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Even the St Louis Fed has gone to the new fangled web look. I am sure there is some technical name for it. Everyone is doing it.

Its funny the things that make you feel old.

According to Google trends, the top city for Google searches for “rapture”  is Oklahoma City, and the top state is Arkansas. The top state for “judgement day” searches is New Jersey. Take that for what you will.

This is the second part of a series of posts responding to Matt Steinglass at the Economist, who put forward some common progressive arguments in favor of more unionization recently. To understand the big picture problem with the argument for more unions, it’s useful to look at the reasons why unions have died out in the first place. One common explanation is that the most highly unionized industries, like manufacturing, have shrunk, and that unionization was simply taken along for the ride. This is not the case however. As Barry Hirsch details, while overall manufacturing employment fell from 20.1 million from 1973 to 15.6 million in 2006, nonunion manufacturing employment rose by 1.5 million. A similar patter persisted in the other main union industries of construction, and transportation/communication/utilities: union employment fell while nonunion employment rose. The graphs below, from Hirsch, tell the story pretty clearly:

If declining industries is not the cause then what? Hirsh identifies 3 main explanations for the decline of unionism: competitive, structural, and institutional. Ultimately, he provides a convincing argument that the fall of unionism is due to a more competitive and dynamic economy. Part of the problem, he argues, is that collective bargaining slows firms down:

“Were changes in the economic environment very gradual and competitive pressures weak, a  formal and highly deliberate union governance structure might pose few problems. The costs of deliberate or sluggish union governance, however, increase with the speed of change and the degree of competition. New information is constantly coming to a firm and its workers and it is prohibitively costly. to have explicit contract terms for every possible contingency. Revising formal contractual terms is costly. Although many collective bargaining agreements have broad management rights clauses, formalized contractual governance limits flexibility and managerial discretion in union companies. “

A related problem is that by cartelizing labor, unions raise wages above the competitive level. The more competitive a firm’s market, the less they will be able to raise price in response to higher wages, and the more costly unionization is in terms of lost employment. For both reasons it is difficult more difficult for unionization to exist in a competitive and dynamic economy.

A common counterargument to this, which Matt makes, is to point to the high employment and unionization of the 50s and 60s as evidence that they can co-exist. But the economy was much less dynamic and competitive than it was today. As detailed by Brink Lindsay in Nostalgianomics, labor market competition in that time period was limited by discrimination against minorities and women, and strict immigration restrictions. Goods market competition was limited by government policy like tariffs and price controls, and a much lower level of global competition than you have today. Despite this, strong economic growth was possible due to lots of long-hanging productivity fruit and innovation.

Today low unemployment can’t co-exist with high unionization of the kind we have in the U.S. because the world, and especially the U.S., is more competitive and dynamic.  I think an implicit argument made by some, although not necessarily Matt, is that we should be willing to give up the dynamic and competitive economy in exchange for more unionization. But aside from being good for all the reasons detailed in Nostalgianomics (free trade, less discrimination, and more immigration are good things), a competitive and dynamic economy is extremely important. As Tyler Cowen argues in The Great Stagnation, we’re out of low-hanging fruit like we used to have, and so we can’t afford to give up the economic growth we do have by attempting to decrease labor market and goods market competition enough that unions can thrive again.

In an attempt to tamp down rising prices, the Obama administration is setting a 10% maximum increase for health insurance rates, above which insurers would have justify the increases based on higher costs. Starting in 2012 they will set different rates for individual states. I don’t know if there is any literature on this in health insurance, but there is evidence that when regulators set price points it can serve as a focal point, or “Schelling point” for economist Thomas Schelling, for collusion. Here is how Knittel and Stango describe the theory:

In practical terms, the problem of tacit collusion often reduces to one of successful coordination.Firms can resolve the coordination problem in many ways; one such way is through the use of a focal point. The theory of focal points dates at least to Thomas Schelling (1960), who noted that in simple games with many equilibria, agents can quite often recognize a focal point and use it to coordinate. In one of his more well-known examples, Schelling discusses the problem of two people simultaneously choosing a common location (in which to meet) in New York City. Given that the game possesses an infinite number of equilibrium location-pairs, we might expect the odds of successful coordination to be quite low. Nonetheless, in practice most people who play the game choose a well-known spot—such as Times Square or the Statue of Liberty—and can successfully coordinate. In situations where firms set prices, it is often suggested that the “clustering” of prices occurs at certain natural focal points (e.g., $9.99).

Like I said, I have no idea whether this would or has occurred in health insurance markets. But regulators should certainly consider it a potential cost to setting prices.

Tim Hartford says

In terms of how economics needs to change in light of the crisis, where I would put my emphasis is not so much in behavioural economics, though I have no problem with it – it’s a very interesting area and it’s producing really important insights – but I think it’s more about engaging with the world, and the institutions of the world as it is. Economists got too used to reasoning in fairly abstract ways, without looking at the details of what was actually going on.If, as an economist, you’d looked at the way sub-prime loans were being sold, and the kinds of contracts that were being written and the financial instruments that were being created, you don’t need any mysterious appeal to psychology to explain the disaster. You just need to have been paying attention.

Now its easy to say this in retrospect but I have the luxury of having said it at the time. Perhaps, that was just a lucky coincidence.

However, I am also saying something that differs from Hartford and just about everyone else that I know of. That is, the deeper and more careful folks look into the crisis the less obvious it will be that it was going to happen.

If you use information available before the crisis you will find it hard to build a model that is consistent with pre-crisis data, yet predicts that the crisis was about to happen.

My thesis was and still is the finance sector failed the Lucas Critique. Firms used models of the world to predict what would happen when you changed the rules by which the world worked. However, those models were only valid under the old rules.

Another from Geithner

“It is true that we are now able to fund these deficits at very low interest rates, less than 3.5 percent now for a 10-year Treasury bond. But these rates are a reflection of confidence that we will act, not a justification for inaction. And they are unusually low now also because of the relative lack of other investment alternatives in a world still recovering from crisis and with the other major economies facing comparatively tougher problems than even ours here in the United States.”

I have struggled to distill the key points of difference between this framework and my own. I don’t think it has much to do with confidence per se as the fact that there is no alternative to low interest rates.  I haven’t gotten to the nugget of it yet but there are a couple of points that are important.

First, the Fed moves last. Ultimately interest rates on government debt are determined by monetary policy. The real question is not “what do investors want” its “what does the Fed want”  Thus ultimately you are asking yourself: Is this string of events inflationary and if so why?

Second, at the end of the day there is no such thing as buying and selling. There is only trading. The phrase I use is that “if you are selling Treasuries then what are you buying.” The point is that you have to be buying something, even if that something is US Dollars. In practice if you are selling Treasuries you are likely buying US Output.

This is why having your own currency is a really big deal. You can sell Greek bonds for Euros and then use those Euros to buy German output. Its entirely possible for Euros to be drained out of the Greek economy by a Sovereign Debt Crisis. This means that a crisis of confidence in Greece could create a monetary shock to the Greek economy and a monetary boom to Germany at the same time. They use the same money.

For the US this is not really possible. You could sell out of Treasuries and into Dollars and then hold the dollars. However, its not really clear what that gives you. Moreover, by pulling dollars out of the US economy and holding them, it gives the Fed room to print more dollars and buy up the US debt.

If on the other hand you sell out of Treasuries and then send those dollars back to the US then you are either increasing investment in the US or buying US output directly. Both of these push US GDP higher, not lower.

Third, Consumption is not GDP. Intuitively economists think of consumption as the ultimate goal of economic production and that’s correct. However, the day-to-day dynamics that you deal with are related to GDP, production and employment. What is relatively likely is that the US will face a consumption slowdown in the medium term. This could happen through rising taxes. It could happen through lower government benefits.

However, imagine this happens through a falling dollar. US exports would rise, imports would fall and net national savings would increase. Same total balance sheet effects as deficit reduction.

America would become more like China. However, notice that you are now saying that if the US doesn’t stop consuming a lot relative to what it produces then we are going to have to start producing much more than we consume.

Tyler Cowen notes

[The 3.7% annualized drop is] not worse than I expected, or worse than what Michael Mandel expected.  The simple lesson is that earthquakes and tsunamis are contractionary, not expansionary.  This is a classic example of real business cycle theory and how it can also apply to economies which are, in some regards, still in Keynesian corridors.

Is it?

I think we want to be careful in distinguishing between the notion that there are real shocks and the idea that the economy perfectly equilibrates to real shocks.

In a speech this morning Tim Geithner said

We need to cut the annual deficits, now roughly 10 percent of GDP, to the point where the overall debt burden begins to fall as a share of the economy. … For the United States, this means a deficit below 3 percent of GDP

Which reminds me of a point I often try to help policy makers understand: for every deficit there is some long term debt level that matches it.

So suppose that the US has a permanent deficit of 3% of GDP. What does that mean for our long term debt? Won’t we grow ever deeper into the whole?

