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A quick announcement: we’ve moved the blog to Forbes. You’ll be able to find us there at blogs.forbes.com/modeledbehavior, and soon modeledbehavior.com will redirect there. All our old links will still work, and an archive of the old site will be available soon. Thanks to everyone for reading, commenting, and linking. We hope you’ll follow us over there… and if you don’t, well quite frankly that will be a little rude.

Catherine Rampell has some excellent coverage of the GOP war on the ACS that does an admirable job of not pulling punches and calling nonsense out as nonsense:

It is, more or less, the country’s primary check for determining how well the government is doing — and in fact what the government will be doing. The survey’s findings help determine how over $400 billion in government funds is distributed each year.

But last week, the Republican-led House voted to eliminate the survey altogether, on the grounds that the government should not be butting its nose into Americans’ homes.

“This is a program that intrudes on people’s lives, just like the Environmental Protection Agency or the bank regulators,” said Daniel Webster, a first-term Republican congressman from Florida who sponsored the relevant legislation….

….A number of questions on the survey have been added because Congress specifically demanded their inclusion. In 2008, for example, Congress passed a law requiring the American Community Survey to add questions about computer and Internet use. Additionally, recent survey data are featured on the Web sites of many representatives who voted to kill the program — including Mr. Webster’s own home page.

This stupidity encapsulates perfectly the extremeness that is showing its face in some elements of the GOP today. Between things like this and the debt ceiling insanity it is hard not to agree with those who claim there is an asymmetrical extremeness in politics today. It is a depressing display.

On Karl’s Up With Chris Hayes appearance, Betsey Stevenson rightly pointed out the obvious falseness of the claim that we would be better off if we defaulted on our debt during the debt ceiling crisis. Everyone seemed to agree it was a problem that there were no elites to come down on Republican politicians making this crazy argument and tell them they are, well, crazy. But as I blogged back then, sane conservative did come out strongly against defaulting. You had Douglas Holtz-Eakin, Gary Becker, Keith Hennessey, Richard Posner, and Glenn Hubbard arguing that not only would defaulting be terrible, but that it would unequivocally be terrible. This was not a failure of the elites, it was a failure of people to listen to them. I suspect we may see the same thing happen when the debt ceiling comes back again.

I think the problem people have imagining a world of self-driving cars is they imagine it happening overnight. Yes, if a self-driving car showed up at your house tomorrow it would be a little nerve-racking to turn over control to a computer. But the progress will be relatively incremental, and we will give up control one piece at a time. In fact, this is already underway.

As far as I can tell, the first such feature to make it onto the market was the self-parking system. These systems automate the steering of parallel parking and provide the driver with distance alerts, but the driver still controls the speed. Watching this technology demonstrated it is very easy to imagine the entire process being autonomous.

There are other examples as well, like adaptive cruise control which adjusts a cars speed to the vehicle in front of it, even bringing the car to a full stop if necessary. This technology is already on the market. Cadillac’s  “Super Cruise” seems like an extension of that which bridges the gap between autonomous driving and adaptive cruise, but is designed to only work highways. With “Super Cruise” the car stays in the lane and at the speed the driver sets, while staying at least two seconds away from the car in front. This isn’t available yet, but it seems a likely precursor to fully autonomous cars and a natural extension from adaptive cruising.

Automatic braking systems are a similar technology that is more focused on preventing accidents. The Insurance Institute for Highway Safety found that automatic braking in Volvo SUV’s prevented one out of four low-speed crashes. Other technologies like this have tremendous potential to save lives. USA Today reports:

“Along with automatic brakes, IIHS is studying the effectiveness of other advanced safety features such as warnings that alert drivers they are leaving their lanes and indicate another car is in the car’s blind spot, as well as adaptive headlights that turn as cars move around corners. NHTSA, in cooperation with automakers, is also studying automatic brakes — which go by different names, including “forward collision warning/mitigation” or “pre-sense” — and advanced safety belts designed to work with the brakes.

