You are currently browsing the monthly archive for May 2011.
A recent paper from Skarbek, Skarbek, Skarbek, and Skarbek (that’s right) interview 31 sweatshop workers in El Salvador to find out how they perceive they job and their next best opportunities. Here are their results:
Field interviews reveal that subjects perceive their alternatives, including agricultural work and street vending, as less desirable when compared to sweatshop labor. Non-monetary benefits are an important part of this appraisal. The interviews provide information about the margins along which subjects’ compensation improves and identifies factory employment as one means of improving intergenerational mobility, educational attainment, and improved economic opportunities for women.
This is, of course, a very small sample. But the study does echo a similar sentiment expressed by Paul Krugmen in an excellent piece from Slate days:
You may say that the wretched of the earth should not be forced to serve as hewers of wood, drawers of water, and sewers of sneakers for the affluent. But what is the alternative? Should they be helped with foreign aid? Maybe–although the historical record of regions like southern Italy suggests that such aid has a tendency to promote perpetual dependence. Anyway, there isn’t the slightest prospect of significant aid materializing. Should their own governments provide more social justice? Of course–but they won’t, or at least not because we tell them to. And as long as you have no realistic alternative to industrialization based on low wages, to oppose it means that you are willing to deny desperately poor people the best chance they have of progress for the sake of what amounts to an aesthetic standard–that is, the fact that you don’t like the idea of workers being paid a pittance to supply rich Westerners with fashion items.
From Bill McBride again
The Census Bureau is releasing the demographic profile data for every state this month. Many analysts use the quarterly Census HVS to track the homeownership rate – and to calculate the excess supply of housing units. Important: Estimates using the HVS appear to overstate the excess supply. When all the data is released (by the end of May), we will probably have a better estimate of the excess supply as of April 1, 2010.
The number of vacant units is key in ascertaining how quickly pressure is building inside of home industry. Given the level of starts and the forecasts of homebuilders there is little doubt in my mind that pressure will mount significantly over the next 12 – 18 months.
It will be fascinating to see how much pressure already exists. My gut tells me that the market could be fairly tight especially in the East, but I am working with very crude series here. I will be extremely interested in what Bill and Tom Lawler conclude when they get a full look at the census data.
I have no idea if this is in reference to anything I have written but Bill McBride is emphasizing the following
This fits with the recent Reis data showing apartment vacancy rates fell in Q1 2011 to 6.2%, down from 6.6% in Q4 2010, and 8% in the Q1 2010.
Two key points I’ve made over and over are 1) with falling vacancy rates and rising rents, the number of multi-family starts will pick up sharply this year (but still be well below normal), and 2) this pickup will lead to a positive contribution to GDP and payroll jobs for construction in 2011, the first positive contribution for either since 2005. This survey reinforces both points.
I pointed out the differences between my perspective and Bill’s in earlier posts. I want to make sure that I recognize that Bill has been forecasting an increase in multi-family construction.
I am in agreement with his call, the series that he used to make the call and I think his analytical methods are solid.
The larger more macro-y points I want to make are in regards to construction and structural shifts in the economy.
First, the idea a lot of folks were pushing – that deep structural change was upon us – is largely wrong. There are major shifts going on in tech and offshoring but that has been happening since at least the late 90s.
Yet as recent as a year ago many were saying that folks in construction will have to find something else to do because we won’t be building homes for a long time. My point is that we are not building homes for cyclical reasons. If the market were in smooth equilibrium you would have already seen a construction recovery.
Second, a double boom phenomenon is building and I want to stake out early what I think is behind it. A few years back housing prices were rising in the face of tightening monetary policy but construction was actually falling. Now, we have loose monetary policy and housing prices are falling and construction is currently very very weak.
We are setting ourselves up for a boom in construction but I would not attribute it directly to traditional monetary policy. Instead the credit channel is all mucked in ways that are confusing the cycle. This is the legacy of subprime and the fact that it was a fundamentally technological development.
Again, I know the word technology has “positive affect” and people will want to push back on my use of it. Yet, if we ignore how words make you feel and concentrate on the underlying mechanics then subprime expanded the choice set and was thus a technological advance. When we think in modeling terms, we should think of it that way.
In this way we should look at the housing boom similar to the way we looked at Dot-Com. There was a gold rush. Prices went too high, too fast and that pushed some extra investment forward. However, we have to distinguish between the run-up in prices which was extreme and the actual push forward in investment which was mild.
Companies didn’t say well we’ve invested all we want in new tech for the next 10 years, we’re done. Similarly, America did not build enough homes during the bubble to last it for ten years. Construction is coming back and it was always going to come back.
This is one reason why aiming for soft landing is preferable to liquidationist mentality. Just saying, look all those carpenters need to just switch to doing something else is inefficient. We will need carpenters again and job switching costs are real.
Ideally you want an asymptotic approach to long run stability, not a get-the-rot-out crash. Yet, a crash is what we had. We can debate why, but the construction collapse was far more historic than the construction boom.
What this means is that we are now set up for a self-reinforcing boom on the other side. More jobs means more households means more construction means more jobs means more households . . .
This is not the kind of cycle we want. Yet, this cycle – I want to emphasize again – was created primarily on the downslope, not on the upslope. Here again is growth in the construction industry. Does the “boom” look weird, or is it the “bust” that stands out.
