Friday, December 30, 2016

Dickens on seeing the poor


Tim Taylor - Charles Dickens sums up Victorian-era economics the way only he can. Man, he really punches hard too:

Here's a piece by Dickens written for the weekly journal Household Words that he edited from 1850 to 1859. It's from the issue of January 26, 1856, with his first-person reporting on "A Nightly Scene in London." Poverty in high-income countries is no longer as ghastly as in Victorian England, but for those who take the time to see it in our own time and place, surely it is ghastly enough.

Economists might also wince just a bit at the reaction of some economists to poverty, who Dickens calls "the unreasonable disciples of a reasonable school." Dickens writes: "I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity ..."

One of the problems I have with learning nothing but pre-Depression economics throughout undergrad is that nobody seems to really have the slightest clue how miserable the world was for the masses before the Depression, so they teach the most abominable nonsense with a completely straight face. After the break, read some more Dickens:

Monday, December 12, 2016

Testing the high-wage economy hypothesis


I was reading "Global Economic History: A Very Short Introduction", where the high-wage economy thesis is introduced. Seemed perfectly reasonable and intuitive to me. But, here's a good article on that topic:

Notes on Liberty - testing the HWE hypothesis.

Unfortunately, too much of it boils down to the unfortunate fact that the historical data is so bad, whatever facts we may apply to the question are drowning in thick bands of noise.

Sorry I haven't been posting for a while, btw: I was (and still am, but not as much) busy with exams.

The book above is very good btw.

Sunday, December 11, 2016

theory of financial bubbles


Noah Smith - a better theory of financial bubbles.

How about starting with the idea that money doesn't vanish on its own, and assets are priced in money?

Seriously, if you have a finite stock of assets (real estate, stocks, bonds and gold), and the total world stock of money has to own all of them all the time, wouldn't that explain asset appreciation?

I'm not just mixing up real vs nominal either, because there's nothing that says e.g. the nominal price of US real estate has to go up at the same rate as the nominal price of US consumer goods.

In fact, real estate appreciating vs consumer goods (combined maybe with the aggregate value of real estate in a period vs aggregate value of consumer goods consumed per period) would be an indicator of income inequality, wouldn't it?


Thursday, October 27, 2016

The state of adjunct professorship in the US



Kevin Birmingham - on how little adjuncts are paid. Quote:

I accept the Truman Capote Award in this spirit of justice. I would be remiss, therefore, if I did not address another injustice tarnishing the literary critical profession. I am, so far as I can tell, the first adjunct faculty member to receive this award. To be sure, I have one of the best non-ladder positions available. My paychecks cover my bills. I have health insurance. I can work full time. I know by the end of June if my appointment is renewed for the fall. And yet I am one of over one million non-tenure-track instructors working on a temporary or contingent basis and whose position offers no possibility of tenure. To be contingent means not to know if you’ll be teaching next semester or if your class will be cancelled days before it starts. Most adjuncts receive less than three weeks’ notice of an appointment. They rarely receive benefits and have virtually no say in university governance.

Yet to talk about adjuncts is to talk about the centerpiece of higher education. Tenured faculty represent only 17% of university instructors. Part-time adjuncts are now the majority of the professoriate and its fastest growing segment. From 1975 to 2011, the number of part-time adjuncts quadrupled. And the so-called “part time” designation is misleading because most of them are piecing together teaching jobs at multiple institutions simultaneously. A 2014 Congressional report suggests that 89% of adjuncts work at more than one institution. 13% work at four or more. The need for several appointments becomes obvious when we realize how little any one of them pays. In 2013 the Chronicle of Higher Education began collecting salary and benefits information from adjuncts across the country. An English Department adjunct at UC Berkeley, for example, received $6,500 to teach a full-semester course. To read the employment details from thousands of people teaching courses in language and literature is a demoralizing experience. It’s easy to lose sight of all those people struggling beneath the data points:

The University of Texas at Austin: $8,500 for a full course.

Columbia University: $6,000

The University of Chicago: $5,000

Vanderbilt: $5,900

Duke: $7,000

The University of Iowa: $5,950

These are the high numbers. According to the 2014 Congressional report, the median adjunct pay per course is $2,700. An annual report by the American Association of University Professors indicated that last year “the average part-time faculty member earned $16,718” per year. Other studies have similar findings. 31% of part-time faculty live near or below the poverty line. 25% receive public assistance, Medicaid or food stamps. One English Department adjunct who responded to the Congressional survey said that she sold her plasma on Tuesdays and Thursdays to pay for her daughter’s daycare. Another woman stated that she teaches four classes a year for less than $10,000. She writes, “I am currently pregnant with my first child… I will receive NO time off for the birth or recovery. It is necessary [that] I continue until the end of the semester in May in order to get paid, something I drastically need. The only recourse I have is to revert to an online classroom […] and do work while in the hospital.” 61% of adjunct faculty are women.

Sounds like someone needs to form a union. I mean, if adjuncts really are half of teaching staff in the US, all you need to do is unionize and do a national walkout, and it all ends then.

Wednesday, October 26, 2016

Council of Economic Advisers on labour market monopsony


CEA - labour market monopsony (pdf). Quote:

A growing literature has documented several indicators of declining competition in the United States, and economists have begun to explore the links between these trends and rising income inequality (Furman and Orzag 2015). While recent discussions have highlighted rising concentration among producers and monopoly pricing in sellers markets (The Economist 2016), reduced competition can also give employers power to dictate wages — so-called “monopsony” power in the labor market. While monopoly in product markets and monopsony in labor markets can be related and share some common causes, the latter has some distinct causes and policy implications.

This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages, employment, and overall welfare, and describes various sources of monopsony power. It then reviews evidence suggesting that firms may have wage-setting power in a broad range of settings and describes several trends in recent decades consistent with a growing role for monopsony power in wage determination. It concludes with a discussion of several policy actions taken by the Obama Administration to help promote labor-market competition and ensure a level playing field for all workers.

Monday, October 24, 2016

Why trade deals lost legitimacy


Dani Rodrik - why trade deals lost legitimacy. Quote:

The elites minimized distributional concerns, though they turned out to be significant for the most directly affected communities. They oversold aggregate gains from trade deals, though they have been smallish since at least NAFTA. They said sovereignty would not be diminished though it clearly was in some instances. They claimed democratic principles would not be undermined, though they are in places. They said there'd be no social dumping though there clearly is at times. They advertised trade deals (and continue to do so) as "free trade" agreements, even though Adam Smith and David Ricardo would turn over in their graves if they read, say, any of the TPP chapters.

And because they failed to provide those distinctions and caveats now trade gets tarred with all kinds of ills even when it's not deserved. If the demagogues and nativists making nonsensical claims about trade are getting a hearing, it is trade's cheerleaders that deserve some of the blame.

One more thing. The opposition to trade deals is no longer solely about income losses. The standard remedy of compensation won't be enough -- even if carried out. It's about fairness, loss of control, and elites' loss of credibility. It hurts the cause of trade to pretend otherwise.

See, this is why I want to study political economy.

Noah Smith on the two liberal economicses


Noah Smith - liberals compete for the soul of economics. Quote:

In 2015, Forbes writer Adam Ozimek suggested that a “new liberal consensus” is forming in the economic-policy world. The data back him up. Many economics professors now tend to favor government intervention in the economy more than the general public. And the profession’s biggest public stars, from Paul Krugman to Thomas Piketty to Joseph Stiglitz, are now more likely to lean to the left than to the right. Meanwhile, I’ve tried to document the flood of new research showing that policies like public housing, welfare and public education spending are more beneficial than conservatives have recognized in decades past.

But there are not one, but two big trends in liberal economic thinking. One wants to modify the economic thinking of the past few decades, and the other wants to rip it up. I expect to see a lot of the economic debate in the coming years play out not between the left and right, but between these two strains of thought.