No.

The deficit–debt balance equation looks like this:

(US-Deficit-Percentage)/(US-Growth-Rate) = (US-Debt-Ratio)

Geithner wants a 3% deficit. The long term growth rate of the US economy is somewhere around 5% nominal. All of this is in nominal, not real terms.

That gives a Debt-Ratio of 3%/5% = 60%.

In other words if the Deficit falls to 3% then the national debt will trend towards 60% of GDP.

This happens to be true whether you are above or below your deficit target. Imagine that we had a balanced budget and we raised the deficit to 3% of GDP. The Debt-to-GDP ratio would still trend towards 60%.

There are a couple of interesting corollaries to this.

1) Even for huge deficits there is some long run balance. So for example a deficit of 10% gives a long run balance of 10%/5% = 200%.

2) A deficit of zero gives a long run balance of zero. That is, you don’t actually have to run a surplus in order to run down the debt. If you stop borrowing completely, you will grow out of the debt.

3) This also works for negative deficits. Negative deficits are of course surpluses. So if the US government ran a 5% Surplus then its Asset-to-GDP ratio would tend towards 5%/5% = 100% of GDP.

In modern terms we would say the US Sovereign Wealth Fund would stabilize at around 100% of GDP.

4) Lastly changes in the denominator matter as well. Lets say the US increased its growth rate by 1% through a policy of slow but sustained immigration. Lets also presume that the deficit as a percentage of GDP did not fall. This means more absolute borrowing since GDP is higher and specifically more borrowing for entitlements since military spending does not rise with increased immigration.

The we have 3%/6% = 50% of GDP

Notice that we haven’t reformed anything about our finances. The per person savings on military spending are presumed to be balanced out by increased per person entitlement spending on immigrants and we are not counting on importing any new Sergey Brin’s to revolutionize our technology. We are just steadily increasing the population.

Nonetheless, debt-to-GDP falls.

The Philly Fed’s Manufacturing Index showed a major drop from 18.5 to 3.9 last month. That’s from steady growth to stalled.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 18.5 in April to 3.9, its lowest reading since last October (see Chart). The demand for manufactured goods, as measured by the current new orders index, showed a similar slowing: The index fell 13 points while the shipments index declined 23 points; both remained positive, however, suggesting slight growth last month. For the first time in eight months, firms reported that unfilled orders and delivery times were falling — both indexes were slightly negative this month.

Firms’ responses continue to indicate overall improvement in the labor market despite weaker activity, orders, and shipments. The current employment index increased nearly 10 points and has now remained positive for eight consecutive months. The percentage of firms reporting an increase in employment (32 percent) is higher than the percentage reporting a decline (10 percent). Only slightly more firms reported a longer workweek (17 percent) than reported a shorter one (13 percent) and the workweek index decreased 14 points.

This has coincided with other poor measures. The only major driver that I see is fuel prices. Yet, they do seem to be taking a major toll.

The hope is that the jump in fuel costs will merely break the economy’s stride a bit but will not alter the general trend towards growth. 

I should add that its possible that the Japan earthquake could be affecting things here, but that doesn’t feel right to me. We are seeing new orders weaken and unfilled orders decline.

Matt Steinglass at the Economist has replied to my recent piece on how liberals often ignore labor markets by outlining how we can have more unionization without less employment.  His argument goes like this:  unions capture profits and increase the labor share of national income. This increases aggregate demand, which fuels growth and leads to higher employment. I’m going to address this argument in two posts, since the reply will be lengthy.

The first question I want to address is “if unions increase wages by capturing profits, would it increase economic growth?” I think this argument suffers from what I’d like to call the fallacy of permanent Keynesianism. It’s true that there is slack in the economy right now, and that increasing consumption and therefore aggregate demand will increase economic growth. But the level of unionization in the economy is a long-term structural and institutional issue, not a short-term countercyclical one.  Attempting to increase consumption like this will come at the expense of savings, which in the long-run means lower investment, a lower capital stock, and therefore lower economic growth. In short, more consupmtion does not necessarily mean more economic growth. Consider, as a simple example, the Golden Rule of savings in a Solow growth model.

In fact, in a symposium commemorating the 25th anniversary review of his celebrated book “What do unions do?”, labor economist and union defender Richard Freeman makes the complete opposite argument as Steinglass.  He argues that the negative direct impact of of unions on economic growth (which, as discussed below, he acknowledges) may be offset by an increase in workers’ savings that result from labor contracts with larger pensions.

But even if it were true that more consumption always meant more economic growth, I do not agree with Matt’s contention that unionization would increase the labor share of national income. The following graph shows the ratio of labor compensation to corporate profit from the BEA’s NIPA tables. While Matt is right that this ratio is at a historical low, notice that the pattern bears no relationship to the level of unionization in the economy, shown in the graph below it.

Labor’s share of national income actually fares much better when you use the definition used by Robert Gordon and Ian Dew-Becker in their paper on inequality.

Here the denominator is GNP minus consumption of fixed capital, minus indirect business taxes. While the number has fallen recently, it is well above historical lows, and well above what it was during the heydey of unionism. Again, the important thing is there is nothing to indicate that the decline in unionization has affected labor’s share. Gordon and Dew-Becker conclude in their paper:

“Thus,to a first approximation, we conclude that the increase in American inequality after the mid-1960s has little to do with labor’s share in domestic income.  What has happened is a sharp increase in skewness within labor compensation.”

However, even if unionization doesn’t allow labor to capture profits in the aggregate, the empirical evidence (some of which is summarized usefully here by Barry Hirsch, more can be found in the symposium discussed above) does suggest that it happens within unionized firms. But is this a good thing as Matt believes? The problem is that measured profits, when they are rents that unions can potentially capture at all, can be either pure rents or they can be quasi-rents. In the long-run, competition eats away at pure rents, and quasi-rents that represent normal returns to long-lived physical and non-tangible capital are necessary and important. Allowing unions to ex-post grab quasi-rents to long-lived capital incentivizes firms away from making those investments in the first place. In fact the empirical evidence on this topic shows that unionized firms have less profit, less investment, and less R&D spending.

While Matt seems to disagree, the notion that unionized firms suffer from lower employment is actually not a very controvertial claim among labor economists.  For instance, in his aforementioned book, Richard Freeman agrees that union firms not only have lower rates of R&D, investment, as discussed above, but that they have lower employment growth. He argues that this may not negatively impact economic growth if the decreases in union firms are offset by increased investment, R&D, and employment growth by non-union firms. But this is exactly the problem with arguing for a more unionized economy: the only way it isn’t damaging is if there are nonunion firms to take up the slack and grow. In the long-run, this suggests a steady decline of unionization is inevitable.

There is another major disconnect between the way liberal writers like Matt and liberal labor economists like Freeman write about unions. Typically, the former praise the so-called “monopoloy face” of unions, whereas the latter usually recognize that unions ability to raise wages above market level is a downside of unions. Labor economists who support unions tend to do so for what economists call the “voice face” of unionism. Indeed, I think this positive aspect of unions, whereby they communicate with owners and managers the desires of the workers, is underestimated by many conservative writers. The “voice face” of unions can lead unionization to have a positive impact on firm productivity. Granted, there are a lot of issues here, like the possibility of alternative ways of providing workers voice that don’t risk a “monopoly face”, and the fact that the empirical impact of unions on productivity is ambiguous whereas the wage impact is not. But suffice it to say that the aspect of unions liberal writers praise is often recognized by prominant liberal labor economists as a problem.

Next I’ll discuss why unionization has fallen in the first place, why high unions could co-exist with low unemployment in the 50s and 60s, and why both of these things tell us that high unionization is undesirable today.

David Henderson goes after Steven Levitt’s full throated endorsement of the nanny-state. Levitt’s remarks:

It wasn’t until the U.S. government’s crackdown on internet poker last week that I came to realize that the primary determinant of where I stand with respect to government interference in activities comes down to the answer to a simple question: How would I feel if my daughter were engaged in that activity?

If the answer is that I wouldn’t want my daughter to do it, then I don’t mind the government passing a law against it.

Now, I am guessing that Levitt is not willing to take this to its fully totalitarian conclusion. If he wouldn’t want his daughter to become a Seventh Day Adventist, would he not mind the government passing a law forbidding people to join them?

Which highlights why these preceding remarks are so striking

I’ve never really understood why I personally come down on one side or the other with respect to a particular gray-area activity.  Not that my opinion matters at all, but despite strong economic arguments in favor of drug legalization, the idea has always made me a little queasy.

Conversely, although logic tells me that abortion as practiced in the U.S. doesn’t seem like such a great idea (see the end of the abortion chapter in Freakonomics for our arguments on this one), something in my heart makes me sympathetic to legalized abortion.

Putting those two together Levitt is basically saying: I’ve never really thought about why I support the policy regime that I do.

