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.

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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.