The research and people I’ve been writing about fit into what we might call the New Center-Left Consensus. This strain of thought is based on data and empiricism. Support for higher minimum wages, for example, has grown among economists because a large amount of careful empirical analysis has shown that minimum wage hikes don’t usually cause sizable immediate disruptions in local labor markets. These economists aren’t ignorant of the basic theory of labor supply and demand -- the kind that every undergrad econ student is forced to learn. They just realize that it might not be the right theory in this case.

The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses to assume, as many conservatives and libertarians do, that free markets are always the best unless there is a glaring case for government intervention. It’s more willing to entertain all kinds of ways that government can improve the economy, from welfare to infrastructure spending to regulation, but it also recognizes that these won’t always work. It embraces a philosophy of careful experimentation. Sometimes the new center-left is even in favor of deregulation -- for example, loosening zoning restrictions and reducing occupational licensing. It’s not ideologically opposed to the free market.

[...]

But there’s a second strain of progressive economic thinking that is gaining attention and strength. This alternative could be called the New Heterodox Explosion. It’s basically a movement to purge mainstream economics from progressive policy-making and thought.

The New Heterodox Explosion rose in large part out of strongly left-leaning intellectual circles, particularly sociology, the humanities and other disciplines outside economics. It has also found a home in some economics departments in other countries (most notably the U.K.). Recently, it has started to permeate blogs and the media.

Personally, I'd like to think I'm not even remotely heterodox in my own thinking. And I really think most of the heterodox movement's concerns can be addressed just by purging mainstream economics of the right-wing ideologues who've spent the past several decades turning the academic field into what it is today.

And I think the present disconnect between the policy world and the academic world will help a lot in driving economics back towards honesty.

Tuesday, October 18, 2016

The thing about $152 trillion in global debt....


The thing about $152 trillion in global debt is, it's also $152 trillion in global assets.

Tim Taylor - global debt hits all-time high. Quote:
Global debt is at an all-time high: specifically, "nonfinancial debt," which is the combined debt of governments, households, and nonfinancial firms in the 113 countries that make up 94% of world GDP. The IMF discusses the situation in its "Fiscal Monitor" for October 2016, which is subtitled "Debt: Use it Wisely."
But shouldn't global debt be at an all-time high if yields are so low? It obviously costs very little to service that debt, and there's a lot of money out there desperate to clip the paltry coupon on that debt.

I mean, the IMF says current debt is around 225% of world GDP; but at today's rates, that's probably only somewhere around 5-10% of world GDP that goes into debt servicing, depending on whether you're using the nominal or real rate, right?

And where else should investors' money go, if not into buying principal & coupon?

Savills estimates world real estate value at $217 trillion, so is global real estate underpriced relative to bonds? Is the world spending far too much of its GDP on renting land and buildings?

Global stock market capitalization is at around $70 trillion or so, supposedly; are global stock markets really underpriced so badly that they could accommodate a few tens of trillions leaving the global bond market?

There's only about $7 trillion in gold; is gold underpriced?

Or should investors dump bonds and just hold cash, the good ol' perpetual zero-coupon bond? Unfortunately, world broad money supply is only around $80 trillion.

Or, most likely: is the IMF simply pumping debt hysteria again?

As an aside:

Brad Setser - is China's problem too much debt, or rather is it too much savings?

Maybe the worldwide problem is too much savings?

Chris Dillow on what's not to like about neoliberalism


I wish the professors at school could reason so fairly and equitably about neoliberalism and free-market capitalism as Marxist Chris Dillow:

I agree that capitalism has been a force for progress – as, of course, did Marx. I agree that hard-core libertarianism is a difficult position to sustain; it always required a very selective reading to suggest that Adam Smith was a libertarian. And I agree on the need for some kind of mixed economy.

However, there are (very roughly speaking!) two types of mixed economy.

In healthy versions, the government corrects market failures whilst the market corrects government failures, and government acts to support entrepreneurship, perhaps in more ways than merely providing stable property rights – for example by ensuring the availability of finance and funding or even conducting fundamental research.

In unhealthy versions, however, we have crony capitalism in which the state supports capitalists at the expense of workers and funnels cash towards favoured clients.

And here’s the problem. For many of us, neoliberalism – insofar as it means anything – is the ideology which helps sustain the latter. Many on the left use “neoliberalism” to describe not just free market economics but also managerialism, hostility to the working class, the crass pursuit of wealth and power and the use of the state to enrich capitalists for example via the too big to fail subsidy to banks. 

I'd go further and say that there's "economics" and then there's "neoliberal propaganda", and a lot of economics Ph.D.s either don't seem to be able to tell the difference which is which, or purposefully teach the latter.


Larry Summers and Adair Turner on secular stagnation


Larry Summers and Adair Turner on secular stagnation:




Thursday, September 29, 2016

Larry Summers on the decline of the middle class


Summers at the WaPo - decline of the middle class is causing economic damage. Short quote:

I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors — Ali Alichi, Kory Kantenga and Juan Solé — use standard econometric techniques to estimate the impact of declines in middle class incomes on total consumer spending. They find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.

This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.

Well, the gig is up. Here I thought a childishly easy Ph.D. thesis would be the quantification of exactly how much right-wing government policy is responsible for secstag: now everyone's writing about it.

Oh well. Maybe I can use this for my undergrad Political Economy essay this winter.

Friday, September 23, 2016

Lars Syll on the political economy of inequality


Lars Syll - being especially grumpy today. Here's a good quote:

No one ought to doubt that the idea that capitalism is an expression of impartial market forces of supply and demand, bears but little resemblance to actual reality. Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models [....]

In other words... economic rent?

Thursday, September 22, 2016

Dietrich Vollrath says "this isn't the service sector productivity you were looking for...."


Dietrich Vollrath - service sector productivity, Roy, Baumol, etc.

This is just so cool:

Alwyn Young published a paper in 2014 on the “cost disease of services” and productivity growth. In short, the cost disease of services is an idea from William Baumol, and it is intended to explain why productivity growth tends to slow down during a structural transformation from manufacturing to services. The idea is that services have low inherent productivity growth compared to manufacturing, mainly because services are often provided in fixed units of time (you can’t get a one-hour massage in less than one hour). Combine that with the fact that services are highly income elastic, meaning we demand more and more of them as we get richer, and labor moves into services over time. Hence the average growth rate of productivity falls because everyone is now working in this low-growth sector. It is certainly one of my leading candidates for an explanation of why productivity growth is relatively low in the last 15-20 years compared to prior periods of time.

Young’s paper questions whether in fact services really do have slower productivity growth than manufacturing. His argument is going to be that we may be falsely under-stating productivity growth in services because we are not accounting for the fact that the labor flowing into services is, compared to existing service workers, relatively bad at doing service work. What looks like low productivity growth is in fact low growth (or negative growth) in average human capital.

At the same time, productivity growth in manufacturing is over-stated because the workers that remains behind in manufacturing as people leave are only the very best workers, and hence the average ability of manufacturing workers (to do manufacturing work) is going up over time. What looks like high productivity growth is in fact high growth in average human capital.

The idea comes from the Roy model (1951), a classic economics paper about the distribution in earnings. At it’s heart, the Roy model is about self-selection. Imagine that each person has some built-in ability to work in manufacturing, and some built-in ability to work in services. There may be some elements of these abilities that are correlated (maybe you are really smart and could figure out how to do either efficiently), but regardless you’ll have a comparative advantage in one of them. Yes, the same idea of comparative advantage as in trade. You may be good at both activities, but relatively speaking you’ll be better at one or the other when I compare you to someone else.

Young works out an exact case of the Roy model where your comparative advantage is positively correlated to your absolute advantage. That is, people who are relatively good at manufacturing are also absolutely good at manufacturing. Let me be specific, because I know I always found these concepts hard to keep straight in my head. My daughter once took a few hockey lessons, but now has been swimming her whole life. She has a comparative advantage in swimming over hockey. I’ve played hockey for a long time, but I never really took swim lessons as a kid, and I’m always worried about losing my contacts in the water, so I know just enough to keep myself from drowning. My comparative advantage is in hockey.