With all due respect, if vulgar paternalism as a normative framework is something of a revelation to Levitt its just not believable that he has ever engaged this question.

Yet, Steven Levitt is a celebrated social scientist at a legendary institution.

I am not even quite sure what to make of that.

On the one hand, perhaps its a good thing that someone is so engaged in positive social science that he or she has not even bothered to think about the ethical framework in which policy is embedded. I could imagine that this leads to less bias in his research.

On the other hand, its so foreign to my understanding of why we become social scientists that I can hardly wrap my mind around it.

I have been making this argument in various forms for a while on this blog, but I think it might be helpful to go back to basics. Here is my basic point:

The idea that taxes decrease our incentive to work runs counter our basic observations about how human beings behave

Why?

Well the basic thing that taxes due is reduce your take home pay.  If you work the same number of hours you earn less for every hour worked.

There are two basic effects here that have been long recognized by economists.

The substitution effect: The substitution effect says is that since I am getting less money for each hour I work I should work fewer hours.  My reward from work is less, so I substitute away from work towards other things.

The income effect: The income effect says that taxes make me poorer. When people are poorer they “need” to work more to pay for the things they want. Therefore, taxes should make me work harder.

The question is, which one of these effects is more powerful?

In the absence of very strong evidence to the contrary we should believe that the income effect is slightly more powerful.

Why?

A few different reasons.

First, introspection. What would you do if your pay got cut? Would it make sense to say, well I got a pay cut so I might as well not put in as many hours? Or would it make sense to say, well I got a pay cut so I am going to have to put in more hours or find a second job?

You could probably think of scenarios in which both make sense, but the latter seems more natural for most people. This should push our estimate towards the income effect being stronger

Second, wage rates have gone up dramatically over the last 200 years. Does it seem like people are working more or working less than they did 200 years ago. It really seems like they are working less. There are lots of confounding factors of course, but the overwhelming sense is that when people made less money they “had” to work harder.

Third, high income people don’t seem to be working that much more than low income people despite the fact that a natural propensity towards work can make one high income.

Indeed, the data show us that low income folks used to work a little more, but now they work a little less than high income folks. Yet, if the income and substitution effects were balanced for each person we would still expect higher income people to work more.

That’s because working hard can lead to more education, more experience and more promotions. Being hard working is also associated with having a conscientious personality type which is itself more valuable.

So if someone was simply born with a stronger propensity to work, we would expect that person to earn more income per hour. Thus we when look at the data we should see that all these high income people are working lots of hours.

Yet, we actually don’t see that. We see only a mild effect and even then that effect is not robust over time. Sometimes, high income folks are working less.

Fourth, household leisure is one of the most common rewards from work. When people think about the return to working hard, many of them mention material consumption. However, very often they mention, leisure enjoyed by themselves or other members of their family. In particular, people mention leisure enjoyed by their children.

Here is a quote from John Adams that gets at what I am talking about

I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

Adams is saying that the goal of his labors is to free up the labor enjoyed by his descendants. Even in advocating  lower tax rates Greg Mankiw displays similar sentiments.

I don’t want to move to a bigger house or buy that Ferrari, but I hope to put some money aside for my three children. They will never lead lives of leisure, but I hope they won’t have to struggle to find down payments to buy their own homes or to send their kids to college.

In short, he saying that he hopes his work will be paid off by decreasing the amount of work his children have to do.

We might find this a noble goal and we may decide that we don’t want to stand in the way of the Mankiw family’s pursuit of happiness. These are important questions.

However, to the narrow question of “will taxes cause people to work less” we have to note that even if taxes do cause parents to work less – which is questionable in itself – they may do so by causing children to work more.

Now there might be all sorts of reasons why you might feel lower taxes are better than higher taxes. Not least among these might be that you feel the government is inefficient at providing services.

I just don’t think the idea that taxes will cause people to work less is among them.

There has been a lot talk recently about means-testing Social Security.

There are a couple of different forms this can take

  1. Giving everyone the same size benefit regardless of taxes paid in
  2. Actually reducing the benefit based on how much income you have later in life

In either case, neoclassical economics calls these a marginal tax increase.

Why?

Because it reduces the marginal return from working and saving.

Lets look at the first example. Right now, the more you work – up to the cap – the more Social Security tax you pay. But, the more benefits you receive as well.

If you are a perfectly rational worker then you understand this and so while Social Security tax reduces your marginal return from working it doesn’t reduce that return by the full amount of the tax. That’s because you expect to get something back later in exchange for the tax.

If we reduce the amount you get back later this decreases the marginal return to working. This is what neoclassicals mean when they say “marginal tax increase”

Now lets look at the second example. Suppose I am considering how much to save for retirement. I know that I will get some Social Security but I want more income than SS will provide. So I save.

Now, suppose the law changes so that the more income I have from other sources the less income I have from Social Security. This means I am not getting as much out of my savings as I though I would. The return to savings has fallen. Again, this is what neoclassicals would refer to as a “marginal tax increase”

 

When thinking about “what is a tax” lots of people focus on whether the particular dollar in question started out as yours versus the governments. There are some deep philosophical problems with this dichotomy, but I would go into that right now.

I will simply point out that this is absolute not how traditional or neoclassical economics looks at the question. Neoclassical economics simply asks, at the end of the day how have the relative costs and benefits of your actions been affected by government policy.

In that world means-testing and marginal taxation are two different phrases for the same thing.

Ezra Klein wants alternatives to the Strong Dollar/ Weak Dollar nomenclature.

My wife and I have joked that fat dollar / skinny dollar should do the trick nicely. That way journalists can write ledes like:

The financial crisis allowed America to gorge itself on financial inflows from the rest of the world, driving the dollar up to morbidly obese levels. An fat dollar is associated dangerously high levels of consumption and debt and low levels of employment.

While that’s a cute counterfactual I am not certain that terminology is really guiding here. Strong dollar rhetoric from leading bureaucrats is fueled by a desire to maintain global financial stability.

As Michael Pettis is found of pointing out a strong dollar is a costly public good the United States is providing to the rest of the world and we are providing for the same reason we provide the public good of military hegemony. Global stability and the promotion of free market economies is viewed as worth the cost.

The question is whether or not an America that produces a decreasing fraction of global economic output can continue to foot the bill for maintaining an international political and economic support system.

I’ve mentioned before that there are many stats on the health of a modern economy but even in the new information age, Industrial Production remains the grand-daddy of them of all.

Given that this is unwelcome news.

Industrial production was unchanged in April after having increased 0.7 percent in March. Output in February is now estimated to have declined 0.3 percent; previously it was reported to have edged up 0.1 percent. In April, manufacturing production fell 0.4 percent after rising for nine consecutive months. Total motor vehicle assemblies dropped from an annual rate of 9.0 million units in March to 7.9 million units in April, mainly because of parts shortages that resulted from the earthquake in Japan. Excluding motor vehicles and parts, factory production rose 0.2 percent in April. The output of mines advanced 0.8 percent, while the output of utilities increased 1.7 percent. At 93.1 percent of its 2007 average, total industrial production was 5.0 percent above its year-earlier level. The rate of capacity utilization for total industry edged down 0.1 percentage point to 76.9 percent, a rate 3.5 percentage points below its average from 1972 to 2010

The St Louis Fed’s data is not yet updated but this information will transform what looks like a strong spike into a premature hump

FRED Graph

Tyler Cowen points to this analysis on structural unemployment

I decided to look at employment – just a simple count of how many people are currently working in each of these sectors. I got all my data from the Fred2 Database. These are the results.

That’s interesting – it looks like job losses in construction and manufacturing are huge! In contrast, job losses in finance or business are much smaller, government is flat, and health and education have actually gained jobs! 

That looks exactly like what the structural recession people are predicting.

This always happens. When you start to think about the business cycle the core question revolves around why construction and manufacturing are so sensitive.

Here for example is year over year percentage growth in manufacturing (green), construction (red) and everything else (blue)

FRED Graph

If you’ll notice non-goods producing job creation rarely turns negative at all on a year-over-year basis. This recession was different in that we had significant losses in almost all categories. Though as always, goods producing is the hardest hit.

 

Its also worth noting that the blog sporting this analysis has some unorthodox and, depending on your tastes, humorous takes on economics. From another post

My theory as to what is happening here? Investment is strongly correlated with employment. I won’t speculate as to the direction of causality. But during the 80’s something weird happened. Not sure what, but I imagine women are to blame.

Noah Smith notes that I posted a link to the Conley-Dupor paper without noting any of its flaws.

This is entirely true, but doesn’t suggest, as some might suspect, that I supported the paper. In truth,  the questions Arnold Kling when raised when referring to the paper made me think of something and I wanted to make a quick comment.

It was also late at night, post-Ambien and by the time I hit post I had forgotten what I had intended to write about in the first place. This is how blogging is often done.

Sorry.

Tyler Cowen points to a new paper on stimulus. I am working on a similar project myself.