IIHS estimated last year that these crash-avoidance features have the potential to prevent or at least lessen the impact in 1.9 million crashes a year and help prevent one out of three fatal crashes. Systems that warn then help prevent frontal crashes by braking automatically could be the solution for most of those — 1.2 million crashes. That represents 20% of the 5.8 million police-reported crashes each year and as many as 66,000 non-fatal injury crashes and 879 fatalities a year, IIHS says.”

Auto executives are quick to ensure people that people and not robots remain in control of vehicles, but as these technologies become more widespread we will begin trusting computers more than ourselves. I suspect their cautionary rhetoric will change as people become more comfortable with computers in charge, and soon enough we’ll be able to be asleep at the wheel, and safely.

Matt Di Carlo at Shankerblog has some, as always, thoughtful and nuanced ideas on the discourse surrounding education policy. He argues that accusations of “teacher bashing” is often an unfair charge to level against education reformers, but that these reformers should also recognize that there is less space between criticizing teachers unions and criticizing teachers than they think. He writes:

So, is there any distinction between teachers and teachers’ unions? Of course there is.

People who disagree with policies traditionally supported by teachers’ unions, or support policies that unions tend to oppose, are not “anti-teacher.”… It’s certainly true that the rhetoric in education can cross the line (on both “sides”), and extreme, motive-ascribing, anti-union statements are understandably interpreted as “bashing” by the teachers that comprise those unions. Some of the discourse involving unions and policy is, however, from my (admittedly non-teacher) perspective, more or less substantive.

So, you can “love teachers and disagree with their unions,” but don’t kid yourself – in the majority of cases, disagreeing with unions’ education policy positions represents disagreeing with most teachers. In other words, opposing unions certainly doesn’t mean you’re “bashing” teachers, but it does, on average, mean you hold different views than they do.

He goes on to note that teachers are not  a monolith, and thus there will be disagreement among teachers and some will oppose union policies. But I think this point deserves more emphasis, specifically I think many rules favor incumbents and people who already are teachers over people who would otherwise be teachers, or will become teachers. This is true of a wide range of occupational licenses. For instance, maintaining rules that make it hard to become a barber make incumbent barbers better off, but hurt those who would have become a barber were it not for the rules.

So while it is true that opposing policies that helps incumbents means opposing policies they support on average, I think it is a less understood and in many cases more important point that rules which help existing workers often hurts others who want those jobs.

One way to help improve the lives of low income people is to focus on how the government can give them more. Sometimes this can be very effective, and even desirable. But a far less common way is to look at how the government can stop doing stuff that is making them worse off. Occupational licensing is a great example of this. In the 1950s, around 1 out of 20 jobs required a license. Now the number is around 1 in 3. This red tape keeps a lot of low income people out of better jobs with better income. This issue receives the discussion it deserves in an excellent new report from Angela Erickson and John Ross at the Institute for Justice. They looked at 102 occupations that are licensed in at least one state and where incomes are below the national average. As an important improvement on past research, they document the difficulty in getting licensed by looking at the five main costs of licensing: fees, education and training, exams, minimum age and minimum grade completed. This allows them to measure not only how widespread licensing is, but how much of a cost it imposes. The following are a couple of facts worth noting from the report, but you should read the whole thing

1. Those receiving licenses have lower income than the average worker ($30k vs $47k), more likely to be minority, and more likely to be a high school dropout or have just a high school education than the general population. Importantly, those crowded out of these jobs probably have even lower income and even less educated than those who actually got the licenses.

2. Forty-seven states find it unnecessary to license interior designers, and yet the four that do find it necessary to receive 2,190 days of training to become one. This is a joke, and congressmen in those four states should be ashamed of themselves for this obvious and egregious handout.

3. Defenders of licensing regularly point to safety concerns, but for a large proportion of the occupations that are licensed somewhere, there are other states where they are not licensed, and in these states we do not witness of epidemic of wildly untrained barbers accidently cutting off ears, for example.  In addition, some jobs that clearly do involve safety often require vastly less training than others where the argument is much more tenuous. For instance, cosmetologists on average require 372 days of training, while EMTs only require 33.