But not only that, our absolute advantages are correlated with our comparative advantages. If we had a swim race, my daughter would win - absolute advantage matches comparative advantage. If we played hockey, I would win - absolute advantage matches comparative advantage. (This wasn’t true a few years ago. Despite my lack of swimming skill, when she was 7 I could still outswim her just because I was bigger. Not any more. But I can still own her on the ice.)

In the Roy model, if there was demand for one swimmer and one hockey player, my daughter would self-select into the swim sector and I would self-select into the hockey sector. Now, if the economy changes and the demand for hockey falls and swimming rises (global warming?), then I will have to switch. This will unambiguously lower the average skill level of swimmers, as I suck.

When comparative advantage and absolute advantage are correlated in a Roy model, any movement of a worker from one sector to another will lower the average skill of the receiving sector, and raise the average skill of the sending sector. If I get moved from hockey to swimming, I lower the average skill of swimmers. The dudes that remain in my hockey league will be the ones who are still better than me (i.e essentially all of them), and so I just raised the average skill level of my league by leaving.

This is the essence of Young’s story, and he shows that if this is how things work, then it has an effect on measured productivity growth in each sector. Just another example of how measured productivity growth is a garbage pile of all the things we don’t know how to keep track of.

Really starting to like Branko Milanovic


Nature - income inequality is cyclical.

As an aside, which of these two methods of doing economics is better?

On the one hand, you have Branko Milanovic's nuanced explanation of some explicit features which have affected income inequality over the long term:

In modern times, economic factors seem to have been the most important drivers of change. In the United Kingdom and the United States, an upswing of inequality, which lasted most of the nineteenth century, followed the introduction of inventions such as the steam engine and the cotton gin. With demand high and competition low, people who invested in the new products and services could enjoy large 'rents' (payments over and above what is needed to cover production costs). Inequality was also probably pushed up by the movement of people from the countryside into cities — to better paid, more diverse (and hence more unequally paid) jobs.

In the United Kingdom, the data suggest that inequality peaked around 1870. Around this time, demand rose for labour (driven in part by people leaving the country) and legislation limited child labour, hours of work and so on. Thus workers' conditions began to improve. In the United States, inequality seems to have peaked in the 1920s to 1930s, its decline probably held back longer than in the United Kingdom by immigration from Europe4.

Next came the great decline in inequality that many have associated with progressive modernization. For the many countries involved, the First World War destroyed assets (particularly in Germany, France and Russia), and brought large taxes on the rich to finance the conflict. These changes, along with the emergence of socialist movements and trade unions, the massive scale up of public education (fuelled in part by an increased need for skilled and educated labourers) and the greater participation of women in the workforce, ushered a period of more than half a century of growing equality in all developed countries. For the West, the period from the end of the First World War to the early 1980s saw a 'great levelling'.

Ultimately, this levelling occurred worldwide. Policies such as the distribution of land to landless people, the introduction of widespread education and the creation of state-owned enterprises — such as those running the railways, or producing coal or sugar — boosted equality in developing nations (particularly in Turkey, Iran, South Korea and Egypt). The nationalization of factories, narrowing of wage distribution, and the elimination of almost all capital income (which tends to be more unequally distributed than are wages) accomplished the same in Communist economies such as the Soviet Union and Czechoslovakia.

And so on.

On the other hand, you have Daron Acemoglu shoehorning a μ term into

an infinite-horizon non-overlapping generations model with bequests. A continuum of agents of mass λ live for only one period and each begets a single offspring. A proportion of these agents are “poor,” while the remaining 1-λ form a rich “elite.”

Where μ means "likelihood of revolution" - except if you actually read it, all it is is a policy decision term where the economic policy, if not decided by the government, is decided by the mass of revolutionary proletariat.

In other words, μ has only whatever meaning anyone bothers to give it. And in any case it doesn't matter what it is, really, since everybody dies each period anyway. It certainly doesn't yield any policy suggestions.

I think I've figured out why I'd prefer doing my Ph.D. in political economy instead of economics.


Wednesday, September 21, 2016

Chris Dillow convinced me technology shocks are a thing! But then I quickly got over it.


Dillow - technology shocks are a thing!

I haven't studied RBC yet, but from my position of ignorance, to the extent people have explained it to me, it always seemed nonsensical.

I mean, how can anyone assert that "productivity variations" are the cause of "business cycles" in the face of the 70s Arab oil embargo, the 1980 Iranian revolution, Volcker, the S&L crisis, LTCM, the Asian crisis, the NASDAQ collapse and the real estate collapse?

That's all either political economy (Arabs, Iran, Volcker), asset price shocks (S&L, LTCM, NASDAQ, real estate), or international finance (Asia).

Where is Solow's z in all that? Not one of those has anything to do with "productivity", right?

Then Chris Dillow posts this, and for a while I was convinced that RBC might be a thing:

However, if we ditch representative agent thinking and think instead of firms as being inherently heterogenous, the notion of a negative technology shock seems more reasonable.

Xavier Gabaix points out that even in a large economy aggregate fluctuations can arise from the failure of one or two big firms. This is especially possible if those firms are important hubs, whose troubles plunge supplier or customer firms into trouble: as Daron Acemoglu shows, networks are crucial in transmitting (or dampening) firm-level shocks throughout the economy.

It seems to me that this is a plausible description of the financial crisis. Banks became less able to supply credit than we thought; this was a firm- or industry-level negative technology shock. And because banks were key hubs, this shock was transmitted to the wider economy.

You can squeeze this into DSGE-style models, as (for example) Michael Wickens (pdf) and Hashem Pesaran (pdf) have done.

OK, fine. Institutions are part of z; they are necessary if you want to multiply f(K,L) to get Y. So then institutions could indeed cause shocks! I'm convinced.

But then I thought about this at a more basic level and became unconvinced.

"The residual" is simply everything in an economy that's not capital, labour, or the production function of the two, right? So by this line of reasoning, all that's being said here is that some vague, unknown thing that's not capital, labour, or the production function is going to be the cause of business cycles.

Or, using logic,

P1) B is a set that contains K, L and f, as well as an indefinite* large number of other things (including phlogiston).

P2) Anything which is not K, L or f can cause a recession.

C1) P1 true + P2 true means that there is an indefinite large number of things (including phlogiston) that cause a recession.

I'm sorry, but that seems to be the sort of emptiness that Romer was mocking this week. Want banks to originate technology shocks? Make them explicit in your model.

I'll repeat what I've said before: show me an RBC model where an exogenous political economy variable, or even better where an endogenous asset price variable, causes regular cycles, and I'll be impressed.



* - I use "indefinite" to mean "some huge, undefineable number that certainly won't be anywhere near infinity, but is still big enough for us to treat it that way". E.g., the mathematical term "gazillion".

Romer gets better and better at calling out your mom


Hello to new subscribers. This is just a blog on economics, I'm just an undergrad so don't expect anything original from me, I'm really just running this blog so that I have sufficient ideas stored up for when I need to write theses.

But feel free to keep reading.


Paul Romer - more on my love letter to economics. Quote:

One suggestion is that it would have been better if I had written one of those passive-voice “mistakes were made” documents that firms issue after a PR disaster.

I name names because this is how science works. The standard practice calls for an individual to put his or her reputation behind a claim; to listen to the claims that others make; and to admit that the claim is false when this is what the evidence shows. I did try to restrict my criticism to people who have received Nobel Prizes in Economics or to Smets and Wouters, who have received wide recognition for their work, so it is not like I’m picking off the stragglers at the back of the head.

Seriously? An important part of Romer's withering attack on Lucas, Prescott and Sargeant was the illustration that economists, far from dispassionately pursuing truth, were instead publishing nonsense papers full of statistical fraud to back up each other's fancy new theory.

The social anthropology of economics needs to be discussed, and Romer did it. It really needs to be discussed, because economics is the only "social science" discipline that still refuses to analyze its own power structures and truth statements, even from a simple historical perspective.