The Crux

We estimate the Act created/saved 450 thousand government-sector jobs and destroyed/forestalled one million private sector jobs

Arnold Kling comments

In the future, I think this will be the big research issue concering the stimulus. It almost surely saved public sector jobs. The question is whether there was any trickle-down into the private sector. The authors suggest that there was more negative trickle-down than I would have expected.

If you follow the left-wing economist blogs, you will see that there could not have been any crowding out of the private sector, because interest rates are not high. That is what happens when you think of the economy as a set of equations drawn from textbooks, rather than thinking in terms of patterns of sustainable specialization and trade.

My biggest concern was crowding out in local labor markets. Broadly speaking when the economy “overheats” crowding out happens in three sectors

  1. The goods sector. Folks here literally try to crowd one-another out when supply is lower than demand. If this happens orderly then we get unexpected increases in inflation. Disorderly and we get the tickle-me elmo craze of 1996.
  2. The labor sector. As I mentioned before this happened in the Raleigh-Durham area during the late 90s and it was a phenomenon of beauty. Like many of my friends I tool a job as a line cook to pay for college.  Business was so go at one point that you could be fired from restraint A on Thursday night and be plating orders at restaurant B on Friday night. The market was just that tight. No search costs, no frictional unemployment of any kind. Perhaps unsurprisingly managing the restaurant became a matter of managing the interaction between cooks and wait staff. At one point I remember my manager suggesting that he was going to introduce a sexual harassment policy and our line staff responded that if he did we would quit on the spot. That’s the last you heard of said policy.
  3. The bond sector.

(1) Refers to inflation and how government spending sans the issuance of debt leads directly to inflation in a full employment economy

(3) Is the classical story of government spending supported by debt crowding out investment

(2) Is the often mixed fact that you can crowd the labor market. However, the concern there is that there has to be a shortage for a particular type of labor.

He asks

Dominique Strauss-Kahn has been arrested, taken off a plane to Paris, and accused of a shocking crime.  When I hear of this kind of story, I always wonder how the “true economist” should react.  After all, DSK had a very strong incentive not to commit the crime, including his desire to run for further office in France, not to mention his high IMF salary and strong network of international connections.  So much to lose.

Should the “real economist” conclude that DSK is less likely to be guilty than others will think?  If you are following the social consensus estimate of p, does that make you less of an economist?  A lesser economist?  Is everyone else an economist anyway and thus you can agree with them?  How many economists seriously use the concept of incentives — more than non-economists do — to understand everyday events?  Is the notion that incentives predict individual behavior actually so central to economics?  Should it be?

So run my thoughts this evening.  I asked similar questions when legal charges were levied against Kobe Bryant.

  1. Just observing one man and one set of incentives tells us little. He may be more likely to commit the crime if he had nothing to lose but who knows how likely that is?
  2. We have a better shot at altering our estimate of p by thinking about the incentives facing those making the estimate of p. After all, we have observed them before.
  3. I tend to think economists take incentives in-and-of-themselves to seriously. To be strictly neoclassical incentives matter because they define the constraint on preference maximization. Yet, preferences are nothing more than that thing which is maximized under constraint to produce behavior. This is not a theory about what people will do. The model does not close for that question. Instead, this is a theory about how what people have done relates to what they will do. And, even that assumes that preferences remain relatively constant over time.

Tyler Cowen, notes

German economic growth is surging; again, real factors matter much more than fiscal policy or fiscal austerity.

Yet, lets look at some of the details from the Financial Times piece he is linking

However, Friday’s eurozone growth data underlined the region’s north-south divide. Growth in Spain and Italy remained sluggish with first-quarter GDP rising by just 0.3 per cent and 0.1 per cent. Portugal fell back into recession with GDP contracting by a further 0.7 per cent.

Germany’s recovery from the 2009 downturn has been far swifter than expected – boosted by tumbling unemployment and strong global demand for its industrial exports. First-quarter GDP was 5.2 per cent higher than a year earlier, the steepest year-on-year rise since reunification in 1990.

The US has also seen economic activity back above its pre-crisis peak. In contrast, the UK’s GDP must still grow 4 per cent before its economy produces the same as it did three years earlier.

Over the past six months, while France’s economy grew 1.3 per cent and Germany’s by almost 2 per cent, the UK economy was stagnant with zero growth.

Spain and Italy, sluggish.  US and France, OK.  Germany, fast. UK and Greece, struggling.

This seems consistent with a story where both fiscal and monetary policy are in the drivers seat and real factors are relatively unimportant.

Indeed, I am not quite sure what the real effect story would be?

A while back I said that if high skilled workers were able to capture the gains from their additional skills that this would necessarily lower the Multi-Factor Productivity growth rate in the US.

That is, saying that the gains in US income have been captured by the educated elite and saying that multi-factor productivity has slowed down are two different ways of saying the same thing.

I said this from a theoretical perspective on what multi-factor (in theorists’ language “total factor”) productivity is supposed to be. I just got a round to looking up the BLS methodology on the issue.

First Technical Information About the BLS Multifactor Productivity Measure

The hours at work for each of 1,008 types of  workers classified by their educational attainment, work experience and gender are aggregated using an annually chained (Tornqvist) index.  The growth rate of the aggregate is therefore a weighted average of the growth rates of each type of worker where the weight assigned to a type of worker is its share of total labor compensation. 

The resulting aggregate measure of labor input accounts for both the increase in raw hours at work and changes in the skill composition (as measured by education and work experience) of the work force.

Second From CHANGES IN THE COMPOSITION OF LABOR FOR BLS MULTIFACTOR PRODUCTIVITY MEASURE

The labor composition index is affected both by shifts in the distribution of hours employed and by changes in the relative wage rates received by different groups of workers.  For example, suppose that the total hours of highly educated workers are growing more rapidly than the hours of less educated workers.  Then, all else equal, an increase in the wage rates of highly educated workers relative to less well-educated workers will result in an increase in the growth rate of the labor composition index.  

Its not quite as straight forward as the calculation I was thinking of but it does look like changes in the wage premium could eat into MultiFactor Productivity if the high wage sector is also growing in size.

My general sense, is of course, that folks need to take a deep breath and relax about Social Security. However, I do want to point out good reform minded ideas when I see them.

This from Charles Balous is moving in the right direction

Legislators could therefore choose instead to slow the growth of benefits – perhaps for that same number of workers, or the top 20% of the wage spectrum. (It is best to set the target in terms of the wage percentile rather than a dollar amount of wages because Social Security benefits are calculated based on an average-wage figure called the AIME, which typically includes several zero-earnings years that bring down one’s career average, and which does not count any earnings above the wage cap. Accordingly, AIME dollar figures are much smaller than most people tend to associate with real-world earnings patterns. To avoid bipartisan discussions being hung up on such confusion, the parties would do well to first determine the percentile that they wish to affect, and then have the Social Security actuaries produce the implementing dollar-figures after such conceptual bipartisan agreement has been reached.)

How much should the growth of such benefits be slowed? It is not financially necessary to reduce Social Security benefits from current levels. Current Social Security proposals, for example, that employ “progressive indexing” would only impose price-indexation on less than 1% of workers, with everyone else receiving faster benefit growth. Limiting the highest-income 20% to inflation-adjusted benefits and allowing gradually faster growth for workers below that level could by itself eliminate well more than half of the entire Social Security shortfall.

I like this because its not that big of a step and it a waystation towards what seems like a good idea to me: basing your Social Security check solely on your credits rather than on your earnings.

Basically every year that you work you can earn up to 4 credits. Most people who are working to support themselves are earning the maximum number of credits.

Now technically this is like a progressive tax increase on upper-income workers. This is because higher Social Security benefits are part of the return from making more money. If you cut those benefits you are cutting the return to making more money.

Maybe people consider how their earnings are going to affect their Social Security when they decide how much they are going to work but I doubt it. I think there is a small set of folks who understand that you need 40 credits to retire.

I think 99%+ of the population has no idea how their check will be calculated and how their earnings per year will affect it. Nor do I think most people have a good sense of how big their check is going to be.

Moreover, the people who do have sense of how big their check is going to be aren’t really counting on the check but are using other vehicles like 401(k)s and IRAs to do most of their retirement savings.

Thus I suspect that the effect on the labor market from reducing benefit growth at the upper end is probably going to be about nil. I could be wrong and its worth going slow, but this is what I suspect.

Ultimately, I think, if the size of your SS benefit check was based only on how many years you worked rather than what you made this would feel fair to most folks, could save some money and would be strongly progressive.

Aaron Carol, at The Incidental Economist, has a post showing that disease prevalence (including obesity) in the United States is a very, very small portion of what is driving health care costs:

Before you start in on me about how obesity is linked to other things and such, you should know that the overall McKinsey & Company analysis showed that the prevalences of disease in the US could account for perhaps an extra $25 billion in health care spending. Let me make a new chart for you:

Yes, obesity is more prevalent in the US, and yes, caring for it costs real money. But even if we get obesity down to the levels in other countries, it’s not going to magically erase the problem. We are spending two to three times per person what they are. There is no simple fix here. There is no one, and no thing, we can easily blame.