4. States should have commissions with the power to strike down these laws unless evidence is presented that the licenses provide a significant health and safety benefit that justifies the cost. For many occupations if one wished to be a tedious contrarian one could say “well, you see florists are a public health concern because…” and then Slate your way into a convoluted argument in defense of a license, but the beauty of this study is that it shows other states where licensing isn’t required. Angry and concerned citizens of 26 states should be saying “South Carolina doesn’t require a license to be a taxidermist, so why the fuck do I have to have one?”

5. If you appreciate this study, you should donate some money to The Institute for Justice.  They do excellent and essential work in areas that go ignored far too often. Sometimes people hold charitable donations up to a high standard by asking “is there some charity I should donate to that would increase welfare more, like giving money to starving kids?”. But this is incorrect framing. You don’t ask that question every time you go to buy something at the store, and if even if you do, you answer “no” enough to buy lots of stupid unnecessary things (don’t lie, you do).  But if you’re going to ask that question, why should you only do so for charitable donations rather than for all spending? Donations are consumption, so let them compete with your other consumption, don’t put them in an isolated and elite league of consumption that pits them against starving children in Africa. Pit them against an extra large container of popcorn at the movies. A donation to The Institute for Justice increases welfare way more than an extra large popcorn.

I’m sorry to do this to you, but I don’t really have Deirdre McCloskey reviewing David Graeber’s “Debt: The First 5,000 Years”. But did you feel how bad you wanted to read that when you saw that headline? Surely, one of our readers has the power to make this review happen.

In the meantime, here is McCloskey on Karl Polanyi, who instead of arguing that the economist’s view of pre-money barter is false, argued that the economist’s view of markets as existing throughout history is false:

…the mistake Polanyi and his school then make is to suppose without evidence that any regulation whatever obviates a market, quantitatively. An epsilon degree of social intrusion, they say, makes for No Market. The standard is again that of Arrow-Debreu -flawless markets or nothing. The presence of regulation -informal or legal- does change relative prices across markets. But it does not by itself eliminate market forces. In China at the height of the Cultural Revolution the women of the village secretly purchased produce from farmers and fishers before the watchmen started their day. Supply and demand popped up. How much? That remains for the economic scientist to determine.

Of course this is the mistake that all schools of economics make, believing they can prove the economy like proving a theorem in geometry. Proof in Math Department’s spirit -the existence of epsilon, no matter what its measure- is of no use for science, as may be seen in physics and chemistry. For the work of science one must measure (as Polanyi implies in appealing to a quantitative rhetoric). Polanyi is trying to prove capitalism false. But in such a matter not “proof”, only magnitude matters: how close to a perfect market economy does an actual economy have to be before the long-run considerations are to this or that degree admissible? How much of a self-regulating market needs to exist before we can assume approximately the functioning of market laws? It is not a metter of on/off, exist/not.

For those with more interest, here is a longer McCloskey article on Polanyi with Santhi Hejeebu. For what it’s worth, I think McCloskey is too dismissive of what economic proofs tell us. What good does it do, for example, to show how close an economy is to a perfect market economy if we cannot establish why and in what ways a perfect market economy is desirable? I agree with McCloskey that the work of science is to measure, but we must first know against what standard we are measuring.

In any case, I hope someone out there is spurred by this to hire McCloskey to write a review of Graeber.

Jagdish Bhagwati provides an argument for more trade liberalization that should be embraced by progressives, and in doing so makes the case against Obama’s World Bank nominee:

In fact, it is the rapid acceleration of economic growth in the major emerging countries that has reduced poverty, not only directly, through jobs and higher incomes, but also by generating the revenues governments need to undertake the public-health, education, and other programs that sustain poverty reduction – and growth – in the long term….