I mean, I'm sure the Marxist heterodox crowd have been writing critically about economics for decades, but their analysis doesn't count. The analysis has to take place within the mainstream. The orthodoxy in every other scientific field analyzes itself: even engineers are postmodern nowadays. Why not economists? Are they scared to look in the mirror?

More:

Why Use Humor and Sarcasm?

Wait... seriously, dude? Is someone honestly suggesting you need a reason? Whoever said that, he sounds like a crybaby to me.

The whine I hear regularly from the post-real crowd is that “it is really, really hard to do research on macro so you shouldn’t criticize any of our models unless you can produce one that is better.”

This is just post-real Calvinball used as a shield from criticism. Imagine someone saying to a mathematician who finds an error in a theorem that is false, “you can’t criticize the proof until you come up with valid proof.” Or try this one on and see how it feels: “You can’t criticize the claim that vaccines cause autism unless you can come up with a better explanation for autism.”

On the topic of Calvinball, do you remember the old methodological rule, “in economics, we don’t make assumptions about preferences.” At some point, this became “in macroeconomics, risk aversion and leisure shocks to preferences cause fluctuations in investment and labor supply.” One suspects that Orwell would have been amused.

I'm going to take note of this, then use it in my 4th year micro class.

Monday, September 19, 2016

Chris Blattman learned something from transvestites today


Chris Blattman - the most interesting email I received today. The concluding paragraph is the real kernel of wisdom, but I'll just repost the whole thing cos it's rather funny:

From my email inbox this morning, one of my research assistants reports issues on a large field experiment and crime victimization survey I am running in Colombia:

In Santa Fe the prostitutes and transvestites haven’t let enumerators do the surveys. The survey firm is contacting two leaders of this transvestites community they have worked with before, but the leaders are currently outside Bogota, so the survey firm is waiting for their return on the next few days.

One of the things I enjoy about my work is collecting data on populations that few people have tried to survey. Often the problems are more harrowing, for the subjects and my staff. The emails from Colombia are considerably better than the ones I got accustomed to trying to track ex-combatants in Liberia (“The Land Cruiser fell through a bridge again, but fortunately no one was seriously hurt”), working with street youth (“some of the research subjects got so enthusiastic they decided to stop drugs, and so we’ve had to turn one of the vehicles into an ambulance”) or an African country not to be named (“Yesterday one of the field managers was arrested by the secret police”).

One of the underappreciated aspects of running large surveys, and especially field experiments, is having to deal with entirely unexpected logistical and political and economic problems. I now miss the pre-teaching, pre-toddler days when I got to do most of this myself, rather than pay assistants to do the really hard work.

In retrospect, these everyday problems of running a project were the most educational part of my research. Everything I know about weak states, crime, and violence came not from surveying bureaucrats or criminals or victims, but navigating problems with them in an attempt to get the study done.

I’ve said this before: field experiments will have a huge effect on international development not because they will give us clean treatment effects, but because the act of doing difficult things in the real world will change the way academics think the world works, and what the real problems are.


Paul Romer just called your mom fat



WaPo - the state of macro is not good. Paul Romer's latest missive, unfortunately not titled "Hey Economists: Your Mom Is Fat", has caused a bit of a stir in the academy:
One could argue that the most high-profile contribution by macroeconomists to the post-2008 global economy has been an emphasis on fiscal austerity as a solution to stagnation. That prescription has been, well, pretty much disastrous.

I bring all of this up because Paul Romer has a lulu of a paper entitled “The Trouble with Macroeconomics” that rocketed around the social media of the social sciences. If you think the title implies criticism, read the abstract:
For more than three decades, macroeconomics has gone backward. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.
It gets more brutal from there, as Romer mocks the logic of real business cycles (a core component behind much of modern macro) and relabels its key explanatory variable as “phlogiston.” In history of science circles, that is a sick burn.
And it provides an opportunity for other people in economics to comment:

Noah Smith - the new heavyweight macro critics.

Chris Dillow - an academic problem.

Mean Squared Errors - the microfoundations hoax.

And Romer himself had to put his paper up for download, since it was already being distributed without him. Read it!

Paul Romer - economists' moms are fat (pdf).


Friday, September 16, 2016

Barkley Rosser on agent-based modelling


Barkley Rosser - whither agent-based modeling? This part was a bit weird:

Anyway, there are these pretty interesting ABMs out there that seem to be able to do interesting stuff, but somehow they are not being picked up by the central banks. Furthermore, I heard rumors that funding from the EU and INET and some other places may be cut for this kind of research. If this turns out to be the case, I think it will be too bad.

Don't tell me INET is dumping ABM in favour of... what, then?More anti-West Putin-funded propaganda?

Anyway, this article got me looking at rents in Genoa, and apparently they're cheap. I wonder if it's at all possible to do a Ph.D. there?



Paul Romer and Simon Wren-Lewis on the trouble with macro


Paul Romer - a draft of "the trouble with macroeconomics". I'll probably read it on the bus to school today.

But for an unexpectedly differing opinion, see:

Simon Wren-Lewis - economics, DSGE and reality, a personal story.

I'm not in this to rubbish mainstream macro, btw: I just want to learn what's true and what's not, without the misleading political propaganda of either the left or the right.

Thursday, September 15, 2016

Jared Bernstein on income gains versus income deciles


Jared Bernstein - my comments on the CBPPS census data press call. Here's the important bit:

So we find in today’s data that while households throughout the pay scale saw real gains, the largest gains accrued to those at the households at the bottom of the income scale. I’m sure you’ve heard the topline income number: real median HH income up 5.2 percent, the largest one-year gain on record in this series, which starts in the mid-1960s, and the first real gain since 2007.

But real HH income went up 8 percent at the 10th percentile and 6 percent at the 20th percentile. Poverty rates for whites fell about one percentage point; the rate for blacks and Hispanics fell twice that much (though from much higher levels).

Meanwhile, income gains at the 90th and 95th percentiles were between 2 and 4 percent, below those of lower income households. This too is a familiar pattern of the benefits of full employment. It’s not that tight labor markets don’t help the wealthy. It’s that they tend to do well in good times in bad, while less well-off households depend on tight job markets to give them the bargaining clout they otherwise lack.

So a big part of the story today is that strong labor markets make a big difference in helping to connect low- and middle-income working families to the broader economy. That also points the way forward. I’m glad to see a great year in these data, but middle and low-income HH’s need a lot more than one good year.

Which seems to suggest that monetary policy has a differential effect on low- and high-income earners, doesn't it?

Wednesday, September 14, 2016

Steven Levitt said there's no such thing as a real world demand curve, gets pwned


Jayson Lusk - real world demand curves. Oh you didn't!:

On a recent flight, I listened to the latest Freakonomics podcast in which Stephen Dubner interviewed the University of Chicago economist Steven Levitt about some of his latest research.  The podcast is mainly about how Levitt creatively estimated demand for Uber and then used the demand estimates to calculate the benefits we consumers derive from the new ride sharing service.

Levitt made some pretty strong statements at the beginning of the podcast that I just couldn't let slide.  He said the following:
“And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it.”

As someone whose spent the better part of his professional career estimating consumer demand curves, I was a bit surprised to hear Levitt claim "nobody ever had really estimated a demand curve."  He also said, "we completely and totally understand what a demand curve is, but we’ve never seen one."  The implication seems to be that Levitt is the first economist to produce a real world estimate of a demand curve.  That's sheer baloney.

Angus Deaton is perhaps most well known for his work on estimating consumer demand curves.

In fact, agricultural economists were among the first people to estimate real world demand curves (see this historical account I coauthored a few years ago).  Here is a screenshot of a figure out of a paper by Schultz in the Journal of Farm Economics in 1924 who estimated demand for beef.  Yes - in 1924!  I'm pretty sure that figure was hand drawn!