Everyone, always will look for a scapegoat. It is in our genes. The good vs. evil story is the oldest trope in existence. Look at the current outcry against “evil speculators” in oil markets (I wonder why Krugman doesn’t make a post about that?). Humans live through stories, humans respond strongly to in-group loyalty, humans have value preferences that lead them to view the world radically differently. I’ve often stated in debate that those who think that a single-payer health care system would somehow reduce our expenditures to a level consistent with other OECD countries are dreaming, at best, or delusional, at worst. And every single data point that passes by in the health care debate does nothing but strengthen the position that Robin Hanson articulated: health care altruism is a permutation of our evolutionary drive to “show we care”; or rather, make infrequent, and very large expenditures to show our loyalty to an alliance. The frequency has gotten greater as our society has gotten richer, but the underlying motive is still linked to our evolutionary roots.

Against this strain of thinking is the hypothesis that Matthew Yglesias articulated in his Bloggingheads diavlog with Karl, that people are stingy in the voting booth, but acquiescent in the doctor’s office. So separating payment and service would act as a brake on health care expenditure. I’m very skeptical of this argument. After all, health care expenditures have risen at a higher rate than GDP/per capita in many countries around the world.

A more interesting question, though, is why is the US different? My crude outline of a hypothesis is that people in the US have only recently come to “share a heritage” that is the United States. It’s only been around 100-ish years that people have really come to view themselves as “Americans”. In the absence of a shared heritage (which provides a built-in in-group), it has been especially important to engage in acts that show inter-tribal loyalty. The US spent a greater amount of money/life/time ending slavery, securing women’s right to vote, and ending segregation than a lot of other countries. We’ve also spent more money/ink/time securing a the minimal welfare state that we have, that is exceedingly expensive (relatively speaking). Not surprisingly, we also spend a ton of money/ink/time on health care that is of extremely dubious effectiveness. A cynic might say that this represents the greater wealth of the United States…but that doesn’t really provide an satisfactory explanation. We have low taxes, so we get away with a lot of inefficiency, but I don’t think that is the underlying driver of our proclivity to expend a lot of resources doing different things.

I think that history will show that Robin Hanson is right, and that whatever health care arrangement we devise, it will continue to be significantly more expensive than the world norm. That it has relatively little to do with the structure of the market (though I stand firmly behind a completely free market in primary care/pharmaceuticals [except antibiotics/microbials]), and a lot to do with our evolutionary drive as a “multi-tribal” society.

From Bill McBride

Victor Calanog, VP Research & Economics at Reis, Inc presented their quarterly briefing on commercial property sectors today. A few highlights:

• Apartments: Vacancy rates are falling and rents rising (see: Reis: Apartment Vacancy Rates fell sharply in Q1, Lowest in almost three years). Calanog expects rents to increase 4%+ in 2011 and 2012, and for the apartment vacancy rate to fall to 5.5% this year (the lowest since 2001). Note that the Reis survey is just for large cities, but this decline in vacancy rates is happening just about everywhere.

Just so everyone remembers Owner’s Equivalent Rent is the big dog in core inflation. As it rises so will the inflation rate. I am still not hawkish on inflation, but I don’t want anyone to be shocked when the core starts to push rapidly higher over the next 12 months.

I am just going to go on record saying that I support the right of fish to live on land and birds to inhabit the Ocean. Michael Gerson apparently feels differently

The conservative alternative to libertarianism is necessarily more complex.It is the teaching of classical political philosophy and the Jewish and Christian traditions that true liberty must be appropriate to human nature. The freedom to enslave oneself with drugs is the freedom of the fish to live on land or the freedom of birds to inhabit the ocean — which is to say, it is not freedom at all.

 

Here is a calculation I am keeping an eye on: Job Openings minus Quits. The idea is that this might capture the aggressiveness with which businesses are looking for workers.

Obviously if you have a lot of quits then even in the same business climate you need new workers. So we take out quits.

FRED Graph

If this is a meaningful measure it is showing a decently aggressive hiring climate for private industries. All of my charts are for the private sector only.

Another interesting fact that I don’t have a good explanation for is this: Hires less Openings is countercyclical.

FRED Graph

What these seems to be saying is that number of people who get a job without there being a formal job opening goes up during recessions. Not just the fraction of jobs filled without an opening but the absolute number.

Is that telling us that social networks become tighter in a recession, that jobs become a commodity that people are only willing to give out to their friends, that business have so many people knocking down the door that they don’t need formal openings? What?

Enquiring minds want to know.

One last tid-bit. Rotal discharges and layoffs are currently around records lows.

Graph: Layoffs and Discharges: Total Private

What is this telling us?

Karl has a fairly passionate defense of “muddling through”. The defense of this position is unquestionable. Any pundit who is actually serious realizes that, based on respectable projections, muddling through is not only a viable strategy, but can represent an optimal strategy (from a continuity perspective). Grand bargains are messy, and they usually mess up more than they fix, and (most devastatingly), they often reflect an overarching philosophy, rather than a solution to “problems on the ground”. Naive lefties and righties wish for grand bargains that destroy capitalism or entrench it…the ultimate in “uncertainty”. Muddling through seems to have actual welfare gains.

It is hard to avoid these ideological fights, and it is really (really) annoying to a utilitarian like me, who understands that if you give an inch in security, you could probably take a mile in uncertainty. Or to put the rubber to the road, if you provide a robust social safety net, you could get away with a vast array of socially-beneficial, free-market reforms that you couldn’t under a regime of uncertainty (in markets). Running off on a tangent here, a lot of right-leaning idiots pundits like to talk about uncertainty without recognizing that the government as an institution is a market-maker in the “certainty game”. Whoever thinks that deregulation would lead to some level of certainty is kidding themselves, and killing their argument. People are certain that agricultural subsidies will be around, and make plans based on that…if all of a sudden you remove them, they will be left to the decidedly uncertain whims of consumer demand. A more poignant example is environmental regulation, which has been a tried-and-true part of Federal legislation, and has had a more-or-less predictable path for the last 70 years. When was the last time you were “surprised” (not astonished, or discouraged) by environmental legislation? However, if you remove all environmental restrictions at the Federal level immediately, you create an entire world of uncertainty. To be honest, Ron Paul’s vision acted out on a quick timeline, relative to baseline (and that is ignoring his monetary proclivities), would introduce so much “uncertainty” into the world that we’d probably experience a really terrible “real business cycle”.

More to the point, the growth and evolution of “social technologies”, of which government is a prime example. Government institutions have not always had an eye toward efficiency, but they do have continuity, and it isn’t efficiency that creates “certainty”…after all, it’s not the most efficient for your mother to cook you breakfast, but if you’re used to it, a change to your breakfast habits represents a major shock (also, the macro assumption of monopolistic competition plays to this tune). The “uncertainty” canard is the imposition of a one-way street, in which the Federal government (in the popular debate, local governments are really good at turning as the wind blows) does nothing but create uncertainty. But the point is that the Federal government (no matter how misguided) shapes markets, and if the rules aren’t changing every “five minutes”, they create certainty…and even if they change laws in a way that is anticipated, they don’t move the dial of uncertainty…they just force the hand of efficiency (in their best days). There are thousands of regulations in the Federal Register. Most of them are probably welfare-reducing, but they aren’t “uncertainty” inducing. Federal law evolves along a fairly predictable path. Decimating Federal law, whether its welfare gains in the long run, would demolish the certainty in the short run.

Delong:

How can you minimize the chances that an economy gets caught at the zero nominal bound where short-term Treasury bonds and cash are perfect substitutes and conventional open-market operations have no effects? The obvious answer is to have a little bit of inflation in the system: not enough to derange the price mechanism, but enough to elevate nominal interest rates in normal times, so that monetary policy has plenty of elbow room to take the steps it needs to take to create macroeconomic stability when recession threatens. We want "creeping inflation."

How much creeping inflation do we want? We used to think that about 2% per year was enough. But in the past generation major economies have twice gotten themselves stranded on the rocks of the zero nominal bound while pursuing 2% per year inflation targets. First Japan in the 1990s, and now the United States today, have found themselves on the lee shore in the hurricane.

That strongly suggests to me that a 2% per year inflation target is too low. Two macroeconomic disasters in two decades is too many.

Yglesias

I think Reagan had this right. Inflation that averages around four percent is consistent with robust growth and minimizes the risk that the nominal interest rate on short-term government debt will go to zero. Efforts to maintain a 2 percent ceiling on inflation have brought few concrete benefits and put policymakers in the unnecessarily difficult position of trying to conduct unorthodox monetary policy measures during a time of economic crisis when elites necessarily come under suspicion.