Pew has a great new typology out on America. I’d like to make more points but with semester winding down let me throw out a few thoughts based just on the demographics.
This tells you a lot about where America and its political parties are headed.
You see the stanch conservatives are much older and on their way out. Some think, and I have suggested, that this means that the US is headed towards a one-party state.
In the medium term I still think that’s true. Sound and fury over the Tea Party aside, the GOP is playing a losing game right now. Bush, Rove and Company tried to take steps to reverse this, but given a number of factors we can debate, they lost too much currency with their base that their efforts to broaden the GOP failed.
Over the longer term major realignment is the likely result. Lots of conservative like to point out that according to polls America is a conservative country. What they often ignore is that the conservative majority is sustained in large part by religious blacks and Hispanics who are voting Dem.
It seems to me that the emerging landscape in US politics is one where the Welfare State is more or less accepted and the on going debate is secularism vs. traditionalism.
Eventually enough staunch conservatives will age out of the GOP that Hispanics and blacks wind their way in. With Obama as the first black President it will take a long while to win over blacks but the fundamentals are there. Most black Americans are traditionalists.
With the increase in the secular / traditionalist divide libertarians and Post-Moderns will fall squarely into the Democratic camp. They will make peace with the Welfare State and will focus an internal debate in the Democratic party debate over more permissive regulation.
On Blogging Heads with Matt Yglesias and I think I know how to share it now. Nope, the video shows up in my preview but as a link on the actual site.
http://bloggingheads.tv/diavlogs/35937
We do a long ramble moving from Osama to the Fed to Health Care.
I get the feeling that the discussion on health care is not easily absorbed. Either I am mistaken or blogging heads commenters missed the point.
The core case is this:
Look free market medicine might be a great idea, but there is no precedent for it happening. The real choice is between an stingy government run sector that actually spends less money on health care or a less stingy government subsidized sector that spends more money on health care.
Further, in any case there is nothing akin to consumer soverignty in Medicine because first drugs have to be approved by the FDA, or else its illegal to prescribe them. Then you have to convince a licensed physician to prescribe them or else its illegal to buy them.
And, remember the part of medicine that does most of the curing is the actual medicine part, which is the most fiercely regulated.
A true free market in medicine would let people create whatever drugs they wanted, however they wanted and would let consumers buy whatever drugs they wanted however they wanted. If someone chose to get the advice or consul of a physician then fine, but there would be no law making them do so.
Given that this is not likely to happen any time soon our real choice is between bloated medicine and austerity. Since in practice Socialized Medicine is austere medicine, I wonder if this could actually get Bryan Caplan on board for fully socialized health care.
On Twitter tonight, in reaction to recent metric modeling I have been doing (for free, for a college lab), I mused about the vast hypocrisy surrounding our societal views on employment, and asked about the signaling model that would produce them. Robin Hanson has asked the same question. The basic thrust of my Tweet was this:
If you are a student working for a lab, you pay for the ability to work. If you are an intern working for free, then you are selling your labor at less than marginal cost. If you are volunteering for charity, then you are selling your labor for nothing. How do each of these fit into a model of signalling?
The reason I ask about signalling is because you can’t assume such drastic asymmetric information that an unpaid internship (or a PhD in a school lab) has simply been hoodwinked by the cost…and charity is completely voluntary. But so is employment. Why is there a dichotomy in the choices offered?
Soon after, I was responded to by @nuveendhingra:
@cheapseatsecon Under CA law, unpaid internships must be educational and can’t give immediate benefits for the employer http://bit.ly/kVpqfW
And it turns out, he is right, but the law in California is actually worse than he describes:
- The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school.
- The training is for the benefit of the trainees or students.
- The trainees or students do not displace regular employees, but work under their close observation.
- The employer derives no immediate advantage from the activities of the trainees or students, and, on occasion, the employer’s operations actually may be impeded.
- The trainees or students are not necessarily entitled to a job at the conclusion of the training period.
- The employer and the trainees or students understand that the latter are not entitled to wages for the time spent in training.
This seems patently ridiculous to me. IF you are looking for training that is “like a vocational school”, then go to a vocational school. If you can’t afford it, then let the government give you cash. If you can’t hack it, then too bad. Training is always to the benefit of the trainee. The regular employees thing is an obvious rent-seeking attempt…but is unnecessary. The fourth criterion is the most baffling to me. The employer should be impeded by instructing someone? At this point, are we in second grade? Do we really not understand the theory of firms? Does anyone engaging in an unpaid internship expect their “deep theoretical insight” to be compensated? And if it should be, then why are the selling it at a zero price? Is there such a deep-seated asymmetry that we need to protect people from their own decisions?
No.
The impetus for these type of laws (making their rounds around the country!) comes from the fact that unpaid internships are highly valued, thus those who can pay for them, will pay lavishly. As evidenced by blogging. You better believe that I put that I’ve been quoted in Atlantic, and linked to by the NYT and Financial Times on my resume, not to mention linked to by economic professors from George Mason to UC Berkeley. It’s all there (and yes, “costly”).
Robin Hanson didn’t really “get it” when he posted the his first inquiry on Facebook in regards to Girl Scouts selling cookies outside a (say) WalMart. My response was, “Do the girls not need the money, or do they not get the money?” But we seem to be blurring that line for “formal work”.