Or, here's Working in a paper in the Quarterly Journal of Economics in 1925 estimating demand for potatoes:



Two years later in 1927, Working's brother was perhaps the first to discuss "endogeneity" in demand (how do we know we're observing a demand curve and not a supply curve?), an insight that had a big influence on future empirical work.

Fast forward to today and there are literally thousands of studies that have estimated consumer demand curves.  The USDA ERS even has a database which, in their words, "contains a collection of demand elasticities-expenditure, income, own price, and cross price-for a range of commodities and food products for over 100 countries." 

Well, I've never seen a real-world demand curve in my own education yet, so I guess Levitt's not really to blame.

Branko Milanovic gets very long-winded about robots


Branko Milanovic - robots or fascination with anthropomorphism. He could have been a lot more concise:
Recent discussions about the “advent of robots” have some rather unusual features. The threat of robots replacing humans is seen as something truly novel possibly changing our civilization and way of life. But in reality this is nothing new. Introduction of machinery to replace repetitive (or even more creative) labor has been applied on a significant scale since the beginning of the Industrial Revolution. Robots are not different from any other machine.

The obsession with, or fear of, robots has to do, I believe, with our fascination with their anthropomorphism. Some people speak of great profits reaped by “owners of robots”, as if these owners of robots were slaveholders. But there are no owners of robots: there are only companies that invest and implement these technological innovations and indeed they will reap the benefits. It could happen that the distribution of net product will shift even more toward capital, but again this is not different from the introduction of new machines that substitute labor—a thing which has been with us for at least two centuries.

Robotics leads us to face squarely three fallacies.
And so on.

Which could have been summarized more concisely as "we've seen automation replace labour for 200 years already and it just made us richer".

Though I watched an old documentary a while ago which suggested that a contribution to the Great Depression was that Ford-style assembly lines increased productivity far faster than consumption increased, leading to a supply glut.

I don't know if this is just a standard left-wing argument, or if there's merit to it. I'd expect it depends on the rate of productivity increase and the consequent rate of change of the labour-capital income split that would determine the rate of change of demand shortfall increase.

But that's just another way of saying that if you screw the poor you'll screw the economy, and that more general thesis seems like the important topic, not just that robots will take our jerbs.


Monday, September 12, 2016

David Ricardo


Today in school I learned that David Ricardo made his fortune by manipulating the stock market.


Sunday, September 11, 2016

Interesting secstag idea


This is very interesting:

Vox EU - secular stagnation and the fat tail. Quote:

Existing theories about why the crisis took place assume that the shocks that triggered it were persistent. Yet such shocks in previous business cycle episodes were not so persistent. This differential in persistence is just as puzzling as the origin of the crisis. What most explanations of the Great Recession miss is a mechanism that takes some large, transitory shocks and then transforms them into long-lived economic responses.

Perhaps the fact that this recession has been more persistent than others is because, before it took place, it was perceived as an extremely unlikely event. Today, the question of whether the financial crisis might repeat itself arises frequently. Financial panic is a new reality that was never perceived as a possibility before.

Our explanation for persistently low output hinges on people’s assessment of tail risk.

Basically, their thesis is that the financial crisis resulted in a permanent re-evaluation of tail risk, and this should be expected to last for years in any part of the economy where finance is important.

One important reason why tail risk has such large aggregate effects is the fact that firms finance investment, at least in part, by issuing debt. Debt inflicts bankruptcy costs in the event of default. The cost of issuing debt, the credit spread, depends on the probability of default. Default risk depends on the likelihood of large aggregate shocks, or tail events. Thus, when the probability of a left tail event rises, financing investment with debt becomes less attractive. As a result, when tail risk rises, an economy with more highly-leveraged (indebted) firms experiences a larger drop in long-run investment and output. We show that the extent to which debt amplifies bad shocks is greater for large tail shocks than it is for events closer to the mean. Thus, debt financing interacts with tail risk to accentuate the difference between extreme recessions and their milder counterparts.

And that's where they include their "gotcha!" chart, the Skew:





And that does seem to back up their thesis, no?


Thursday, September 8, 2016

China's insufficient investment in education, or more likely not


Tim Taylor - China's insufficient investment in education.

Someone at PIIE just wrote a paper that makes me think PIIE have no idea what they're doing. Here's Tim Taylor's summary:

Jacob Funk Kirkegaard suggests that one substantial hindrance may be China's education system is not keeping up. He lays out the case in "China’s Surprisingly Poor Educational Track Record," which appears as Chapter 3 in
China’s New Economic Frontier: Overcoming Obstacles to Continued Growthpublished by the Peterson Institute for International Economics (PIEE Briefing 16-5, September 2016, edited by Sean Miner).

As a starting point, compare countries by per capita GDP and what share of the adult population has at least an upper secondary education. As shown in the figure, the education level of China's adult population ranks well below other countries with a roughly similar level of per capita GDP.



China has made dramatic gains in its education level in the last few decades. One standard measure of gains over time is to compare the education level of a younger age group to an older age group, like the average education level of adults age 25-34 with adults age 55-64. The red bars--with China shown in yellow--shows how much the education level of the younger group exceeds that of the older age group. Clearly, China has made substantial gains. But just as clearly, the gains in China's education attainment are below those for France, Spain, Brazil, Korea, and others. Moreover, China was starting at a much lower level of educational attainment (the hollow box showing educational attainment for the 55-64 age group is lower for China than for the comparison countries shown here) and so middling gains for China in educational attainment aren't helping it to catch up.



Kirkegaard sums up the situation this way:
"In some ways, China may have been a victim of its own success. The pull effects of its sustained economic boom and rapidly rising wage levels appear to have led too many young people to leave education too early to acquire the skills needed to sustain them (and Chinese economic growth rates) throughout their lifetimes. As Chinese economic expansion shifts toward more skill-intensive growth, those without a secondary education will be less able to find jobs. ...  The Chinese government and society appear to have failed to keep enough of the country’s young people in school during the recent decades of economic growth. This is likely to have long-term scarring effects, as public underinvestment in human capital and individual acquisition of needed skills are difficult
to undo. People’s “lower than otherwise would have been the case” skill levels cannot easily be restructured. Skill shortages at the upper secondary level will make it harder for China to move into the production of higher value added goods and services, lead to increased income inequality and geographic wealth diversity, and complicate the transition to a widespread consumption-based economy."

I think the problem here is that JF Kirkegaard fails to note that educational attainment in China has been "lagging" GDP growth precisely because their GDP growth has been so fast for so long. That explains all the other countries you find below the curve in that first chart (except Saudi Arabia, which has other understandable reasons for low educational attainment): they've experienced a human generation of fast growth.

The countries above the curve have seen GDP deflation over the past generation.

And education is capital that takes a generation to produce.

So sure, China's spent a decade getting way ahead of themselves in transportation infrastructure and physical capital, which is wise because (a) they built it when construction costs were lower and (b) as long as you can pay the upkeep, you can let this capital sit there and do nothing til you've grown into it. But that capital is far faster to form.

And still China was mocked for the past decade for its excess physical capital.

How much more would China have been mocked if Xi Jinping hopped into a time machine and travelled back in time 30 years to convince Deng Xiaoping to spend a pile of money on increasing highschool completion rates?

Excess human capital left to sit idle does not provide a future benefit. In China's case, I'd think their politicians of a generation ago would have even thought idle human capital would produce social unrest.

And I eagerly await someone to tell me the names of those trade theorists 30 years ago who would have encouraged China to spend a fortune on education.

This paper (or, at least, Tim Taylor's condensation of it) makes no sense to me.


Tuesday, September 6, 2016

WSJ - could reducing tax cheating close the deficit? Me - has anyone figured out 1+1 yet?


WSJ - could reducing tax cheating reduce the deficit? Short answer is duh:

The most recent estimates for the size of the “tax gap” (basically, how much tax revenue should be collected but isn’t) are for tax years 2008-2010. Thanks to the financial crisis, both the economy and the deficit looked especially bad then — incomes were depressed and a very expensive stimulus package had just passed — so it’s not a perfect analogy to today’s world. Rather than looking at the raw number of tax dollars that went unpaid those years, then, I’m going to rely on the percent of tax dollars that went unpaid, and apply that figure to today’s fiscal situation.