Naturally I am warmed by Matt Yglesias joining me on the limb in saying that just perpetuating the status quo spending regime in the United States is utterly doable.

I don’t think that preserving Medicare exactly as currently structured is a good idea. To me, simply allowing current CBO projections of Medicare spending to take place would represent an inefficient use of social resources. That’s why it’s a good thing that the Affordable Care Act contained a large number of small changes to Medicare, small changes that will hopefully provide a basis for further reforms. But to write, as The Washington Post editorial page does, that “simply preserving Medicare as we know it is not an option” is false.

As I have said and Matt says, this is not a good idea, but it’s a doable idea. I harp on this because I find it both annoying and potentially dangerous when people start promulgating falsehoods.

I know this is done either consciously or unconsciously as a noble lie. The status quo is so bad that its better to tell people its unsustainable than to have a straightforward conversation about the consequences of sustaining it.

The problem is that this sort groupthink is part of why grand ideas are so often so bad. Somewhere along the way an assumption was made that a big part of the choice space was just off limits. Folks accept this and the conversation proceeds.

However, at some point you run into a hitherto unforeseen problem, issue or motivation. In light of this you would really like to retreat back to some variant of the old status quo. Yet, you have already walled that space off. So now you are left in a purgatory of your own design.

I think this mental walling off of options happened big time on the European integration project. It happened in a different sort of way with financial deregulation. It happened with the War of Terror. It is happening now with Climate Change. And, of course I see it happening with the budget outlook.

So, I am happy to hear people say that yes we could simply continue to pour more and more of our national resources into the existing system that we have and raise taxes to pay for it.

Then we can talk about why that’s a bad idea.

Via Jamelle Bouie, via Paul Krugman I see that Glenn Kressler doesn’t like this quote by Kathleen Sebelius

“I think there’s no question if you take a snapshot, people will run out of money, very quickly [under the GOP Medicare plan if you have cancer]. And if you run out of the government voucher and then you run out of your own money, you’re really left to scrape together charity care, go without care, die sooner. There aren’t really a lot of options.”

Kressler says

Her answer was strong stuff, suggesting that the GOP plan could cause people to “die sooner” if they had cancer and ran out of money. We have been critical of some of the ways Republicans have described the plan, but is this even remotely possible?

I didn’t read it that way. I thought she was saying that dying sooner was the alternative to either getting charity or going without care. This is an essentially correct riposte to an argument I have been making.

 

For a while, the prevention people tried to make the case that taking action to detect and treat disease early would bring down costs. I, among others, argued this was nonsense. The real way to bring down health costs is to eschew prevention and let disease progress to the point where death comes quickly and without warning.

The earlier you catch a disease the more likely you are to spend a bunch of money treating it. This is only made worse in the rare case that the treatment is successful. At that point you have already dumped a bunch of money into someone who is likely going to come back with another disease later.

In response, folks began arguing that people like me thought the best way to save money is to have people die quickly. And, in my case that is utterly true. I do believe that. Though my point really centered around early detection.

I hoped that this realization would help people get at the problem of affect.  Saving money sounds like a good thing. Early detection sounds like a good thing. Its natural to think that they go together. However, they are actually opposites.

This happens all the time. People think that bad things beget other bad things and that good things beget other good things. But, good and bad are properties assigned in the mind. Cause and effect extend from the relationship between real things in space-time.

The two don’t necessarily overlap. We make major reasoning mistakes when we assume that doing good things will have good consequences. Consequences have nothing to do with good or bad. They simply are.

Anyone arguing that employers in some industry should raise wages should have to sit down with a labor market supply and demand graph and explain what it is they’re asking for. As it is most people calling for so-and-so to raise wages don’t seem to be thinking about labor markets, and instead think of wages as something that you can always just raise without any consequences, for instance losses to workers via unemployment.

You can see this in the common refrain that workers would be better off if we had a vastly more unionized economy. Maybe workers would be better off, meaning those that can get jobs would gain. But if you’re going to hold wages above market levels you’re going to decrease employment, so you’ll benefit workers at the expense of those who can’t get a job or who take a lower paying job. Sure, there are exceptions to this, like when a union counters monopsony power. Or when unionization provides workers voice in a way that allows them to communicate more efficiently with management and raise productivity. But to prevent unemployment you need the cartelization of the labor market and subsequent higher wages to be either just enough to offset the lower wage resulting from monopsony power, or you need them to be fully offset by productivity increases. If wages go above this at all, than there will be unemployment. Rarely if ever is any time taken to argue why x% higher wages are the right amount to offset monopsony power. This dfficulty is mostly just ignored, and the fact that cartelized higher wages is an unmitigated good is just presumed.

Tom Philpott, writing at Grist, provides another example of ignoring the costs of higher wages. He tells us about the  “penny-per-pound” movement that is asking for Burger King, McDonalds, grocery stores, and other food companies to pay a penny more for each pound of tomato so that a particular group of tomato farmers can have their wages raised from $7.25 to $13.25. But what does Philpott think will happen to labor demand if the price of labor doubles? Even if the tomoto farmers promise in the short-run to not fire anyone, in the long-run does he really think that wages can remain at double the market level without downstream buyers gradually shifting to tomatoes grown in Mexico, California, Canada, or from the increasingly competitve greenhouse tomato industry? What will doubled wages do to farmers incentives to replace workers with machines? Consider the following from Philip Martin:

There were many other labor-saving changes in the mid-1960s in response to rising farm wages. Cesar Chavez and the United Farm Workers won a 40 percent wage increase for grape pickers in their first contract in 1966, increasing entry-level wages from $1.25 to $1.75 an hour at a time when the federal minimum wage was $1.25. Farm worker earnings rose faster than nonfarm earnings between the mid-1960s and late 1970s, prompting the use of bulk bins and forklifts in fields and orchards that eliminated thousands of jobs. Conveyor belts moving slowly down rows of vegetables made it possible to pick and pack lettuce, broccoli, and other vegetables in the field, eliminating jobs in packing houses.

Immigration critics like CIS, who Martin wrote his paper for, are quick to point out that there are many labor saving technologies that farmers could employ but haven’t due to low wages. In 1960 there were 45,000 workers picking California’s tomatoes. A decade later, the use of machines allowed the work to be done by less than 5,000. Would a doubling of wages cause tomato pickers to be replaced by machines? I don’t know. But it does put more pressure on the whole supply chain to shift away from these workers. Labor replacing technologies and production shifting to Mexico when that minimizes true costs doesn’t concern me per se, but this is a problem for the workers Philpott wants to help, and an issue he has to contend with.

My biggest problem with Philpott’s viewpoint however, is his contention that “low” agriculture wages tell us that we should oppose the cost minimizing efficiences and low prices pursued by Walmart and the agriculture system in general:

The creed of “Everyday Low Prices,” the zeal to churn out profit by maximizing sales volume and minimizing cost, lies at the root of our food-system dysfunction. Relentless cost-cutting means pressure to move environmental destruction off of corporate balance sheets, creating ecological sacrifice zones. It also drives companies to pay workers as little as possible, creating a vicious circle in which we need cheap, low-quality food in order to feed millions of low-wage workers.

This reflects a view of the world where the predominant way that companies lower prices is through grinding the working man ever  lower. But the history of agriculture and retail productivity in this country is an amazing success story, and the gains are so large that it would literally be impossible for a large percent to have come from driving wages down. Consider a few statistics. In 1950 food consumed at home took up 22% of an average households budget, and by 1998 this had been reduced by 7%. The retail price of food fell by around 25% from 1900 to 2000, and the farm price fell by over half. The current labor force dedicated to agriculture is 1/3 of what it was in 1900, but the level of output is seven times higher. The welfare gains to households that these numbers represent are massive.

Could these drastic changes have plausibly been driven by, or outweighed by, the “pauperization” of farm labor? First note that that over that same timeperiod that food budgets fell from 22% to 7%, the average income for farm families went from below to above that for nonfarm families. It is true that wages for hired farmworkers are extremely low. But they have always been low. You’d never get that sense from Philpott’s piece, but the figure below from Bruce Gardner’s “American Agriculture in the Twentieth Century” shows the ratio of average hired farmworker wages to manufacturing wages from 1920 to 2000. It’s hard to find a “pauperization” of farm workers in there, or a golden age of farmworkers for that matter.

The problem with trying to raise farmers wages by opposing Walmart and low prices in general is that farm worker wages are a very small part of the total bill. The total amount of farm worker wages in the U.S. are just over $20 billion, while the total amount of traditional food store sales in 2009 around $550 billion. Now all the food we buy doesn’t come from U.S. farms, and all food made on U.S. farms doesn’t get eaten by us, but the relative sizes here do give you some idea of difference in magnitude. If these stores were somehow holding wages down 50%, then that would account for less than 2% of the retail price of the food.

