This Year’s Crisis

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

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

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

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

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

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

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

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

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

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

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

Something to Worry About: Russia

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

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

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

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

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

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

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

Keep an eye on this one.

Quantifying Economic Uncertainty

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Fibs Progressive Tell

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

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

I lifted this table shamelessly from this piece:

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

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

Read the whole thing.

Via Carpe Diem.

One Reason Why Household Income Is Falling

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

Then what about this:

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

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

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

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

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

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

Via Carpe Diem.

How Stupid Is Obama?

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

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

Here goes:

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

Where do I begin?

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

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

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