In each of those years, an average of 81.7 percent of taxes were paid “voluntarily and timely.” Another 2 percent were ultimately collected late and after enforcement actions, which brings the “net compliance rate” to 83.7 percent. These estimates of compliance rates have been relatively stable over the last three decades.

The Congressional Budget Office’s detailed revenue estimates show that about $3.083 trillion in tax revenues will be collected in fiscal year 2016 (counting only individual income, corporate income, payroll, excise, estate and gift taxes). If we assume that figure represents only 83.7 percent of what’s legally owed, that means the real total tax liability is closer to $3.684 trillion.

It also suggests we’re leaving about $600 billion on the table in uncollected tax revenue ($3.684T -$3.083T = $600B). The budget deficit for 2016, according to the C.B.O., is $590 billion.

That’s right: The estimated amount of dollars lost to tax cheating is almost exactly equal to the size of the annual deficit.

I'll go one further:

I'd bet that, from a savings/consumption perspective, something approaching 80-90% of tax-evaded money is going into savings. Which means there's $600 billion too much in savings being generated in the US each year.

(It's "too much" because real rates are negative, so there must be too much savings for the level of investment demand.)

If the government didn't use this $600B to reduce the deficit, which would be stupid to do when real borrowing rates are negative, but instead spent it on infrastructure and capital generation with a positive 30-year rate of return, that would mean $600B/y less in savings, $600B/y more in government "consumption", and thus $600B/y more in annual capital generation.

That would fix the whole secular stagnation problem, no?

Let me know when I'm taking an economics class that makes this point.


Sunday, September 4, 2016

WSJ on natural rate of interest, economists fail at stats edition


WSJ - think you know the natural rate of interest? This part here stuns me:

Economists — and investors — tend to ignore the level of confidence in a calculation. (If you doubt that, look at the attention paid to small beats or misses of expectations for the nonfarm payrolls report, which has a margin of error of plus or minus 100,000 jobs, with 95% confidence.) Holston, Laubach and Williams helpfully published the margin of error around their estimates, and it is big enough to drive a truckload of economists through.

The error margins they produced allow a 95% confidence interval to be calculated, and for some regions it is just silly: They are 95% sure that the natural rate of interest in the eurozone is currently somewhere between plus 12% and minus 12%. Frankly, I’m 100% sure the natural rate sits in a much narrower band than that, without even picking up a calculator.

I think we can take that confidence interval as an indication that their "natural rate of interest" is the deranged fantasy of someone who fell off a bike at high speed while not wearing a helmet.

Seriously, this right here is why I'm taking extra stats classes beyond what is required for an economics BA. I could probably do one paper a year just on bad statistics.


Chris Dillow on incompetence


Chris Dillow points out that incompetence is something that should be part of economic models, but isn't:

Chris Dillow - on incompetence. Quote:

Should ineliminable incompetence play a bigger role in economic and political thinking?

My trigger for asking is a piece in the Times by Oliver Kay on the appalling mismanagement of football clubs such as Blackburn Rovers, Charlton, Leeds and Blackpool. But of course, incompetence is much wider than that. Trains are late and overcrowded; building projects run over time and budget; utilities, banks and broadband providers often have poor quality service that can’t wholly be explained by profit-maximizing; and you all have examples of bad management in your own workplace.

Which brings me to a paradox. Whereas our own eyes tell us that incompetence is ubiquitous, standard economic theory regards it as merely a temporary deviation. It thinks that agents are incentivized to optimize; that badly managed assets will be bought cheaply by people better equipped to run them; and that competition will drive incompetent firms out of business.

But here's where he sums up the problem in one sentence:

I have an incentive to become a Premier League footballer or Nobel laureate, but you’d be ill-advised to bet on me becoming either.

It's not really a case of "incompetence", but rather one of unequal endowment of human capital. Unfortunately, recognizing that would mean using human capital as an input to every model, and it would also mean learning how to quantify human capital in some way if you want numbers to come out the other end.

Monday, August 29, 2016

What is heterodox and what is orthodox?


What is heterodox and what is orthodox?

That's one big question that I want to answer before I graduate.

After all, if Larry Summers, Paul Krugman, Joe Stiglitz, Dani Rodrik, Branko Milanovic, Thomas Piketty, George Akerlof and Paul Romer are the great thinkers and Nobel-winners who lead their discipline and represent economics to the public, shouldn't they be considered orthodox?

Here's some links to get me going, and hopefully I remember to come back here and actually read this stuff:

Jo Mitchell - on heterodox macroeconomics.

Noah Smith - economics without math is trendy.

Simon Wren-Lewis - heterodox and mainstream macroeconomics.

Lars Syll - dumb and dumber in modern macroeconomics.

Leigh Tesfatsion - agent-based economics: basic issues.





Larry Summers is going to be writing a lot on CBs and fiscal policy failures


Larry Summers - disappointed by what came out of Jackson Hole. Quote:

I had high hopes for the Federal Reserve’s annual Jackson Hole conference.  The conference was billed as a forum that would look at new approaches to the conduct of monetary policy—something that I have been urging as necessary given secular stagnation risks and the sharp decline in the apparent neutral rate of interest.  And Chair Yellen’s speech in a relatively academic setting provided an opportunity to signal that the Fed recognized that new realities required new approaches.

The Federal Reserve system and its Chair are to be applauded for welcoming challengers and critics into their midst.  The willingness of many senior officials to meet with the Fed Up group is also encouraging.  And its important for critics like me to remember that the policy explorations of today often become the conventional wisdom of tomorrow.   In this regard the fact that the Fed has now recognized that the decline in the neutral rate is something that is much more than a temporary reflection of the financial crisis is a very positive sign.

On balance though, I am disappointed by what came out of Jackson Hole judging by press reports since I was not there.  First, the near term policy signals were on the tightening side which I think will end up hurting both the Fed’s credibility and the economy.  Second, the longer term discussion revealed what I regard as dangerous complacency about the efficacy of the existing tool box.  Third, there was failure to seriously consider major changes in the current monetary policy framework.

and

Additional points that I would have thought appropriate in commenting on near term policy include: (i) with current estimates of the real neutral rate running near zero and there being a downward trend it is far from clear that current policy is highly expansionary. (ii) It is plausible that hysteresis effects account for some of the decline in productivity growth and that if so allowing for rapid demand growth might have lasting supply side benefits. (iii) if a two percent inflation target was appropriate when the neutral real rate was thought to be two percent and stable, surely a higher target is appropriate when the neutral real rate is zero and unstable. (iv) in contrast to the risks of inflation exceeding two percent ,which are likely very small, the risks of a downturn are very serious. (v) the apparent rigidity of inflation expectations and insensitivity of inflation to measures of slack create extra uncertainties about the conventional idea that unemployment rates in the 4.5 percent range risk accelerating inflation.

As an aside, why shouldn't a zero inflation expectation be normal in this day and age? Fiscal conservatism has won, labour bargaining power has been eliminated, and the Fed has spent 35 years jacking up rates whenever inflation has shown up.

Don't 35 years of policy mean anything to inflation expectations?


Sunday, August 28, 2016

Branko Milanovic is weighing in on income disparity


Branko Milanovic and Nassim Nicholas Taleb - why the super-rich may be indifferent to income growth in their own countries (pdf).

Unfortunately it's all math. I don't know why he needs to say this in math.

Maybe in 20 years fiscal policy will change


Reuters - global central bankers unite in plea for help from governments. Quote:

Central bankers in charge of the vast bulk of the world's economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.

Mired in a world of low growth, low inflation and low interest rates, officials from the Federal Reserve, Bank of Japan and the European Central Bank said their efforts to bolster the economy through monetary policy may falter unless elected leaders stepped forward with bold measures. These would range from immigration reform in Japan to structural changes to boost productivity and growth in the U.S. and Europe.