Girls probably get something out of Girl Scouts. Being a guy, I have no idea what…but Cub Scouts is a status game among parents (even if it teaches you rudimentary skills). I assume that Girl Scouts is the same. But again, this is an echo-chamber where middle-class people reaffirm their middle-class-ness among other middle-classers. Rich people don’t do ‘scouts, and poor people can’t afford it.
So why the rules on unpaid internships? Well, because unpaid internships are the providence of rich people. They are a status symbol, not so much a learning experience (although if you view it differently, you reveal just where you stand)…the problem is that now “middle class” and poorer people are more and more sacrificing to (maybe) swallow the loss in wages. In response to the growing demand, the law is trying to turn the experience into a rote learning experience. The law can’t do that, because the value of an unpaid internship is (nearly) strictly status. If you dilute that, then rich people will just devise another plan to show status. After all, way back in the day ‘apprentice’ was a status symbol.
The model seems to be: When rich people have their own status game, it’s fine. When middle class people break into that status game, they need an upper hand through transfers. But when poor people enter, they need explicit protection.
Thoughts?
P.S. I’m sure that Robin Hanson understood the situation perfectly well, he just asked the question so idiots like me could write meandering posts like the one I just wrote.
P.P.S. “Idiots like me” is code for “making me think, but I don’t do it as well”.
Today, Barney Frank introduced legislation in committee to remove regional Fed presidents from the FOMC:
U.S. Rep. Barney Frank (D., Mass) Tuesday introduced a bill that would let interest rates be set only by Federal Reserve officials picked by the government, a new attempt to move power away from regional Fed officials chosen by the private sector.
The bill would remove from the 12-member policy-setting Federal Open Market Committee the five members who represent regional Fed banks. Only the seven-member board in Washington, which currently has two vacant seats, would get to vote on interest rates. The congressman said this would make the Fed more democratic and increase “transparency and accountability on the FOMC” by eliminating those officials who are effectively picked by business executives
Now, I have never been a fan of Barney Frank, but I do see merits in this legislation. However, first a contrary opinion, courtesy of Mark Thoma:
I can support – and have advocated — reforming the way in which regional bank presidents are selected. But this proposal, which removes geographical representation even though recessions do not hit each area of the country equally, is a bad idea (the Board of Governors can already veto the appointment of a regional bank president, though I don’t know of any instances where this power has been used). It takes us further away from the populist roots of the Fed’s structure, a structure that tried hard to represent all interests in policy. It also furthers the concentration of power in Washington that has been occurring slowly but surely ever since the Bank Reform Acts in the wake of the recession established the Fed’s current structure. In addition, it takes another step toward increasing the power of Congress over day to day monetary policy…I hate to even imagine how bad things would be if Congress had been in charge of monetary policy.
…reform the selection process for regional bank presidents, but don’t increase the concentration of power in Washington…I would like to see, at a minimum, less representation of business so that the public interest generally can take center stage.
While I can stand broadly stand behind the anti-concentration of power sentiment, if you have regions of a country which fluctuate so wildly from baseline that their performance creates a necessity for special accommodation from monetary policy in general, that is an OCA argument against having a single currency area. David Beckworth has argued that the “rust belt” in the US could have possibly benefited from its own currency over the last decade, and I agree!
Do we need regional Fed presidents at the table? After all, in the Great Contraction of 2008, and the ensuing recession, it has been the regional presidents that have provided the voice of hawkishness, even through tumultuous 2009! So when the chips are down, and adequate monetary policymaking is at its highest stakes, these guys were wrong…and being that they largely represent banking interests, they are likely biased against inflation at all costs. This certainly hasn’t been any help to our recovery!
Thoma is worried about Congressional power eroding sound monetary policy decision-making…but our current Fed structure doesn’t prevent that, indeed, it probably enhances it!* After all, Bernanke held the first press conference amid rising populist fears stoking an encroaching Congress’ ire regarding monetary policy. When Mark hopes that public interest would take center stage — and I do as well — but I don’t see how reforming the Fed presidents’ selection process is superior to having a board that is wholly selected by the President, and approved by Congress. If you want to do 12 members that way, so be it!
However, while Barney Frank’s motivation is mostly suspect, sometimes even then you stumble upon a good idea…but this idea isn’t good enough. If you are in a position where your legislation has little chance of making it out of committee, my play would be to lay all of my cards on the table: rewrite the Fed charter such that it requires the Fed to set one nominal target, and keep it on a level growth path. I would prefer NGDP, as I believe that targeting nominal spending is far superior to targeting inflation. This is obviously not Frank’s goal, and it would likely go against Franks (poor) instincts as it removes the unemployment portion of the mandate…but the level of employment in an economy is a real variable.
So what if trend NGDP was perfectly on target, but unemployment remained uncomfortably high. Is that a reason for monetary policy to act? Well, it could be…but there are other questions to ask of other policymakers. What are the structural problems? If there are supply side rigidities, look at removing them (not just removing specific laws, but increasing education, etc.). If you are uncomfortable with removing them, then live with higher joblessness. If there happened to have been an extremely productivity-enhancing technological development (like mass teleportation?) that is causing persistent unemployment because it significantly increases the return on capital investment vs labor investment, then perhaps the long-run growth potential of the economy has been increased — if that is the case, monetary policy may need to target a higher growth path for NGDP.
