the Hoover and Lake Powell dams don’t generate that much power (I personally recommend a dam tour sometime, it’s sort of amazing how little they actually accomplish with this huge structure). Wind power is starting to be subject to the same problems: the same places with wind are the ones where people have clear views they’'. Solar is fine, but nowhere near as important as people think it is: it won’t be until it’s a lot cheaper.

Visualizing the Global Economy

A Voronai diagram of the global economy":

This is based on World Bank data, which is adjusted across countries using PPP. PPP isn’t bad or wrong, but it is more of an upper bound that shows poorer countries being bigger than they probably are.

Via howmuch.net, Business Insider, and Newmark’s Door.

What Do Economists Know?

I think I annoy many students.

They come to me with questions, generally about policy. And they want definitive answers: is this policy beneficial or not?

They could ask these questions of anyone.

But they ask me because they think I will be able to back up my answer more solidly. After all, I’m a macroeconomist, and I think a lot about policy.

Here’s the annoying part: a lot of my back up leads me to the conclusion that I don’t know the answer, and no one else does either.

That’s not very comforting. It’s also hard to digest, because when we watch or listen or read about policy analysis, we’re confronted by people who are certain they have the right answer. It’s easy to mistake their certainty for a preponderance of solid evidence supporting one side of the policy or the other. Certainty is very common. Convinving evidence that tilts us one way or the other is much rarer.

Economics is not alone in this problem. It crops up in all the social sciences, and a good chunk of the harder sciences as well (e.g., anthropogenic climate change).

One last note before I move on. At the risk of sounding age-ist, the tendency to see the world in black and white diminishes with age. I think this is a good thing, but I’m no longer young. Here’s the thing: there’s pretty much never been a former student who you run into many years later who remarks that economics make less sense than it once did. And most of the time their opinion revolves around to noting that they didn’t realize how few solid conclusions there were about anything, until they’d gotten out in the adult world for many years.

***

I am not alone in my position. And I fancy it to be rather “grown up”.

Russ Roberts has published an essay on this entitled “What Do Economists Know?”. Read it.

John Cochrane has a good follow up on this, urging more humilty amongst economists. Don Boudreaux riffs on that here.

For my part, the intro to Roberts’ piece happens to me with not just journalists, but students and other professors:

A journalist once asked me how many jobs NAFTA had created or destroyed. [substitute most questions about economics there] I told him I had no reliable idea. …

The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer.

Yep, that annoys people. Here’s what we hope happens, but sometimes it doesn’t:

What usually happens is that very smart well-trained people on both sides of the issue argue. …Eventually, sometimes a consensus emerges but that consensus can be reversed by further empirical analysis. … This consensus is … like the two sides in a trial — one hopes the process yields truth more often than not.

But there is no way of knowing reliably if the consensus reflects the truth. It may rely instead on the underlying biases of the prosecutors and defendants in the intellectual trial of ideas. Or where they received their PhD degrees. Or the fashionability of certain positions over time as society changes. … there are no clear feedback loops in the world of academic economics. You can say something that is wrong and the price you pay may be zero. In fact you may be rewarded.

So, here’s where I am coming from in your class:

Where does that leave us?

First let me make it clear that facts and evidence matter. I am not saying that measurement is irrelevant.

…

Facts matter but some facts are extremely difficult to measure … Some facts are quite difficult to pin down and prone to extreme misinformation and even deception.

…

Or as Brian Nosek, Jeffrey Spies and Matt Motyl put it:

Published and true are not synonyms.

So where does that leave us?

…

If I am right, economists are mostly dangerous. At least economists as the world perceives them. But most of the people I am talking about are not economists. They are really applied statisticians.

Those are the people that I think are in the Trump White House. And the Obama White House.

And I think they are mostly applied statisticians who aren’t very comfortable with the tools actual statisticians use.

Think people who spend many seconds perusing the box scores after the game and think they know something about why a certain team won. Policy is made that way in capital cities all over the world.

Roberts continues:

Economics is primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops. Studying economics sensitizes you to these things and others and helps you appreciate complexity and various outcomes …

Economists understand that many things are more complicated than they seem. …

… These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.

