Monthly Archive

An update, from the invaluable Calculated Risk

The vacancy rate for the third quarter, which wraps up the prime leasing season, fell to 5.6% from 7.1% a year earlier. That is the lowest since 2006.

The increased demand follows several years that saw little new apartment development. About 8,200 units came online during the third quarter, one of the lowest quarterly figures since Reis began tracking the data in 1999.

Also, tightening supply is not what a recessionary chart looks like. I continue to see the fundamentals pointing towards growth even if we are experiencing strong headwinds right now.

Goldman is pegging the odds at 40%. Those seem a bit high to me. Now it could be that they have a more sophisticated gasp of the effects of a European Implosion than I do.

However, I have a hard time getting there from here. You would have to believe that the exports channel is going to be really big for the Untied States and that it will not be offset by the gasoline channel.

I still think the Fed can do more to promote recovery including extending low interest rates to 2015. I also think the fiscal authorities could do more, particularly through expanding and extending the payroll tax cut – business side as well as worker side.

However, even in our current state its just hard to piece together a recession.

Look at these vehicle fleet dynamics

The center of the distribution is moving rightward. This means not only is our vehicle fleet rapidly aging but that if vehicle production actually fell the scrappage rate would skyrocket in the coming years.

You would have the mass of cars headed towards obsolesce. Is this what is going to happen? Its hard for me to see how it is.

This is something we should talk about more but an export oriented economy like Japan could easily get trapped in a very long liquidity trap, especially when you add a rapidly aging workforce to the mix.

However, a relative young and import oriented society like the US is going to have a much harder time staying stuck.

Tyler and Scott are not fans. Brad is.

I tend to side more with Brad conceptually but I prefer the IS-MP model.

That is where on one side we have investment decisions and on the other side we have monetary policy.

I like this in part because I think every conversation about the macro-economy should be piped through the language of monetary policy.

The real world is nominal and students know that. They always want to “follow the money”

For example, in international trade they want to say that if we send all our money to China we will have no jobs here. You could try to get around that by talking about comparative advantage but you are ignoring their question which is ultimately a monetary question and needs to be answered with monetary policy.

Likewise if people say that there community is dying because there are no jobs and businesses, they are not telling you a story about the geographics of production. They are telling you a monetary story.

They are saying that there is a severe monetary contraction going on in their community. The answer to this story must involve banking, lending, debt, prices, import or export. It will not be solved by changes in real productivity alone.

Why?

Because plenty of communities an be dirt freaking poor and not have the problems that these communities are having. Plenty of poor communities can be thriving. While rich communities can be in throes of death.

Indeed, the more you listen to people talk about “economic problems” the more you realize that they are talking about monetary problems. Problems involving prices, money, debt and lending.

The economy of China is quite poor. The economy of Portugal is quite rich. Yet right now Portugal is experiencing a severe monetary contraction while China is trying to put the breaks on monetary expansion.

Thus it feels to just about everyone that the economy of China is doing well and the economy of Portugal is doing poorly.

The real world is nominal. IS-MP helps us see that.

I think we have basically two recessions going on in the United States. One is a standard recession in which the rate of inflation is too low and the real interest rate is two high.

This is causing the accumulation of capital and durables goods to be depressed from their long term equilibrium.

Why do I say depressed and not a return to normal?

Well, because as of the last few years the auto fleet in the United States has begun to shrink. That is, we are scrapping cars at a faster rate than we are producing them.

Unless something changes in the next 18 months, our scrappage rate will begin to exceed new cars sales by the millions of units per year. In a country that is still growing in population and still adding drivers every year its hard to explain why the optimal path is suddenly for the vehicle fleet to shrink.

The same thing is becoming true with houses. New homes starts are roughly were demolitions are. We are scrapping about as many new homes every year as we are creating.

It will be a while before the stock of new homes appreciably declines but it will not be too long before homes per person in the United States falls to multi-decade lows.

Now maybe something radically changed and we all decided that actually we had too many cars and too many homes but an alternative explanation is just that the real interest rate is too high.

At the same time there is also a balance sheet recession going on that looks a little different. What we see here is a decline in retail sales ex-autos that is truly historic. Don’t pay attention to people waving graphs of PCE.

PCE is fine for what it is, but what it is not, is a measure of what consumers purchasing decisions. It is dominated by either third party payments, imputed expenditures or what most people would call “bills” things like electricity, heat and rent.

What you really want to look at his retail sales ex-autos. Those are in the dumps. They are in the dumps in large part because people saw their home values decline and are now pulling back.

These two recessions are happening at the same time but they are not quite the same.