So, to sum it up, I think removing regional Presidents does make the board more accountable, and it would probably also improve the decision-making process. And if you really wanted to reform the Fed with an eye toward independence, remove the dual mandate and institute a explicit nominal target.
*Imagine a Congressional hearing under an NGDP targeting rule. What would it consist of?
Congressman: “Is NGDP on target”?
Fed Chair: “Yeop”.
Congressman: “Lets get lunch”.
That is obviously a joke, but it is the wiggle room created by the confusing dual mandate that allows Congress to leverage nearly all of its power against the bank.
Orin Hatch (R-UT) has a somewhat confusing statement on taxation
American taxpayers are skeptical that the answer to our fiscal problems is for them to sacrifice more, when almost half of all households are not paying any income taxes,” said Hatch. “Those who promote higher income tax rates in the name of equality and deficit reduction need to come clean about what this means. With the income tax base so narrow, meaningful reductions in our deficits would require far more than taxes on the rich. Those tax increases would squarely hit the middle class, which the President and others have said is off limits. In short, the quest for social equality results in fewer resources and worse outcomes for the nation as a whole and the poor in particular
I’d like to make a couple of notes because I think many of my friends on the right, for their own sake, are going down the wrong road on this one.
- The narrowness of the base depends on the share of income going to the taxed. If say only the top 400 households in America paid income tax but they took 90% of the income then the base would be fairly broad. Its just important to remember that we arguing that the budget cannot be balanced on taxes on the rich. It depends on how rich they are.
- Letting the income tax wither and die is in the long run interests of reducing the impact of taxation on growth. As is strengthening Social Security through payroll tax increases. It is already almost the case that the majority of US federal revenue come from a flat tax on labor. Imagine that, do you think you could ever convert the income tax to a flat tax on labor? Yet, the mechanics are making that happen on their own.
- Raising taxes for the rich by ending the cap on the payroll tax is the quickest way to move the US even further down the road towards a flat tax nation.
I don’t have a target number to report but contrary to many of my colleagues I am beginning to see signs of growing consumer inflation. One thing to remember is that housing is by the biggest share of the core expenditures.
The BLS calculates the cost of housing using rents. For renters it measures the actual rent they pay. For homeowners it measures what you could have rented your home for. That’s because the BLS considers buying a home an investment, not a consumer good. What you consume is “not having to pay rent.” So, to tell how much that is worth, they try to figure out what your home would have rented for.
I see a rental market that is likely to tighten significantly in the next 18 months. This implies increasing inflation rates. Moreover, it represents something that we are actually interested in, pricing power for suppliers of an important commodity.
If we look at transportation we see similar issues. Core transportation expenses are dominated by the purchase price of vehicles. As sales increase I expect vehicle price increases to accelerate in the coming 18 months.
I don’t know much about the apparel supply chain but my naïve hunch is that a significant portion runs through China, which is experiencing rapid wage inflation.
These developments set up the prospect for increasing inflation in the 18 months ahead. Now I am currently not alarmed about any of this because I see inflation as too low. I also think that we need to make up for some of the sluggish inflation.
This probably belongs in a separate post but an important thing to remember is that the Federal Reserve actively allowed the notion of a 2% inflation target to be promoted in the 1990s and 2000s. This was the basis of some financial decisions by borrowers during that period. No, of course not most consumer borrowers, but some players especially at the business level.
For the Fed not to reverse the low inflation we have experienced would be to permanently screw those borrowers and to permanently benefit creditors.
Even more to the point there is a tradeoff between inflation and unemployment. Even ignoring the need to make up for exceptionally low inflation the Fed should be willing to tolerate somewhat higher than normal inflation to deal with higher than normal unemployment.
Gallup’s job creation index is hitting new highs and looks to be on the right trajectory.
I am sure my reports of job growth will further dampen reputation as an incorrigible pessimist. I’ll do damage control by asserting that none of this does anything to stop the evitable heat death of the universe and the extinction of all life. This will still all end very badly.
In the mean time, however, the economy seems to be on a positive path.
John Papola responds to the criticism of his rap video
I repeat. He’s not the “real” Keynes. Keynes is dead. Keynes wasn’t a rapper. Rap didn’t exist in 1936 nor did Keynes write anything about the current great recession.
That seems obviously right to me. In my critique I referred to the “Keynes character” because this is obviously what it was.
Where I want to object though is in the continuing equation of Keynesianism and government spending and in particular government consumption. I understand that this is a convenient fulcrum for folks who always want to debate private vs. public expenditures, but it seems largely beside the point to me.
Here is Papola again
No, the Keynesian administrator must spend the money on particular people, firms and production. They must plan that spending from the center of Washington, DC. They must plan that spending with few ways of knowing if the firms that receive their subsidies and production that emerges conforms to people’s ongoing preferences. Will the solar panel company’s product still sell at cost-covering prices without the stimulus funds? How about that corn-ethanol? Does anyone really want that?
Why must they plan anything in particular? As I always write on my student’s papers when they advocate a particular policy or regulation to extinguish some ill facing a group of people – what’s wrong with just handing out cash?