… [But we] economists should be more humble and honest …

Cochrane sums up with a discussion of 7 things he thinks we learn from economics (the bullet points and organization are my summary of a couple of pages of finer points):

• Economics leads you to great sensitivity to the fact that  correlation is not causation.
• Budget constraints and accounting identities. I think good economists quickly follow the money one more step than most analysts.
• Unintended consequences. Our field is, perhaps, best described as a collection of funny stories about unintended consequences.
• Supply response, (or demand), and competition. … we are not always great at quantifying their relative significance. But "not zero" is usually an eye opener in public policy.
• The fallacy of composition ought to be right up there with correlation is not causation. We can't all negotiate better.
• In sum, I think economics provides an excellent set of bullshit detectors. This is my stock answer about my own professional expertise. I may not know what makes the economy grow, or how monetary policy works. But I now [sic] with great detail exactly why the ten stories in front of us are all wrong, and typically logically incoherent.
• … Let's call it Hayekian humility. This is the hardest one for so many economists to admit, as we all like to play central planner.

Boudreaux’s post takes on a faux debate format between a non-economist and an economist over policy questions. Good stuff too.

Tim Worstall Visits Bangladesh

Bangladesh was the poorest place on the planet when I was a kid. We’ve defined relative global poverty upward. Now we talk about living on $2/day as extreme poverty, but it used to be $1/day, and most Bangladeshi’s didn’t make that much.

Tim Worstall is there right now as an invited speaker. It’s his first visit.

Tim and I have been virtual friends for 12 years now; we were both very early economics bloggers. He’s had a varied career, one part of which is that he’s now an occasional columnist for Forbes.

On his blog Tim often uses language that some might find offensive. You’ve been warned.

Sexist too. You have been warned. The articles he gets paid for are far less … hmmm … salty.

Per capita incomes in Bangladesh show that it has risen to about the 30th percentile amongst countries, so it has overtaken the level of well-being of perhaps sixty others.

Bangladesh, like China, is what the growth models we’ll be doing after spring break say should be happening in every poor place. That it is not is an astounding commentary on the amount of poor policy practice around the world; many macroeconomists, myself included, assert that the poor choices of many governments around the world qualify as crimes against humanity.

Tim is giddy about what he is seeing in Bangladesh, so I felt I would paste in his entire post. Our world has, over your lifetime, undergone the greatest reduction in poverty and misery in human history. Heck, more people have been lifted out of poverty over that time than in all the rest of human history. That’s a story that every college student should know by heart. Here’s Tim, starting out by noting that Bangladesh was so bad 45 years ago that most international advisors didn’t even know where to start:

In a piece of his talking about how sweatshops ain’t great but they’re better than what poor places have to offer as an alternative Krugman says something like “even Bangladesh”. On the basis that 120 million people on the flood plains of the Himalayan rivers, with little other than the people and the flood plains, has always been one of those places where the development specialists and planners go “Well, what the fuck do we do here?”

Which rather speaks to this comment on the blog here:

I’ve become more optimistic since taking the time to read Tim’s Register and Forbes articles. I like that the world is getting richer. I didn’t realise how much and how quickly.

They’re having an industrial revolution, something that’s not pretty nor nice up close but it is happening. And like most other places that have had one they’re starting in textiles. Here it’s making up the garments, not the weaving or spinning. But that industry employs 4 million and produces 82% of exports.

It’s the old thing. The options are staring at the south end of a north moving water buffalo or the factory. And the water buffalo option produces an income (including domestic production of rice etc) of perhaps 2,000, maybe 3,000 takka a month. 20 to 30 quid. Rickshaw drivers get about the same. One thing I noted was that they’re direct drive, no gears on them. Asked around and gears are considered too expensive…..that’s a certain level of poverty, no? A short rickshaw ride is 10 takka. Got to do a lot of 10 p rides to make a living….

Minimum wage in the factories is 5,000 takka. Time and a half for overtime etc (not included in that number and min wage goes to the new entrants, no training etc). As ever in these sorts of industries the “names” pay better, offer free school for the kiddies, health care etc. The penumbra of subcontractors don’t. A typical career path is off the paddy into the subcontractor factory, a year or two later, with some experience and training under the belt, into one of the main contractors.