I haven’t said much about Solyndra because I am of two minds about it and I didn’t want to confuse the issue while it was still a “scandal”

However, now that its cooled down, I’ll say this: Solyndra does show us the general folly on industrial policy. Not because the federal government invested in a project that went bad. Lots of folks invest in projects that go bad.

Instead, because the federal governments rules defining who could take the grant actually caused other companies to take a pass on the funding and directed resources precisely towards a company that was taking taking an unwise leap.

However, that being said I think people are wildly off base in getting caught up in this as an example of the government “wasting our money.” That the government wastes taxpayer money in pursuit of its goals is something to be thankful for.

Why?

Because the real alternative to putting money on the table is command and control.

The government and more importantly the people of the US want to do something to promote clean energy. There are basically three ways to go about this:

1) We could have a carbon tax. That would be the best way to do this because it could correct an externality while raising money that could be used to lower other taxes or in the future offset the deficit. No offsetting the deficit, now. But, that’s another story.

2) Second best would be for the government to promote clean energy through grants. The looser the grants the better generally speaking. However, people are worried about wasting money so there are all sorts of qualifiers that lead to bad industrial policy such as Solyndra.

3) The worst option would be for the government to mandate the use of renewable fuels or outlaw certain fossil fuel plants. This actually taxes no money and “wastes” no tax payer money. However, it has the highest cost to the actual citizens of this country. It would cause energy prices to be higher than they need to be in order to achieve clean energy goals.

My fear is that in our zeal to prevent the government from wasting money we will actually default to (3). That’s because the public desire to promote clean energy is not going to go away because people bad mouth Solyndra. It’s only going to manifest itself in an even worse form.

Zandi on Consumer Confidence

Confidence normally reflects economic conditions; it does not shape them. Consumer sentiment falls when unemployment, gasoline prices or inflation rises, but this has little impact on consumer spending. Yet at times, particularly during economic turning points, cause and effect can shift. Sentiment can be so harmed that businesses, consumers and investors freeze up, turning a gloomy outlook into a self-fulfilling prophecy. This is one of those times.

How would we know if this was true? What you are saying is that I can forecast sentiment using economic variables except when things turn sharply and then I can only forecast variables using sentiment.

Isn’t the obvious implication that people knew things were about to go bad for them personally and so their sentiment turned. Isn’t it convenient that turning points are the only place when the causality reverses.

Perhaps that simply means that the model can’t see around the corner while the consumer can.

I’ve said before that a recession is a decline in construction and manufacturing. Or slightly more broadly construction and industrial production, which adds in mines and utilities. The last two are not a big parts of the US economy but it is in other countries.

Via Catherine Rampbell here is a chart on OECD jobs losses that shows 2008-2009 to just be your garden variety severe global economic recession.

The red sections represent jobs in industrial production and the green jobs in construction.

You can see that across the board job losses were dominated by red, green or a combination of the two.  However, in France and the Netherlands those two sectors were clearly overwhelmed by what in the US we call FIRE and Professional Services.

Great Britain saw some pretty heavy losses but at least their you can tell a story about the dominance of the City of London. Is there a similar story to tell in France and the Netherlands?

Now of course this latest crisis had an unusually heavy financial component. Still you never see losses pilling up in those categories like they did in those two countries. It is fascinating and I am not exactly sure what’s going on there, but it is an interesting mystery.

Contra  Jesse Toprak, of TrueCar.com the apparent rise in US auto sales looks about right to me. Via Marketwatch

TrueCar.com analyst Jesse Toprak called the results counterintuitive, and said the overall numbers are shaping up to beat his relatively lofty targets.

”Housing and stock markets are still suffering, consumer confidence is down and gas prices are moving higher,” he commented. “That’s usually disastrous, but clearly the pent-up demand is there.”

General Motors Co. GM -2.11%  on Monday posted a 19.8% surge in U.S. sales last month to 207,145 cars and trucks. The Detroit car maker said retail sales jumped 19% to account for 74% of the total sales volume.

What made me expect increasing sales was the BLS reports indicating increases in used car prices. Basically, the US has a rolling stock of autos. What you want to know is how tight that rolling stock is. Is there slack, are there cars sitting around which could be used but aren’t etc.

Used car prices tell you that. When they started rising in the mid single digits that was a sign that the rolling stock was finally starting to tighten. And, not unsurprisingly. The currently low new car sales rate was causing the vehicle fleet to age rapidly.

So, as consumers lose the opportunity to buy used cars, this pushes them into the new car market.

All that having been said the final word isn’t out and no one yet thinks we are hitting new auto sales highs. Still, the fundamentals look like accelerating sales through the end of 2011.