If there is a problem first – and usually best – solution is just throwing money at the problem. I know its more glamorous to come up the perfect idea, but unfortunately almost all your ideas are horribly bad. That’s just the nature of ideas. Nothing personal.
Throwing cash at the problem could come as an income tax cut, a payroll tax, a tax rebate or even just checks-in-the-mail.
Brad Delong puts the point
At this point, anything that boosts the government’s deficit over the next two years passes the benefit-cost test–anything at all.
Now clearly Brad didn’t mean this. Genocide, is if nothing else, monumentally expensive. The budget deficit would surely rise, if we embarked on a massive genocidal campaign. Yet, I doubt that Brad would support such a campaign.
Still Brad is right to place the emphasis squarely on raising the budget deficit. That is the primary goal. Channels and multipliers are details.
However, when the raising the deficit is the goal, the most straight forward and logistically simple way to do it is to simply extract cash from the US government and distribute to US citizens. No hiring, no contracting, no procurement. No choices to be made about this versus that. No time wasted establishing a fair and transparent process.
Broad based tax cuts accomplish this. Yet, the ultimate and deeply Keynesian goal of increasing the government’s budget deficit is accomplished.
Robin Hanson argued some time ago that politics isn’t about policy. This was his theory for why we have so many excessive regulations that “make everyone act like high status folks act, regardless of how appropriate that is for their situation”. Here are some of his examples:
“Consider one-size-fits-all building codes, food and drug regulations, safety rules, professional licensing, and medical insurance regulations. Such rules tend to make sure that a typical rich person wouldn’t accidentally buy a product or service of a much lower quality than they would desire.”
His favored theory for why these types of laws are pervasive is that politics isn’t about policy, in that:
“We (unconsciously) don’t care much about the consequences of such policies – we instead support policies to make ourselves look good. If our support for regulations pushing high status actions is taken as a signal of our personal status, then we can want to support such regulation regardless of what results when such regulations are implemented.”
How would we know if Robin was wrong? I think that no matter what your policy priors are, there are some obvious things policy should incorporate if in fact we did care about policy outcomes. The lack of these policy features suggests to me that Robin is correct.
For one thing policies should be designed so that we can tell if they worked. One way to do this would be to incorporate randomization into their design. State and county differences in laws are already used as instruments for economic studies, but endogeneity of policy is always a concern. The experimentalist school of economics is growing more and more prominant, and government’s could hire staffs of these economists to design very subtle and smart ways to insert randomization into policies and tease out causality.
A state that wants to raise the minimum wage, for instance, could raise it in randomely selected counties. Or consider what could be learned about payday lending if some state or group of states hired Dean Karlan and Jonathan Zinman to design a study oriented policy. It certainly would have been a good use of money to randomize some of the first round stimulus package. If it worked as proponents claim then it would make it easier to get a second round of it, and if it didn’t as critics claim then it would be much less likely we would waste money on future stimulus.
Of course this would not work with all policies. Sometimes the effects are significantly long-run, indirect, or they impact hard to measure outcomes, such that it would be difficult or impossible to empirically determine whether they’ve worked. Here we must be guided by theory. But surely there are many laws where this is not the case.
Another thing you would observe if politics were about policy is sunset provisions in laws where the efficacy is examined some predetermined number of years out and they are automatically repealed unless they are shown to have had a demonstratable effect. This would go hand in hand with policies designed so that effectiveness can be measured.
Policies that are designed so that we know if they worked as intended, and are be automatically repealed if they don’t: why is such a common sense idea so foreign, and what does that tell you about politics and policy?
(Thanks to the always insightful Sister Y for inspiring this post)
He starts
It is widely believed that shifting the tax base towards consumption, through, for example, a progressive consumption tax, would have a large and significant impact on investment levels. And the beauty of this kind of decentralized private investment is that it involves risk-takers (and risk-bearers, ideally!) making bets with their own money.
I agree in someway but perhaps not in others.
I agree that decentralized decision makers making bets – though not necessarily with their own money – are likely to stumble across innovation. However, scale matters, which is why most folks in the innovation business are actually playing with someone else’s money – sometimes twice removed. A start-up gets money from a venture capital fund which is in turn supported by a hedge fund which in turn is playing other people’s money.
This leveraging process is powerful and important for creating things. Its also why the government can accomplish amazing things. It has the ability to more or less leverage its entire taxing authority if wishes too.
The problem I see is more subtle. That to leverage in the private world you have to convince folks you have a good idea and deliver. Leveraging the political process is a complex mixture of power monopolies, political incumbency and an electorate with limited attention.
More than even getting the investment right per se, you have to get the people right. And, politics doesn’t have a clear mechanism for getting the people right, from a return-on-investment perspective.
Reihan goes on
And if “venturesome consumption” is crucial to profiting from innovation, and to developing the more valuable and less-mobile downstream innovations, can one make a decent case that maintaining a low, stable, and sustainable tax burden is pretty important to maintaining a healthy level of disposable income?
Well you might want to make the case for high levels of disposable income, but that need not be associated with a low tax burden. If what the taxes do is take money from some people and give it to others, the healthy and stable could easily go the other.