Without that, they said, it would be hard to convince markets and households that things will get better, and encourage the shift in mood many economists feel are needed to improve economic performance worldwide. During a Saturday session at the symposium, such a slump in expectations about inflation and about other aspects of the economy was cited as a central problem complicating central banks' efforts to reach inflation targets and dimming prospects in Japan and Europe.

ECB executive board member Benoit Coeure said the bank was working hard to prevent public expectations about inflation from becoming entrenched "on either side" - neither too high nor too low. But the slow pace of economic reform among European governments, he said, was damaging the effort.

OK, sounds good so far....

"What we have seen since 2007 is half-baked and half-hearted structural reforms. That does not help supporting inflation expectations. That has helped entertain disinflationary expectations,” Coeure said.

Ah.

So in reality the central bankers are asking for more "structural reforms", which in the past have always meant "reforms to destroy labour power and tank consumer demand while simultaneously opening up trillions of dollars worth of tax havens for the rich".

So I guess we can expect another 20 years of secular stagnation, then.


Saturday, August 27, 2016

German fiscal surplus


Brad Setser - Germany's going to run a fiscal surplus this year. Quote:

Barry Eichengreen on economic history


Here's Barry Eichengreen on the Great Depression versus the 2009 crisis, and the fallacies of analogy between the two:

Barry Eichengreen on economic inequality over history


Barry Eichengreen - presentation on inequality through history (pdf).

When you get to slide 16 it becomes rather obvious that economic inequality is almost entirely driven by exogenous political decisions, not by anything economically endogenous.

The new (post-1980) boost in inequality also turns out to be obviously the result of overt political action, since he notes it can be seen more in English-speaking countries than in continental Europe. Yet as he notes,

"skill-biased technological change (favoring the relatively well educated) and globalization (disfavoring the unskilled in the advanced countries) are the popular explanations."

It's funny that a social science so infused with politics tries so hard to deny the effect of politics.

Friday, August 26, 2016

Some problems I have with tying owner equivalent rent to CPI


Unfortunately I don't know the nuts and bolts of how interest rates got incorporated into owner equivalent rent (OER) in the 70s, so I'm not sure I understand CPI and OER.

But someone (Dean Baker?) has written about an interesting thing:

Apparently, sometime in the 70s the Fed changed the way it calculated CPI: it started to include change in mortgage interest in OER.

Obviously, that would have a tremendous impact on CPI readings later that decade: the Arab oil embargo, and later the Iranian revolution, generated massive short-term commodity-driven spikes in inflation.

But Dean Baker (or someone whose paper he came across, I dunno) has apparently gone into the inflation data and found that, if you back out the inflation/interest component of OER, there actually was no inflation problem in the 70s aside from those two supply shocks.

As I said, I don't know enough about the mechanics of OER and CPI calculation, and I can't find the paper (if there is one) that explains this stuff in detail. But own my own I can see massive methodological problems with incorporating inflation into CPI:

1) if you take the aggregate mortgage costs as changing with interest rates (debatable, see 2 below), then the NPV of future payments with which you might calculate OER is only known post-hoc: you can't extrapolate NPV from the present rate, because the present rate will continue to change, and compounding can introduce almost an order of magnitude of error! So it depends how OER amortizes this incredibly indefinite NPV.

2) In my own parent's case, they were locked in at 6.25% all through the 70s, so couldn't you say their OER went *down* in real terms? Basically the Fed would have to incorporate into its calculations some measure of how many mortgages are locked-in, and then (for the locked-in crowd) adjust their OER for future increased wealth (see 4 below).

3) Mortgage interest, in the US, is tax-deductible anyway, so wouldn't that make the delta of OER deductible?

4) Housing's an asset, so if rapid house price accumulation eats into current consumption, it'll also radically increase future income (in something like a sophomore economics 2-period everybody-dies model). Essentially, OER is paying for an asset (and theoretically thus paying for future income): it's not consumption. Essentially the home owner is getting that money back someday.

5) And does an interest-adjusted OER also take into account how increasing home prices increase the wealth of home owners with no mortgage?

6) If we incorporate price inflation of housing assets into CPI, why not incorporate price inflation of other assets, like stocks?

7) Similarly, if interest rate increases inflate OER, does the Fed also take into account the effect of interest rate increases on the NPV of firms' capital? I.e., is corporate rented-to-own capital treated the same in CPI?


Thursday, August 25, 2016

Rob Axtell models the economy with 150 MILLION AGENTS WHAARRRRRR


I guess you need something a bit stronger than NetLogo to model the economy with A HUNDRED AND FIFTY MILLION AGENTS:



This is just so damn cool.

But I think you can probably get away with a few orders of magnitude less than 150 million agents. 

I'd like to hear the argument against that.

Wednesday, August 24, 2016

New study from the Institute of No Shit Sherlock


WSJ - paid sick leave reduces flu transmission. Quote:

Everyone knows staying home from work when you have the flu helps protect your co-workers from getting sick.

Just as an aside, it also helps protect your older relatives who don't even go to work but are still exposed to the flu, and who are much more likely to die from it. But please continue:

Unfortunately, not everyone does it.

A new National Bureau of Economic Research paper argues that one reason for that is access to paid sick leave. The paper by Stefan Pichler and Nicolas R. Ziebarth argues that the general flu rate “decreases significantly” when employees have access to paid time off due to illness. It also found that more people play hooky, or stay home when they aren’t actually contagious.

Unlike most industrialized countries, U.S. workers are not guaranteed pay when they take off from work due to an illness. Messrs. Pichler and Ziebarth say half of American workers don’t have access to paid sick leave.

In the U.S., the fight over access to paid sick leave has largely been about income inequality. Labor Department data from 2015 shows that only around 31% of the lowest-earning quarter of private-sector workers had access to paid sick leave, while 84% of the highest-earning quarter did.

And is this just a sad result of 19th-century economic orthodoxy? No:

While some cities and states have implemented sick leave schemes, there has been a simultaneous effort by some Republican-dominated state legislatures to preemptively ban cities from implementing rights to paid sick leave.

Yup, as we can see, it's active class warfare by a party that intends to do whatever it takes to put the boots to working people with every action.

Tuesday, August 23, 2016

And you wonder why there's secular stagnation?


Brad Setser - IMF hooked on fiscal consolidation worldwide. Quote:

In theory, the IMF now wants current account surplus countries to rely more heavily on fiscal stimulus and less on monetary stimulus.

This shift makes sense in a world marked by low interest rates, the risk that surplus countries will export liquidity traps to deficit economies, and concerns about contagious secular stagnation. Fiscal expansion tends to lower the surplus of surplus countries and regions, while monetary expansion tends to increase external surpluses.

And large external surpluses should be a concern in a world where imbalances in goods trade are once again quite large—though the goods surpluses now being chalked up in many Asian countries are partially offset by hard-to-track deficits in “intangibles” (to use an old term), notably China’s ongoing deficit in investment income and its ever-rising and ever-harder-to-track deficit in tourism.

In practice, though, the Fund seems to be having trouble actually advocating fiscal expansion in any major economy with a current account surplus.

Best I can tell, the Fund is encouraging fiscal consolidation in China, Japan, and the eurozone. These economies have a combined GDP of close to $30 trillion. The Fund, by contrast, is, perhaps, willing to encourage a tiny bit of fiscal expansion in Sweden (though that isn’t obvious from the 2015 staff report) and in Korea—countries with a combined GDP of $2 trillion.

How can anyone still believe that secular stagnation is caused by any sort of endogenous characteristic of economies, when there's tens of trillions of dollars being committed to crushing demand and increasing savings every year as the result of overt political decisions?


Saturday, August 20, 2016

St. Louis Fed on government spending and jobs: well there's your problem


I'm sorry, this just looks bad:

St. Louis Fed - does government spending create jobs? Quote:
Research Analyst Rodrigo Guerrero and I took up the issue of the efficacy of government spending at increasing employment. We looked specifically at over 120 years of U.S. military spending, which provides a kind of "natural experiment" for our analysis.