UPDATE: Calculated Risk reports the final SAAR rate at 13.1Million. A complete recovery from the tsunami.

Robin Hanson replies to my take on single moms

Now Bryan is clearly right — this is in fact a choice. But Karl is also right — it is a choice made in the face of relatively strong desires. The key question is: how weak do temptations have to be to make the choices they influence unworthy of charity? We feel only weak inclinations to help people who choose poverty, and could easily have chosen otherwise. But we feel much stronger inclinations to help folks who could have avoided poverty only via quite unusual levels of self-control and determination. Where in this spectrum does the temptation to single parenthood lie?

Central to Byran and somewhat shockingly to me – Robin’s – thinking is whether or not the single parents deserve charity.

On Facebook I think Robin framed the question as “how weak do temptations have to be before they make people less deserving of charity”

My clear answer would be that there is no level so low. Human suffering is bad. Reductions in human suffering are good.

Why humans are suffering is of concern to us in knowing when our interventions might be productive but it doesn’t affect whether they are warranted.

In the extreme, take the example of Fred, who is suffering because he constantly turns on the water in his bathtub too hot. When asked why, Fred answer I don’t know, I just do. Hot baths always seem good right before I step in, and then I burn myself.

The key question here are

1) Is there anything productive we can do to help Fred

2) Will our resources be more productive in helping someone else.

However, the seeming absurdity of Fred’s behavior is itself not and issue. It feels like an issue because our sentiments are proxying for (1) and (2). Trying to help someone who could help themself is usually unproductive or at least less productive than trying to help people who can’t help themselves.

However, using our intellect we ought to be able to see through our sentiment and realize that these practical questions are what lie at the heart of it all.

In my mind this is all important because as Bryan can well attest to, for the most part people are born and they are what they are. Importantly, they didn’t ask to be born and they didn’t ask to have the preferences or constraints that they have. This was all imposed on them.

You can’t have a philosophy that blithely imposes life upon people and then ignores the consequences of that imposition.

All that being said, I agree with Robin’s conclusion that helping the global poor has a higher marginal product than helping poor natives. This is why free trade and open immigration are our most powerful anti-poverty tools.

ISM Manufacturing Index stayed in narrowly positive (above 50) territory in September.

Given the decline in gasoline prices and what I have seen on the auto sales front we should expect this gauge to trend upwards in the coming months.

In a practical sense a recession is a contraction in manufacturing and construction. There is no indication at the moment that construction is headed for contraction and the probability that manufacturing is contracting is headed downward.

Thus, I believe a double-dip becoming less likely.

My gut always thought this was the right answer, but the numbers did and to to a large extent still do, look disconcerting.

I get the sense that a lot of people believe that if we increase investment in the United States we will increase economic growth. This is not exactly the case.

An increase in investment will increase the size of the capital stock which will take us to a higher growth path. The reason we are on a higher growth path is because we have more capital per worker and that makes every worker more productive.

However, the fundamental reason we have economic growth is because increases in technology. Expanding the capital stock happens naturally as technology improves. But, increasing investment will likely have very little effect on how fast technology progresses and thus the long term growth rate of the economy.

This is in contrast to say China, where the story is everywhere about capital deepening.

In that context its worth taking a look at what the US capital stock is composed of when thinking of how big of a deal this is.

Here are the components of the US capital stock

For example its worth noting that home improvements are twice as large as industrial equipment or information processing equipment and software.

The only part of the capital stock that beats out home improvements are homes themselves and the super-category of Commercial and Health Care structures. This latter category includes, offices, malls, warehouses, hospitals, etc.

Now this only includes private capital so roads and other government infrastructure are not in there. However, you can see that its overwhelmingly housing, then shopping.

So when you say, increase the size of the US capital stock to large extent what we mean are bigger and better homes and shopping centers.

And when we say increase the productivity of workers what we mean is that homeowners get more out of being their own landlords and that retail workers are serving customers in nicer facilities.

These are important things, but we should keep in mind that this is what we are talking about, not inducing a new industrial revolution come about. That will come from technological advances that seem to progress along with little concern for tax policy.

Krugman mocks James Pethokoukis’s reply on business uncertainty and the recovery. I think that mocking is not the best strategy for getting people to give up even ridiculous positions. It raises the cost to them of admitting that they were wrong.

Its like your facing a wrath of zombie ideas and your solution is to tighten monetary conversation policy. And, I should note that I believe Krugman is doing it for the same reason that people are pushing for tighter monetary policy – he is letting is moral sense get in the way of his practical sense.