We take from those who are doing unusually well and give to those doing unusually bad so that everyone is always doing decent. Not that this always the outcome, of course, but you can build a clear case for it.
Even still though I have begin to wonder whether or not growth per se is an important component here. As people become accustomed to the life they are living and less and less income is functionally disposable. Thus a steady increase in income might form the fuel for taking “consumptive risks”
Bill McBride (Calculated Risk) may be coming around to my point-of-view. He quotes an article from Bloomberg
Millions of young adults like Webb are starting to leave their parents’ homes, creating households at the fastest rate since 2007.
…
Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau
and adds his own take
We already know the net number of housing units added to the stock will be at or near a record low this year. With a million new households formed this year, the excess supply of vacant housing units will be reduced significantly (but will still be high).
What I still see is the potential for a boom within the boom. Increases in jobs opportunities will increase the rate at which young people try to move into their own places. It will probably also reverse the decrease in immigration. These forces will lead to a booming demand for housing units, which are rapidly closing in on below trend.
How will economic growth proceed over the coming year? While the impact of high energy prices is worrisome the overall trend looks robust to me.
The ISM Manufacturing Survey is strong
Not that manufacturers are reporting”better” conditions than the ever did during the 1990s and during most of the 00s. Maybe this won’t last but outside of energy prices there is nothing clearly on the horizon to make it stop.
Moreover, rapid growth in Brazil and China lays the groundwork for strong manufacturing in the US. Some of that will come about as US companies provide the business inputs – jet planes and bulldozers – for the developing world. Some of it will come about as more richer consumers in those countries begin consuming US products. Some of it will come about through a slowdown in off-shoring and in some industries the possibility of manufacturing returning to the US.
This still seems distant for most production but even a slowdown in manufacturing going overseas will mean an increase in US manufacturing’s outlook.
The death spiral of construction – investment in structures to be more specific – seems to be petering out. Notice the year-over-year growth rate has been negative for, count them, five years now
Growth in Equipment and Software has rebounded
Even on payrolls, if we take the long view, the growth rate, looks symmetric and on the whole moving in the right direction
If you look at the 90s recession and to an even greater extent the 00s recession there is a tilt in the growth rate. This implies that payroll growth fell much faster than it rebounded. That lean isn’t readily apparent in the current recession.
To be sure the fall was longer and deeper but the overall shape is largely symmetric.
A closer view shows how the dynamics of this recession differ from the last
Looking at the log of the level of employment we see a couple things. First, the drop has a S-shape rather than slow downward slide. Second, the growth rate since the bottom of this employment cycle is almost as strong as the growth rate from the bottom of the last cycle. Though it has come 6 months earlier.
There are difficulties facing us and a huge employment problem that should not be ignored. However, the dynamics look like growth.
I have not read this new NBER working paper on racism in sentencing, but the abstract is both provocative and sadly unsurprising:
This paper proposes a test of racial bias in capital sentencing based upon patterns of judicial errors in lower courts. We model the behavior of the trial court as minimizing a weighted sum of the probability of sentencing an innocent and that of letting a guilty defendant free. We define racial bias as a situation where the relative weight on the two types of errors is a function of defendant and/or victim race. The key prediction of the model is that if the court is unbiased, ex post the error rate should be independent of the combination of defendant and victim race. We test this prediction using an original dataset that contains the race of the defendant and of the victim(s) for all capital appeals that became final between 1973 and 1995. We find robust evidence of bias against minority defendants who killed white victims: In Direct Appeal and Habeas Corpus the probability of error in these cases is 3 and 9 percentage points higher, respectively, than for minority defendants who killed minority victims.
On May 11th, 2011, my original blogging location, CheapSeatsEcon, will go offline, as I have decided not to renew the domain. It’s been quite an exciting ride from my humble beginnings as a free WordPress blog, to having my own domain, to writing for ModeledBehavior. I have been blogging for a little over a year now, and in that short amount of time I’ve made new friends, interacted with some of the most intelligent people in the econ/political blogosphere, done a couple QA’s for bigger sites, gotten quite a few e-mails from people asking various questions, and got some freelance work doing research locally. In short, it’s been much more eventful than I had ever dreamed!
One of the craziest things that ever happened to me was Tyler Cowen linking to my third post ever. I told literally everyone who would listen to me! The funny thing is, though, that I still get pretty excited when people link to my articles…it just never seems to fade (or maybe I’m just weird). I’ve gotten many compliments (and links) from people I greatly respect, and it’s been wonderful debating with everyone (I don’t want to name names, because you inevitably leave someone out)!
In any case, I’d like to thank all of the readers of the blogs for which I’ve written. You certainly are the reason that I write, and your support is the reason I am where I am today in the blogosphere!
P.S. If anyone is interested in the subject, and I get more time, I may start doing more posts about “complexity economic” theory; including implications and applications, and its relationship to the current state of the economy. I did a couple series’ on my old blog, but they weren’t very popular, and were very wordy (one of them was very math-y as well). If anyone else as any other suggestions (and I’m at the very least competent in the subject matter), you can comment or e-mail me and I’d be happy to write about them.