The problem with Kim, and presumably with the Obama administration’s development experts, is that they do not understand that successful development requires big-payoff pro-reform, pro-growth policies, not just small-payoff micro-level policies….

Kim is hardly likely to understand this dynamic. A decade ago, he cheered on the tirades against “neoliberal” reforms that, in fact, were the harbingers of higher growth and lower poverty around the world. The World Bank presidency should not be an apprenticeship.

Bhagwati suggests Ngozi Okonjo-Iweala and Laura Tyson as better choices.

Housing markets need better information. An interesting AP article discusses both the informational problems in determining how big the shadow inventory of housing is, and how informational problems are in part causing the housing inventory:

Economists at CoreLogic, a California company that analyzes mortgage data, weigh in at the low end, charting 1.6 million homes in shadow inventory nationwide. They count homes not listed for sale, with loans that are at least 90 days overdue, in foreclosure or bank-owned.

Others say the shadow is much bigger. Laurie Goodman of Amherst Securities in New York says it covers from 8.3 million to 10.4 million homes. Goodman’s analysis includes homes with loans that are at least 60 days overdue, have been delinquent in the past and are likely to go into default again, and thousands of homes whose owners are making payments but are likely to give up because they are so far “underwater,” in homes worth less than they owe.

“The question is `how long is the shadow?’” Goodman says. “I think some people are definitely underestimating the seriousness of the problem.”

And more on the difficulty in reading price signals in this environment:

But investors and those who represent them complain banks are not realistic about the prices they’ll accept. Verna, the real estate agent specializing in distressed properties, says that slowing the flow of homes into the market creates an artificially low inventory in some neighborhoods, which can temporarily lift prices. At the same time, lenders are increasingly selling homes or the underlying loans in bulk to hedge funds.

That’s where Verna comes in, tracking down borrowers to convince them to trade deeds for cash, and turning around homes like the building on 21st Street for resale. This takes patience and a strong stomach. Abandoned homes are frequently trashed or occupied by squatters. Borrowers are difficult to track down and reluctant to talk.

Verna has tracked one homeowner from address to address to address. Each time the real estate agent thinks he’s caught up, the man has moved again.

At this rate, Verna figures it will be three to five years before lenders let all the homes go. The risk is that, by moving too slowly they could artificially raise prices in some areas, which might spur investors who bought homes as rentals to put them up for sale.

H/T Market Urbanism

Consider three leading explanations for the current weak economic conditions. First, a new paper from James Stock and Mark Watson identifies demographic shifts as an important determinant of poor current economic conditions, and a likely problem going forward:

…barring a new increase in female labor force participation or a significant increase in the growth rate of the population, these demographic factors point towards a further decline in trend growth of employment and hours in the coming decades. Applying this demographic view to recessions and recoveries suggests that the future recessions with historically typical cyclical behavior will have steeper declines and slower recoveries in output and employment.

Second, as Karl has argued, the economy is waiting for “the kick” of an increase in sales of durables like housing and autos. Third, you have low house prices in holding back the economy by weakening household balance sheets.

My question is this: do not all of these factors point towards more immigration to drive both a recovery now and a recovery from the decline in the long term economic trends? In The Great Stagnation, Tyler Cowen identified lots of immigration as one of the three main kinds of low hanging fruit that helped drive our earlier growth:

“In a figurative sense, the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there.”

But this low hanging fruit has not gone away. We have simply stopped grabbing it.

I find Shanker Blog’s Matt Di Carlo to be a reliable and very fair minded source for education research coverage despite coming from a somewhat different part of the ideological spectrum than I do on education reform. He has an assessment of the literature on TFA that I recommend.  Although I don’t know this area of research very well, his discussion reflects my general impression. Here is how he summarizes:

 One can quibble endlessly over the methodological details (and I’m all for that), and this area is still underdeveloped, but a fair summary of these papers is that TFA teachers are no more or less effective than comparable peers in terms of reading tests, and sometimes but not always more effective in math (the differences, whether positive or negative, tend to be small and/or only surface after 2-3 years). Overall, the evidence thus far suggests that TFA teachers perform comparably, at least in terms of test-based outcomes.