In contrast, Jerry Hausmann estimated that by offering lower prices and driving competitors to lower prices, big box stores, including Walmart, have made consumers better off by 25% of their annual food spending.  A study by Global Insight commissioned by Walmart quantified their impact on prices overall:

It estimated that “the expansion of Wal-Mart over the 1985-2004 period can be  associated with a cumulative decline of 9.1% in food-at-home prices, a 4.2% decline in commodities (goods) prices, and a 3.1% decline in overall consumer prices… This amounts to a total consumer savings of $263 billion by 2004.

Walmart doesn’t -and couldn’t- lower prices this much by “pauperizing” labor. They do it through operational efficiencies and driving down the profits of competitors and suppliers.  After all, is it really plausible that Walmart began entering the grocery market because they realized they could beat their competition by driving down agricultural wages that constitute 2% of the food bill? Or did they enter because existing supermarkets had large profit margins due to a lack of competition? Hausmann, at least, believes the latter is true, and provides this graph of rising supermarket profit margins throughout the 90s as evidence:

Farm work is not a well-paid or pleasant job. But if you want to advocate for higher wages for these workers you need to recognize the tradeoffs. And trying to improve the lot of these workers by opposing Walmart and lower food prices is the most expensive and ultimately unproductive way to go about it.

Another problem with Philpott’s argmument is that he is making a huge mistake, one common to environmentalists, in attacking efficiency. There is no greater friend to environmentalism than efficiency. Pollution is private benefits paid for with public costs, and as such is inefficient. Policies that mitigate pollution smartly are efficient. This is why so many economists, even conservative ones, favor a carbon tax: because it’s efficient. Environmentalists should not cede the banner of efficiency to those that oppose regulating pollution. They should not ignore the fact that taxing and regulating pollution can be a low cost policy, and that the right costs to consider are not just private but public as well.

By making themselves the enemies of low costs and efficiency, greens are on the wrong side of history, and they’re ignore the massive gains in human welfare that falling prices and rising productivity have wrought.

From a paper by Paul Posner

Paradoxically, the global financial strength of the United States may ultimately constitute a weakness. Simply put, we have the capacity to weather high levels of debt that may bring other nations to the brink of a loss of investor confidence and a subsequent economic meltdown. Carmen Reinhart and Ken  Rogoff observe that many nations with weak economic underpinnings default at debt levels below 60 percent of their economy.

Waiting for a crisis before we begin serious fiscal actions and reforms would force the nation to go through years of slower economic growth in the wake of higher interest rates and current account deficits stemming from years of reliance on foreign-held debt. Moreover, the flexibility to respond to emerging needs or other crises would be severely curtailed as interest costs grow inexorably to crowd out other budgetary priorities. Lacking the dramatic signals of a crisis, we may in fact be able to muddle through at relatively high levels of deficits and debt for years to come.

A couple of quick comments, made less charitable by their brevity

1) I read Ponser’s statement that strength may be a weakness as “strength may prevent the US from doing what I want it to do”  However, seemingly its what lots of other people want to do.

Getting to do what you want to do is, first order, a good thing. You face a heavy burden when trying to make the argument that people are better off doing something they don’t want to do.

Indeed, I suspect the real case here that we would be higher status if we tackled the budget gap and we could maintain more national prestige.

2) Obviously there is the argument that doing something about the budget gap now will make today’s crisis even worse and as crises go this is a pretty bad one. There are plenty of people making this case.

I want to always keep our eye on the longer case though that the very reason people don’t want higher taxes and lower spending is because they would be unpleasant. The argument that we should do something unpleasant now or else something else unpleasant might happen later is starting from a position of weakness.

You might be able to make up for that weakness with a really rock solid argument but you are climbing a steep hill.

This problem is made worse not better by pessimism. I have been accused of saying “oh don’t worry everything will work out.”  No, no, no. I am saying “don’t worry everything will definitely not work out”

The things that you care about: your life, the lives of your friends and family, the organizations and institutions you are invested in, will soon come to an end. Gather ye rose buds while ye may.

3) The opportunity to muddle through is a gift. It allows one to make changes at the margin, to monitor their effects and to update accordingly. It allows us to avoid massive often useless sacrifice. It allows our knowledge, understanding and resources to race ahead opening up new ways to deal with our problems.

Life is full of mistakes, something synthetic and delusional happiness obscures. Not having to take bold decisive action is a blessing. It means that you can avoid decisively screwing up.

We don’t always have that opportunity. Sometimes we are forced to deal with things in a big way. Indeed, this is much of what we mean by crisis. However, you don’t want to avoid an externally inflicted crisis by creating a self-inflicted one. If you have a chance to make your way with adjustments at the margin, take it.

The moral is that we are lucky to have the luxury of irresponsibility. In large part due to repeated disastrous attempts at farsighted thinking the Euro-Zone has locked itself into a state of pain and unfortunate sacrifice. This began with the creation of the Euro itself and continues to this day. I can only hope that the US is able to avoid adopting such farsighted measures.

A new working paper by Redzo Mujcic and Paul Frijters uses the question of “Who stops for whom in traffic?” to shed light on several important and interesting issues related to when, why, and for whom we exhibit altruism. Here is how they summarize their results:

We study social preferences in the form of altruism using data on 959 interactions between random commuters at selected traffic intersections in the city of Brisbane, Australia. By observing real decisions of individual commuters on whether to stop (give way) for others, we find evidence of (i) gender discrimination by both men and women, with women discriminating relatively more against the same sex than men, and men discriminating in favour of the opposite sex more than women; (ii) status-seeking and envy, with individuals who drive a more luxury motor vehicle having a 0.18 lower probability of receiving a kind  treatment from others of low status, however this result improves when the decision maker is  also of high status; (iii) strong peer effects, with those commuters accompanied by other  passengers being 25 percent more likely to sacrifice for others; and (iv) an age effect, with  mature-aged people eliciting a higher degree of altruism.

I am not sure how to think about the break up in the Euro for the United States. My instinct is to think of it as a major threat to US growth. It would seem to support a strong dollar rally, which is the last thing we need.

Right now, it’s Indian Summer for US manufacturing. Here is the ISM Manufacturing employment index. It’s a survey of how many manufacturers say they are hiring or letting go. I subtracted 50 (which means matched hiring and letting go) so you could better see expansions and contractions.

FRED Graph

Look how far back you have to go to see conditions this good, that is this many folks hiring. The 70s recovery is the last thing that matches it.

You have to go back to the 60s to find something that is clearly more solid.

At the same time, however, a collapsing Euro means potentially lower commodity prices. That seems good as well. It just doesn’t seem as good as a weak dollar.

Tyler Cowen asks

Is the downturn all about weak aggregate demand?

Here is one report from yesterday:

Dining out will cost more this year as U.S. restaurants take advantage of the nearly two-year long expansion to boost prices on food and drinks.

Higher-priced menus reflect growing confidence by eateries that consumers can afford to pay more to eat out. Restaurants are emboldened in part by the success of U.S. airlines, which have raised fares almost 10 percent since a year ago, according toDean Maki, chief U.S. economist at Barclays Capital in New York.

 

Something I don’t have a macro-theoretical explanation for but have divined from experience is that people in general and managers in particular think of the market climate in terms of rates of change.

Business is doing well if business is doing better. Business is doing poorly if business is doing worse. This is irrespective of where they are compared to some baseline.

For example, you hear all up down the supply chain that hospitality is “doing well”

If you look at sales growth you see it right smack at you. Here is food service sales growth – eating out – over the last ten years

FRED Graph

Nice tight ever higher bars. Business is doing better and better, anyone would say so. Good times.

Here is the same data in levels

FRED Graph

Lets add a trend line (human estimated)

image

That doesn’t look so good. We are well below trend. Yet, that’s not how business feels.

It is, however, how the job market feels because the same data is reflected there.

FRED Graph

If you assume that growth in employment is slightly lower than growth in sales then the two graphs match up. Here are the two growth rates plotted together.

FRED Graph

The moral of all of this is that although the business headline seems to diverge from what people are experiencing on the ground the two actually line up perfectly.

Its not that there is something different between what’s happening in the restaurant industry and what’s happening in restaurant employment. The difference is in how people look at the two.

The restaurant business is “doing well” that means growth rates are good. The economy is “bad” that means employment is below trend. Both are true.

The idea of grand bargains, big deals, and come-to-Jesus moments where our leaders get serious about the deficit are sexy but they are not realistic and quite frankly not smart. Big ideas make for big narratives and great stories to tell your grandkids but the history of ideas is that most of them suck and hanging your hat on any one of them is the surest route to ruin.

Ezra Klein outlines the real endgame

The report’s key insight is that deficit reduction usually gets broken into pieces. “None of the major deficit deals in recent decades has subtracted more than $500 billion from the cumulative deficit over a five-year period,” the authors note. When Ronald Reagan had to reduce the deficit, he raises taxes multiple times over a course of years and spearheaded a separate effort to reform Social Security. In the 1990s, there were three separate deficit-reduction bills: George H.W. Bush passed one in 1990, and Bill Clinton passed follow-ups in 1993, 1995 and 1997.