Gary Taubes is on blogging heads. I highly recommend it. He also, has a piece in NYT Magazine that I had missed. In the magazine piece he describes the work of Bob Lustig
If Lustig is right, then our excessive consumption of sugar is the primary reason that the numbers of obese and diabetic Americans have skyrocketed in the past 30 years. But his argument implies more than that. If Lustig is right, it would mean that sugar is also the likely dietary cause of several other chronic ailments widely considered to be diseases of Western lifestyles — heart disease, hypertension and many common cancers among them.
I recommend reading the entire article and watching the blogging heads, but if you have to choose one go with the article.
I’ve said before that the obesity epidemic probably has a single cause and that it is likely even a single molecule. Lustig is not shy about calling that molecule by name, fructose.
I am more shy. The sketches of the fructose argument are there. Its associated with obesity increases. It does strange things to the liver. Those strange things seem to be associated with insulin resistance and metabolic syndrome. Metabolic syndrome seems to be a major player in obesity.
Still the entire theory is not there yet. For example, the cortisol camp seems to have been making progress recently.
Due to its impact upon health and the economy, the mechanisms that contribute to the pathogenesis of obesity and the metabolic syndrome are under intense scrutiny. In addition to understanding the pathogenesis of disease it is important to design and trial novel therapies. Patients with cortisol excess, Cushing’s syndrome, have a phenotype similar to that of the metabolic syndrome and as a result there is much interest the manipulation of glucocorticoid (GC) action as a therapeutic strategy.
. . .
So far studies have primarily been carried out in rodents, with results showing improvements in metabolic profile. Data are now beginning to emerge from human studies and the results are promising.
The short story here is that metabolic syndrome looks a lot like Cushing’s Syndrome, a disorder in which the body is constantly exposed to too much cortisol. Cortisol has several interesting links to modernity. Its associated with increased stress and low social status. Corticosteroids are used to treat allergies. And, environmental estrogens are thought to increase the level of cortisol in the blood.
Fructose has a lot of strikes against it, but we are not ready to condemn it just yet.
Some time ago I challenged those who don’t believe that paternalistic regulation is characterized by a slippery slope to provide some examples of regulation that would prove them wrong. The problem I saw was that paternalism fans always deny the slippery slope exists by claiming that new regulations are just reasonable policies. But of course this is how the slippery slope works, as today’s new policies will be used to justify future policies and to make them look reasonable. After all, every new step is only a small distance from where we are currently standing, but what are we walking towards? Nobody took the challenge, but pivoting off of San Francisco’s Happy Meal ban I did makee some predictions about future likely paternaism:
Making fast food less attractive may protect parents when they happen to be near a McDonalds with their kids, but it doesn’t protect them from having McDonalds reach out to children in the first place and getting it into their heads that their food and toys are awesome. If you’re going to stop this problem, it must be at the root. One way to do this is to ban advertising of fast food targeted at children. This would probably start with children specific magazines and TV shows, but move to a general ban.
Now regulators are helping to make my predictions come true, as they attempt to place limits on advertising by food companies to children. Here is how Ad Age describes the guidelines:
…the rules would start in 2016 and only allow foods that contain no trans fat and not more than one gram of saturated fat and 13 grams of added sugar per “eating occasion” to be marketed to children. Also, the foods could not contain more than 210 milligrams of sodium per serving. The sodium restrictions would tighten by 2021. In a concession to industry, the rules do not include “naturally occurring” nutrients. Additionally, the foods must provide a “meaningful contribution to a healthful diet,” including from at least one major healthy food group such as fruit, vegetables, whole grain, fish, eggs and beans.
The guidelines are said to be “voluntary”, but as Ad Age points out this is a little murky:
Although not binding, whatever emerges in the final report to Congress will likely be adhered to in some fashion because the rules are put forth by a quartet of agencies that have strong sway over marketers, including the FTC, Food and Drug Administration, Centers for Disease Control and Prevention and Department of Agriculture. “Despite calling these proposals ‘voluntary,’ the government clearly is trying to place major pressure on the food, beverage and restaurant industries on what can and cannot be advertised,” the ANA said in a statement.
I would be interested in reading more about the “strong sway over marketers” that these agencies have, and exactly how the nominally voluntary guidelines would be non-voluntary in practice. This will probably come to light, as Ad Age says that this announcement is only an “opening salvo in what will be a lengthy debate between government and industry on how to solve the growing childhood obesity crisis”.
If paternalists truly were concerned about reducing childhood obesity and not simply trying to make themselves feel good, then they should be willing to include in these regulations a sunset provision that repeals them if they don’t have a demonstratable impact on childhood obesity rates in 5 years. My guess is that paternalists wouldn’t go for this, because deep down they know this isn’t going to make much if any difference in children’s health and are really interested in banning something they find distasteful.
The slippery slope from here is pretty obvious: strictly non-voluntary guidelines that require any food packaging or advertising of must be approved by a regulatory agency and subject to standards similar to those above. But we know that advertising isn’t the only way that companies influence purchasing decisions. Why shouldn’t the color of packaging be regulated? I’m sure behaviorlists can tell us which colors children like most, and I’m sure regulators would be happy to insist on gray boxes for unhealthy foods. Children are also probably more drawn to items low on grocery shelves or in the checkout aisle, so why shouldn’t regulators determine where in a store products can be placed?
I’ll repeat my challenge to paternalists: if this isn’t evidence of the slippery slope of paternalism, then what would be?