Yes, these are shitty wages and neither you nor I would want to try to live like that (note they’re at market exchange rates, not PPP, they understate the standard of living quite a bit, at UK prices think more like £150 a month). But the change wanted, the change desired, is happening.

I was talking to one of the industrialists, and at another time to an Oxford Prof who studies these things (household surveys on stress and mental health of those in and out of the industry for example, being in it raises stress for the worker, lowers it for the extended family…economic security is valuable it seems), and both said much the same thing. The biggest problem for the factories is access to labour. They’ve pretty much swept up that reserve army and are now, to their consternation, competing with each other for access to the desired labour.

As even Marx pointed out, that’s when wages start to rise, seriously and substantially.

The people who invited me out there are the mill owners. Not even Victorian yet, this is still a Georgian economy and some are taking the high road, some the low. Some are training and developing their staff, some are squeezing them. It ain’t, as at the top, pretty nor nice up close.

But the big question in development economics has been, over these past 5 or 6 decades, well, we think we know quite a lot about various places. But what the fuck do we do about Bangladesh? No, really, that’s been the general conclusion all along. And the answer seems to be, as it always has been everywhere, to have a free market driven industrial revolution.

And it is free market too. The creation myth of the industry is that back in 197x, a bloke (I was told his name, cannot recall it) corralled a few dozen sewing machines into a couple of apartments and started. Exports in year one were $20,000. He shipped a dozen likely lads off to Korea for 6 months training, the understanding being that they would then work for him for 5 years, a non-compete clause. None of them kept to that for even 12 months, having seen that this was a bit of alright this business. Absolutely no planning, no legislation, no government help, nowt. Just the lust for profits and market experimentation.

Exports will be $28 billion this year, there’s those 4 million in employment making that double the normal wage (a teacher in a government school might make 8,000 takka a month, with free accommodation, a high school teacher in the private sector would be thoroughly middle class on 15,000 takka. 5,000 takka plus overtime straight out of the fields doesn’t look so bad).

The great economic question in all of history is how do we move on from us all standing around in muddy fields. “So, Rasel, you know how this rice stuff works?” “Fucked if I know Faruqe.” “Mohan, Mohammad, know how we stop the buffalo eating the stuff? “Not a scoobie, sorry.” The answer being that all go off and work in factories.

And it’s happening. Even in that arse end of the development universe, Bangladesh. 5 and 6% GDP growth per year from a Stone Age starting point doesn’t sound like much but they’ve been doing that for two decades now. I spent 22 hours of yesterday traveling, I should be feeling like shit. I don’t think I’ve ever been quite this generally cheerful about the world. Sure, of course, I’ve been personally more excited (that realisation that the bird with the Big Tits is about to put out always generates a certain joy for example) but in that agape instead of eros sense I am indeed that cheerful.

We’d all like this to have happened 250 years ago, when it happened to our forefathers. But it’s true, the poor are getting rich. Life for great vast multitudes of people is getting better.

Time for the Happy Dance, no?

It’s only the dawn but there’s a certain bliss to being alive and knowing it is happening. Now what I’ve got to do is work out if there is some manner in which I can get involved, help prod it along. Probably not, for it has all happened without the intervention of the western upper middle classes in how it works. It’s been everyone else voting with their dollars, buying the stuff produced, which has made it work.

But bugger me, it is working. Ain’t that fucking grand?

There are some Britishisms you may not know. “Quid” is slang for a single English pound. The “Georgian” period ran from 1715 to 1837, with the “Victorian” following — so he’s asserting that Bangladesh is still very early in their industrial revolution. “Nowt” is nothing. “Not a scoobie [doo]” is rhyming slang for a “not a clue”. In America, we probably would not say “arse end of the development universe” but we might say “armpit of the universe”. And “bugger me”? Please don’t go and look that up for a literal meaning and blame me. For slang, in contemporary Utah it is akin to “oh, my heck”.

If you care about people, the economic growth over the last generation is one of the most important stories in all 5,000 years of human civilization. Every economic issue discussed in our recent election cycle pales in comparison.