The wish for a grand bargain that’ll take care of the deficit all at once is probably just that: a wish. The likelier outcome is a slew of deficit-reduction measures passed over the next decade or so. That’s even truer for health-care spending, which is both the biggest fiscal problem we face and the one that most requires a decades-long process of trial-and-error in which we test out new ways of delivering care, of paying for care, of separating useful treatments from useless ones and of modernizing the sector’s IT infrastructure.

Bit-by-bit we make our way. That’s how the future is built.

Via this Greg Mankiw post I am pointed to a post by Steven Landsburg that argues

Just a couple of days ago, President Obama excoriated the Republican Congress for wanting to keep tax rates low for “people like me” — that is, people who, like the President, have very high incomes.

Now we learn that on an income of $1.7 million, the Obamas paid $450,773 in taxes, taking full advantage of the Bush tax cuts. I think it is fair to ask: If the President believes that people like him ought to be paying more, then why didn’t he pay more? There is absolutely no rule against sending in more money than you owe.

Landsburg goes on to argue that while the extra contributions from the Obamas would be small, so would their sacrifice, since they are only one family as opposed to many. Indeed, the Obama sacrifice would give more bang for the buck since it would go to the most underfunded areas of the government.

What this highlights is a breakdown in the way we talk about taxes. Its convenient to make simply moral plays – the rich should pay more taxes. Where in this case we use the word should like we do when we say you should call your grandmother more often. That is, the rich have a moral obligation to help the country by paying more taxes.

Some people may mean this and its certainly good for intensifying the debate. What is more likely meant by thoughtful commentators is that the world would be a better place if the law required the rich to pay more in taxes.

If we want to be truly honest then most people mean something like this: I would prefer a world in which all other rich people paid more taxes and I paid less. However, I doubt that anyone is going to go for this. So I am willing to settle for a world in which all rich people including me pay more in taxes. I am not willing to settle for a world where I am the only rich person paying more in taxes.

This is often how public decisions work. I would prefer a world in which everyone else had to obey speed limits but I could speed when I felt it necessary. Yet, its unlikely that anyone is going to go for this. So I will settle for a world in which everyone including me is subject to speed limits. I am not willing to settle for a world in which I am the only person obeying the speed limits.

Matthew Yglesias has a post today, riffing off of Kevin Drum’s muted anger, calling for reviving the now defunct (in the United States) “postal savings system“. This system, which began in 1911, was designed to get money out from under mattresses, and encourage banking by immigrants (where postal banking was a common practice). The bank payed a flat 2% interest rate on deposits, which it then re-deposited in local banks at a rate of 2.5%. Upon deposit, customers were given certificates of deposit in $1, $2, $5, $10, $20, $50, and $100 increments. Minimum deposit was one dollar, and deposits were limited (by the end of the system) to $2,500. The system was slow on the pick-up, but really ballooned after 1929 (spiking to $1.2bn in the 30’s), for obvious reasons. However, during the 30’s, with local banking systems in shambles, the practical effect of postal banking was nearly the same as privately hoarding gold.

The draw of the postal banking system, of course, was the “full faith and credit of the United States government”, a guarantee that didn’t exist for private sector banks. Coincidentally, with the passage of FDIC, and after WWII (when it payed an astronomical interest rate relative to the “market” rate), interest in postal banking severely waned, and by 1967, the system was absolved by an Act of Congress. Mildly interestingly, at the time of its dissolution, there was around $50 million unclaimed on deposit, which individuals could claim up until 1985, when payment of any claims were stopped by law. Long before then, however, the system stopped paying interest on deposits.

Now, I’m on the record somewhere (though I can’t find it at the moment?) claiming that the FDIC nearly single-handedly killed financial architecture. By that I mean, banks are ugly now, and the FDIC made them so. Apparently the FDIC also had a hand in killing off the postal banking system. But I still have a lingering question about why it was so unpopular in the US to begin with, and no convincing answers really come to mind at the moment. Many countries (including Germany and Japan) still operate a public postal bank, although many are in the midst of being privatized (along with postal delivery in many countries!).

I think postal banks in the current era would be a magnet for small and very short-term demand deposits, and not much more. Those types of deposits are, of course, the type that people have trouble with (as far as ‘vanilla banking’ goes). Thus, the bank would likely be relatively costly, as I’m assuming that “we” would be subsidizing smaller explicit fees. This would undoubtedly help people who don’t manage their accounts very well (or don’t even have an account, as many poorer people don’t), but doesn’t do much by way of preventing that from happening. Pair it with a savings lottery, and you have a nice idea to help poor people build intergenerational wealth (a bigger problem). And of course the “payday lending” industry is ever-unpopular, so it’s an easy political solution.

Finally, you have a question of what is done with the deposits. Direct loans (of course to ‘small business’)? T-bills? Muni’s? Redeposit in other lending institutions? I would, of course, warn that a public savings bank given a broad enough mandate would be a nearly irresistible vehicle for highly subsidized (and politically directed) lending. I don’t think that we’re headed this way; but the history is not exciting, nor are the possibilities — so it is a natural subject for me to think about.

“….conservatives condemn them as intrusions into the free market, liberals denounce them…, and both sides see them as a form of corporate welfare.”

Can you guess what it is? Here’s another clue:

Powerful interests and political traditions continue to constrain efforts to cut XXX. While all the free-market Republicans back reducing XXX in general, some continue to support targeted XXX… Newt Gingrich, the former Republican House speaker and likely presidential candidate, has been assertively arguing in favor of maintaining XXX in the face of intense criticism from backers of market reforms like the editorial page of The Wall Street Journal.

The article quotes Tyler, who says “….it is a great one-time gain, and it means lower prices for consumers and is a good idea all around.” Figure it out yet? The answer is here, and it is a very good thing if we can get reform in XXX.

Karl Smith on the Recovery: If We Had Ham, We Would Have Ham and Eggs, If We Had Eggs…

~ Brad Delong

Lets start by assuming ham and eggs. Here are private non-construction jobs gained or lost each month for the last 10 years

FRED Graph

What you see is a private non-construction recovery stronger than anything we saw during the 2000s. The absolute level of gains looks better than almost any month, the gains are increasing and they are solid month to month.

Lets take a closer look at something that a few of old cranks also find interesting and that’s mining, utilities and manufacturing: the traditional industrial heart of the economy.

FRED Graph

We don’t see huge gains but given that massive losses are the norm, the numbers are strong. Clearly they are better than anything that has happened in the last decade.

Indeed we have to go back to the mid-to-late 90s to find anything this strong. Notice also that the total post dot-com carve out in industrial employment was just as bad as the Great Recession. Yes, the mildest of the post war recessions hit industrial workers as badly as the Great Recession.

FRED Graph

Now lets turn to retail and hospitality. These are the sponge industries. When our marginal worker Jane Doe “needs a job” she is probably looking in retail or hospitality.  These are jobs like cashier, wait staff, line cook, etc.

FRED Graph

Not blowout performance but not horrible either.

Lets briefly turn to the golden children: education, health, professional services, business, finance, insurance and real estate. These are the aspirational jobs. People in these industries use the term “career.”

FRED Graph

This is quite solid performance. Not as go-go as the mid 2000s and that is primarily due to the strength of finance and real estate during that period and its weakness right now.

So what are we missing, Ham and Eggs naturally. Government and Construction.

Here is the disaster that has been construction

FRED Graph

You can see that we are just now rising out of the depths even though we have been depressed more or less since early 2006.

The government chart is all mucked up by the census but you can still see that it has been a major drag since 2009.

FRED Graph

Now why is any of this important?

Partly because most folks live within a given employment class and so it helps to see how the rest of the world lives. It also helps economists and wonks who are used to looking at the top line see the human shades of the recession.

Additionally, however, it changes the way I look at the top line number. The things that are holding us back are specific dysfunctions that we have reason to suspect will go away.

Construction: obviously finance is causing the headache here. However, the news in multi-family construction is that equity is stepping in to make up for the difficulty in getting loans. That is, people are putting down more and more cash to build apartment buildings. This should give us near term hope.

Over the longer term the pressure builds for more housing construction generally and we should see a turn around as living arrangements revert back to normal.

Government: The drag from government should end soon. Much of this is state and local consolidation driven by low sales tax revenue and balanced budget constraints. Most state and local governments have rainy day funds of on sort or another. However, those funds were not big enough to whether this storm. In particular the collapse in sales tax revenue was unprecedented.

I literally can find no records of a drop off like we experienced. During the Great Depression, property tax was a much stronger part of state and local revenues.

Yet, that is turning around and state and local should stop bleeding by the end of this year.

 

So given the real potential for a construction turn around and the likely healing of state and local government the jobs trajectory looks fairly good.

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