David Frum, commenting on the Keynes vs Hayek rap video released last week, makes a point that I noticed throughout the video as well:
The economic question we have faced since 2008 is not: “Shall the government of the United States dictate prices and production throughout the US economy?” Who advocates that? Not Larry Summers. Not Tim Geithner. Not Ben Bernanke. And if there’s any tiny remaining sliver of Barack Obama’s being that wishes for central planning, it to this day remains profoundly hidden beneath all his contrary appointments, policies, and pronouncements.
Throughout the video, “Keynes” asserts that in a depression, we need to start the flow of spending, to boost aggregate demand to a level in which the economy can sustain itself. Keynes, and modern Keynesians, believe(d) that fiscal policy could take up the torch of private spending while household balance sheets were mended, and that the boost in GDP would help us recover more quickly. And, while “Hayek” had some really brilliant lines throughout the video (“…if every worker was staffed in the army and fleet/we’d have full employment and nothing to eat…“, and my favorites: “…jobs are a means, not the ends in themselves/people work to live better, to put food on the shelves/real growth means production of what people demand/that’s entrepreneurship not your central plan…” and “…the economy’s not a car, there’s no engine to stall no expert can fix it, there’s no “it” at all…“), you’ll notice that through nearly all of the video, he is making a generalized argument against central planning. They’re talking past each other, or at the very least perceiving themselves as having two different conversations.
However, Frum runs into trouble with this:
The Hayek character says, “I feel for the suffering, I’m not some kind of jerk.” The Keynes character answers, “Now my old friend, I’d never reject you as if you were heartless, you know I respect you.”
But the suffering want more than “feeling.” They want a policy response. And it is precisely a policy response that our modern self-described Hayekians preclude. Monetary policy? No can’t do that – it only leads to inflation and more bubbles. Stimulative government spending then? No that’s out, it leads to inflation, bubbles, etc. Tax cuts for the ordinary working person such as the payroll tax holiday? No way – we must balance the budget. So that leaves only supply-side tax cuts aimed at the upper-income brackets. balanced by large immediate budget cuts in Medicaid, food stamps, unemployment insurance. Does anybody believe that such a policy mix will lead to rapid employment growth? The Heritage Foundation claimed so, for approximately 48 hours, but now even they have abandoned that assertion.
To the question: What do you do in a deflation, Keynes offered an answer. He intended his answer as a means to preserve exactly the kind of spontaneous order praised by Hayek. Keynes lived and died a liberal in the old sense of the term. There are many criticisms of the Keynesian answer, mostly having to do with that long term that he so famously shrugged off. But some answer is better than no answer – and much better than the answer offered by the modern self-described Hayekians.
I don’t know about “modern, self described Hayekians” (actually I do, but I don’t want to speak for them), but this wasn’t Hayek’s position at all. As Larry White has pointed out in a JMCB article:
The Hayek-Robbins (“Austrian”) theory of the business cycle did not in fact prescribe a monetary policy of “liquidationism” in the sense of doing nothing to prevent a sharp deflation. Hayek and Robbins did question the wisdom of re-inflating the price level after it had fallen from what they regarded as anunsustainable level (given a fixed gold parity) to a sustainable level. They did denounce, as counterproductive, attempts to bring prosperity through cheap credit. But such warnings against what they regarded as monetary over-expansion did not imply indifference to severe income contraction driven by a shrinking money stock and falling velocity. Hayek’s theory viewed the recession as an unavoidable period of allocative corrections, following an unsustainable boom period driven by credit expansion and characterized by distorted relative prices. General price and income deflation driven by monetary contraction was neither necessary nor desirable for those corrections. Hayek’s monetary policy norm in fact prescribed stabilization of nominal income rather than passivity in the face of its contraction.
The bolded line is important, because if you take the Sumnerian theory of the Great Recession seriously, or even the most common explanation of events leading to the Great Contraction (’29-’32), the problem is that the monetary authority (the Federal Reserve) allowed NGDP expectations to fall off a cliff in late 2008 by passively tightening monetary policy…and that is exactly the opposite of what Hayek would have considered proper macroeconomic stabilization policy. As I understand Hayek’s NGDP rule, the central bank should stabilize M for any given V, consistent with zero aggregate growth in in the price level (PY), which would result in the type of deflationary growth that Hayek (and George Selgin) advocated.
No need to take White’s interpretation, though, here’s Hayek himself, agreeing with Keynes on the matter of deflation (though not the prescription of government expenditure, which is redundant with a NGDP level target):
On the first issue — whether to use one’s money or whether to hoard it — there is no important difference between us. It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.
Really, on the issue of monetary policy, I see Keynes and Hayek arguing together against the ever-popular real-bills doctrine
The debate about central planning was indeed contemporary in the 30′s, and today I think many libertarians don’t recognize or appreciate the extent to which we’ve won on that point…Hayek, indeed had a good (and I believe superior) answer to Keynesian fiscal policy…but you unfortunately won’t find it in the Keynes/Hayek video.
Note: I’m not foremost expert on Hayek, but I’m sure that if Greg Ransom (and others!) reads this blog, he will correct my errors in the comments!
Update: Tyler Cowen makes the same point in a single sentence…bet you wish I had put this update at the top ;].