People with bad ideas should be mocked. But, intellectual discourse is not a morality play. The goal is to increase understanding, whatever the source of misunderstanding is.

So, how should we be dealing with an idea like “Business uncertainty is the cause of the slow recovery?”

Well, we want to lower the cost to rejecting this idea and so we should divorce rejecting it from rejecting other ideas that people hold dear.

I would start by saying: Okay, so Obama is might do all of these bad things. Well, lets start by spelling out all the bad things he might do. Then lets imagine that he actually did these things. How would markets react?

I would need the persons actually response, but I would want to show them that even if what Obama did radically lowered both welfare and output in the United States, its probably going to be difficult to get it to lower the number of people that businesses want to hire, without invoking some kind of Keynesian effect.

That is typically what we see from bad policy is lower wages and/or people dropping out of the labor force. What we typically don’t see is failure of the labor market to clear.

So, we don’t have to stop thinking any bad thoughts about Obama or his policies or any of that, to accept that to get to failure of labor markets to clear, that something somewhere has got to be sticking.

If that’s true then it opens up the possibility that monetary stimulus could unstick it.

There are a lot of reasons why this graph

should be very weak evidence that stimulus doesn’t work. Many of them are hashed out by my liberal friends everyday. However, I think I may be able to explain the issue in a way that makes more sense to my conservative friends.

To begin, lets understand that this graph – which shows unemployment higher than predicted – is undoubtedly evidence against the proposition that stimulus worked. There is no way that I know of to logically get around this fact.

The easiest way to see this is to imagine what one would have thought if the unemployment rate tracked exactly along the curve that Romer and Bernstein laid out. First, off it would have been strong evidence that Romer and Bernstein were working with an ungodly good model of the economy. Predicting the future is hard for any discipline.

No one doubts that the weather runs by the laws of thermodynamics but anyone who could dead-on predict the number of hurricanes every 3-months seven years into the future would be a modeling genius.

So, if Romer and Bernstein had got it dead-on we would think that their model was incredibly good and since their incredibly good model tells us that stimulus worked that’s strong evidence that it worked.

If that’s true then it must be the case, that observing the opposite condition is evidence against both their model and stimulus. This Bayesian Conservation of Probability. X cannot increase the probability of Y, unless not-X increases the probability of not-Y.

So we know failure of the Romer and Bernstein prediction increases the probability that stimulus does not work. The question is by how much does it increase the probability. The answer should be almost nothing.

Why? Well, the short mathematical answer is because it was overwhelmingly likely to be the case that Romer and Bernstein were wrong whether stimulus worked or not. That they missed should be surprising to no one.

I don’t know if anyone has named the Law of Conservation of Surprise, but it extends naturally from the Conservation of Probability. If it would have been extremely surprising that for Romer and Bernstein to nail the right answer then it must be unsurprising for them to miss.

Here is an analogy – and the original motivation for this post  – that might help clarify.

Suppose I asked Casey Mulligan whether or not raising the minimum wage to $12 an hour would create or destroy jobs. If I may be so bold I will assume that he would say that it would destroy jobs. Fine.

Now, I say tell me both what the path of Non-Farm Payrolls will be over the next 7 years and tell me also what they will be if Obama raises the minimum wage to $12 an hour.

Now, suppose Mulligan made his prediction, the Obama administration raised the minimum wage and he was dead-on right about the path of Non-Farm Payrolls. That would crazy evidence in favor of the proposition that raising the minimum wage to $12 destroys jobs.

However, suppose he was wrong. Suppose the path of the Non-Farm payrolls was actually higher than his baseline. Would that be strong evidence that raising the minimum wage does not destroy jobs?

For me it would be practically no evidence at all.

Why?

Because I already believe that Mulligan will mis-forecast the path. I don’t think he or anyone else has access to a model that good

So, his missing on this question would not be very strong evidence and would not be a reason for folks to go around saying – look the minimum wage doesn’t hurt employment growth after all.

I just very lightly skimmed Greg and Matthew Weinzierl’s paper which seems to be built out of intuition very similar to mine.

A few quick comments

This very Keynesian result, however, is overturned once the set of fiscal tools available to policymakers is expanded. Optimal fiscal policy in  this situation is one that tries to replicate the allocation of resources that would be achieved if prices were flexible. An increase in government purchases cannot accomplish that goal: although it can yield the same level of national income, it cannot achieve the same composition of it. We discuss how tax instruments might be used to induce a better allocation of resources. The model suggests that tax policy should aim at increasing the level of investment spending. Something like an investment tax credit comes to mind. In essence, optimal fiscal policy in this situation tries to produce incentives similar to what would be achieved if the central bank were somehow able to reduce interest rates below zero.