Looking at government spending more generally suffers from the problem that the spending may be correlated with economic activity: The government may spend more during a recession (as with ARRA) or more during an expansion (when tax revenues are high). This might bias the results, which economists call "an endogeneity bias."

Military spending, on the other hand, is likely to be determined primarily by international geopolitical factors rather than the nation's business cycle.

And no surprise at what they find:

We used a similar methodology and found that military spending shocks had a small effect on civilian employment. Following a policy change that began when the unemployment rate was high, if government spending increased by 1 percent of GDP, then total employment increased by between 0 percent and 0.15 percent. Following a policy change that began when the unemployment rate was low, the effect on employment was even smaller.

Yeah, don't you see the problem?

You've factored out all government spending associated with economic activity. But Y correlates with L.

So that means you've factored out any government spending that correlates with jobs.

So it wouldn't surprise me that you've found that the government spending that's not correlated with jobs is not correlated with jobs.

I also think it's faulty methodology to use 120 years of military spending, because those periods will include:

1) American pre-war and intra-war isolationism;
2) WWII's command economy, with its wage and price controls; and
3) the wasteful spending of post-WWII's military-industrial complex.

That is one big fallacy of analogy there.

Friday, August 19, 2016

The Krugginator on Summers on John Williams on inflation targeting


Larry Summers - John Williams on the low r*. Quote:

Williams rightly if rather tentatively draws the conclusions that a chronically very low neutral rate has important policy implications. He stresses the desirability of raising r* by pursuing structural policies to raise growth and affirms the importance of fiscal policy. I yield to no one in my enthusiasm for improved education and educational opportunity but I do not think it is plausible that it will change the neutral rate appreciably in the next decade given that the vast majority of the 2030 labor force will be unaffected.

If Williams is overenthusiastic on education, he is under enthusiastic on fiscal stimulus. He fails to emphasize the supply side benefits of infrastructure investment that likely enable debt financed infrastructure investments to pay for themselves as suggested by DeLong and Summers and the IMF. Nor does he note at current interest rates an increase in pay as you go social security could provide households with higher safe returns than private investments. More generous Social Security would likely reduce the saving rate, thereby raising the neutral interest rate with no change in budget deficits. Nor does Williams address the possibility of tax measures such as incremental investment credits or expansions in the EITC financed by tax increases on those with a high propensity to save. The case for fiscal policy changes in the current low r*’environment seems to me overwhelming and much can be accomplished without any increase in deficits.

Won't happen because political economy. And as K-dog points out, economic orthodoxy in general also should take the blame:


The Krugginator - slow learners. Quote:

Yet as Larry says, the paper is still weak and tentative even on monetary policy, to an extent that’s hard to understand:

I am disappointed therefore that Williams is so tentative in his recommendations on monetary policy. I do understand the pressures on those in office to adhere to norms of prudence in what they say. But it has been years since the Fed and the markets have been aligned on the future path of rates or since the Fed’s forecasts of future rates have been even close to right.

Furthermore, there’s basically no break with orthodoxy on fiscal policy, despite the evident importance of the liquidity trap, evidence that multipliers are fairly large, and basically zero real borrowing costs.

Yet Williams is at the cutting edge of policy rethinking at the Fed. And in general mainstream thinking about macroeconomic policy has changed remarkably little, remarkably slowly.

You might say that it is always thus. But, you know, it isn’t.

I fairly often find myself comparing the intellectual response to the financial crisis and its aftermath with the response to the emergence of stagflation in the 1970s. I say the 70s, but really stagflation emerged as an issue in 1974, after the first oil shock, and pretty much ended with the Volcker double-dip recession of 1979-82 – a recession whose end implication was that monetary policy continued to work in a fairly Keynesian way. So it was well under a decade of experience; yet it utterly transformed how everyone talked about macroeconomics.

Then came the 2008 crisis. As I’ve written many times, events since that crisis have played out pretty much the way someone who knew their Hicksian IS-LM would have predicted – but that should have been shocking to the many people, both in policy circles and in the economics profession, who dismissed that kind of economics as worthless, proved false, whatever. And the sheer persistence both of depressed economies and of low inflation/interest rates should by now have led to a big rethinking. Depression economics redux has now gone on as long as stagflation did.

Yet rethinking has been glacial at best. People who warned about the coming inflation in 2009 are warning about the coming inflation in 2016. Orthodox fears of budget deficits still dominate a lot of discourse. And the Fed still clings to an inflation target originally devised in the belief that the kind of thing that has happened to our economy would never happen.

I’m not entirely sure why learning has been so slow this time. Part of it, I suspect, is that the anti-Keynesian backlash of the 1970s had a lot of political power, and behind the scenes a lot of money, behind it – which influenced even academics, whether they realized it or not. And these days that same power and money is deployed against any rethinking.

Whatever the explanation, however, it’s taking a painfully long time for serious policy discussion to arrive at a point that should have been obvious years ago.

Not hard to understand. You've got Krugman, Summers, Stiglitz, and a dozen other leading lights of the economics profession advocating a simple solution to the problem of prolonged economic depression; but all of undergraduate economics seems to be teaching the exact opposite, and most politicians apparently hewing to the kill-all-government line of Murray Rothbard and Ayn Rand.

What do you expect the economic result to be?


Learning Netlogo for free


So it's not enough that I'm going to be learning Scilab at university this fall.

I want to learn multi-agent programming, and apparently the easiest language to use is NetLogo.

Thankfully, Jose Vidal at USC has an entire video playlist where he leads you through learning NetLogo.

Youtube - Jose Vidal's NetLogo tutorials.

And you can download and install NetLogo for free from the NWU website.

Reuters: Global negative-yielding debt still over $11 trillion



Reuters - global negative-yielding debt slips to $11.4T. Quote:

The global amount of negative-yielding government bonds edged down to $11.4 trillion on Aug. 2 from two weeks ago as Japanese debt yields rose in reaction to more official stimulus announcements, Fitch Ratings said on Wednesday.

On July 15, there were about $11.5 trillion in sovereign bonds with negative yields in Japan and Europe, whose central banks adopted negative rate policies and have been purchasing bonds heavily in an effort to stimulate their sluggish economies.

Japanese government bonds accounted for more than half the negative-yielding debt with $7.2 trillion, down from $7.5 trillion two weeks earlier and $7.9 trillion on June 27, the rating agency said.

OK, then riddle me this.

Why shouldn't trillions of dollars of debt be negative-yielding, when:

1) decades of work by the IMF has aimed at making governments more reliable debtors, thus reducing the default risk premium on their debt;

2) there's been a similar move for decades to increase domestic saving worldwide, as a way of making government (and I guess corporate?) debt more sustainable, and an increase in saving should drop the S-I equilibrium rate of interest;

3) there's been decades of pro-rich and pro-corporate tax policy meant to increase the savings of the rich, eliminate corporate taxes and construct tax havens, which again means S-I equilibrium r goes down;

4) there's been decades of anti-poor tax and income policy which would obviously decrease consumer demand in the majority of the population, meaning less investment demand and again equilibrium r goes down;

5) there's been decades of "inflation targeting" that's now built an expectation of periodic massive layoffs and demand destruction whenever inflation goes above 2%, dropping equilibrium r and also reducing the inflation risk premium on debt;

6) there's been decades of political campaigning against government spending, to the point that now the US isn't even meeting its spending requirements to counteract depreciation of public assets, which reduces public investment and increases private savings, again equilibrium r goes down;

7) there's been years of pro-austerity propaganda to the point that the EU, a major economic bloc, explicitly wishes to stay in a prolonged economic depression instead of stimulating demand, which means again higher S and lower I?

Seriously, "secular stagnation" seems a childishly obvious result of decades of political policy. You guys wanted zero inflation and low interest rates, now you got it and you complain?