This makes a lot of sense in the blackboard framework. When it comes to current American policy there are two concerns I have

1. Investment tax credits moving swiftly into the territory of industrial policy
2. The current situation in which investment in E&S seems to be rebounding extraordinarily well but we have a very little investment in structures. Is it realistic to think that in the wake of a housing bubble burst and a collapse in consumer spending that the government is going to subsidize houses and shopping malls? Again politically this seems odd.

I still think that simply arbitraging the public-private spread through broad based tax cuts seem realistic.

Also, I have to look at the internals of the model but it seems natural that cutting the employee portion of payroll taxes is going to do a lot to combat the sticky-wage problem, especially when you combine sticky-wages with a liquidity constraint on some businesses. My look at the data suggest smaller non-corporate entities are still facing liquidity concerns.

Second

A final implication of the baseline model is that the traditional fiscal
policy multiplier may well be a poor tool for evaluating the welfare implications of alternative fiscal policies. It is common in policy circles to judge alternative stabilization ideas using “bang-for-the-buck” calculations. That is, fiscal options are judged according to how many dollars of extra GDP are achieved for each dollar of extra deficit spending. But such calculations ignore the composition of GDP and therefore are potentially misleading as measures of welfare

This is a conclusion I am big on. The way people talked about multipliers always bothered me. Multipliers are a useful concept but it is not like we are “buying GDP” and need to get the best deal.

Suppose that we had massive tax cuts for liquidity constrained households, but we got very little change in GDP.  We have still improved welfare because we are allowing the households to move consumption from the future to today, which is what they want to do but cannot because of breakdowns in financial markets.

Lastly,  the obvious response to this paper is one in which the marginal product of government investment exceeds the marginal product of private investment. The motivation is that government officials are myopic and that voters dislike deficits; two assumptions that don’t seem wildly unrealistic.

In this case the government will suffer from investment that is too low and – I believe – taxes that are too high relative to the optimum.

In the case of recession this problem may be aggravated. This would give the result that “ a crisis is terrible thing to waste”

I have said before that I like retail and food service sales as a proxy for consumer demand because this is actual spending that folks are plunking down on a month by month basis. In Personal Consumption Expenditures on the other hand include things like financial services, owners equivalent rent and health care paid by third parties.

These are not things that consumers are actually “buying” or perhaps to put it another way, there is no cash-in-advance constraint on these services.

Over the last thirty years or so retail sales as a fraction of disposable personal income were constant. However, the personal savings rate has been in decline.

So, what exactly makes the difference. It looks like its all health care and much of it can be explained simply by looking at Medicare and Medicaid.

The red line is the personal savings rate. The blue is the personal savings rate calculating by extracting Medicare and Medicaid from Personal Outlays.

Now I haven’t thought carefully about Medicare contributions through payroll tax but I don’t think it can change the picture dramatically.

I think there is a similar phenomenon going on with employer contributions for health care but I don’t have the data to manipulate handy.

Dean Baker thinks so

Actually, the United States economy is not being held back by a lack of consumer spending. The ratio of spending to income is still considerably higher than the pre-bubble average as reflected by the lower than normal saving rate. The problem is that the bubble had generated excessive consumption demand, which is not being replaced by any other source of demand.

I am not so sure. This is a genuine mystery to me which I want to get to the bottom of but it doesn’t look like there was a whole bunch of extra spending going on during the boom.

Here are retail sales as a fraction of disposable personal income

The redline is the old series and the blue line is the new series which includes food service sales.

As you can see we were coasting along in the upper 30s and then feel precipitously in the wake of the crash.

What about the Personal Savings rate data that Dean cites. I think the key is finding out what goes in there. I am not actually sure how its calculated and I will need to look that up but I am betting a substantial and important portion of it is imputed.

UPDATE:

So yeah, personal savings is simply personal income minus taxes minus personal outlays which is dominated by personal consumption expenditures which is in turn heavily imputed.

Also the math on my last graph was sloppy it should read like this

A commenter was confused about my objection to this graphic from the WSJ

I was probably a little to technical just saying its stocks vs. flows.

Think about it this way, investment in Equipment and Software is nearly 30% since the recession ended. This is very strong but not wildly unusual for a bounce back from a recession.

Think about what it would mean in payrolls were up 30% since the recession ended. At the bottom of the recession the US had roughly 130 million people on payroll. A 30% increase would have meant that the US now 169 million people on payroll or an increase in jobs of 39 million over 2 years. Note there are only about 14 million unemployed people in the US.

Does that sound even remotely realistic?