I also Matt is correct to look to the meta lessons about TFA and teachers in general, but I disagree somewhat about the meta lesson. He says:

But, to me, one of the big, underdiscussed lessons of TFA is less about the program itself than what the test-based empirical research on its corps members suggests about the larger issue of teacher recruitment. Namely, it indicates that “talent” as typically gauged in the private sector may not make much of a difference in the classroom, at least not by itself.

In contrast, I would say the lesson from TFA is that “talent” as typically gauged in the private sector makes as much of a difference as an entire four year teaching education does. If talent didn’t matter much, then you could give all teachers five weeks of training instead of four year educations and the outcomes would be comparable to what we are seeing now. Either talent doesn’t matter much or going to college for four years doesn’t matter much, in either case one is about equal to the other on average.

One thing this lesson implies to me about policy is we should think about how we can combine the most important aspects of the four teacher year education and boil it down to something more than five weeks and less than four years in order to make it easier to recruit people with TFA level talent into teaching. We should be experimenting more with alternative credentialing regimes for teachers.

ADDENDUM:  In response to BSEconomist’s comment let me clarify. The evidence shows a lot of ability is worth about as much as a full teaching education. Yet we only allow two choices: a lot of ability with very little education (TFA), or a full education. We should allow a wider variety of substitution of ability for training  instead of just all or almost none.

Not everyone will lose from climate change, or to put it another way, not everyone would gain from climate change mitigation policies. But a smart mitigation policy, like a carbon tax, creates more benefits overall than costs. Some people will see the benefits over gains as sufficient justification for mitigation policy, but others oppose such policies unless the redistributive effects of the policies are compensated for so that the change is a pareto improvement. With climate change this would be, for example, areas of the country where cheap gas prices or carbon based energy production are disproportionately important.

Not everyone will lose from protectionism, or to put it another way, not everyone would gain from free trade. But free trade creates more benefits overall than costs. Some people will see the benefits over gains as sufficient justification for free trade, but others oppose such policies unless the redistributive effects of the policies are compensated for so that the change is a pareto improvement. With free trade this would be, for example, areas of the country where manufacturing jobs that would be displaced by trade competition is disproportionately important.

I don’t think there will be much of a correlation between these positions, yet they use similar logic. How do people decide when redistribution effects of a policy change are sufficient to overcome the desirability of benefits exceeding costs? Is there something more than political allegiance going on here?

Long time China correspondent Adam Minter has a good interview in Time Out Shanghai that anyone interested in labor standards in China should read. Here is how he answered a question about whether Foxconn’s labor standards need to be improved:

My expertise is not in high-tech manufacturing, but rather recycling facilities like scrap yards, and raw material processing facilities like aluminum smelters. I wouldn’t want to generalize either of those industries, but I can tell you that companies engaged in raw materials are far more dangerous, unhealthy, and unpleasant places to work than somewhere like Foxconn. Indeed, I can think of a range of industries that are more dangerous than Foxconn: textile dying, batttery manufacture, paper making, the list is endless.

The goal should not be raising the standards of Foxconn, but rather the much more difficult task of raising up China’s other industries to the level of a Foxconn. Responsibility for that, however, belongs to the various levels of the Chinese government, ultimately. I don’t think any amount of consciousness raising on the part of foreigners can make a bit of difference.

I don’t think Mike Daisey has had any impact on China’s labor situation, and I don’t expect his current troubles to have an impact either.

The ongoing debate about Apple’s supply chain in China has me wanting to put down a couple of quick thoughts on corporations and whether they should, to put it broadly, promote laws and standards around the world. This isn’t an attempted knockout punch to any position, and while I am often a critic of regulations, and will be here in some places, this is just as much of a rebuttal to Milton Friedman’s argument that the only social obligation of business is to maximize shareholder profits.

In many developing nations, the legal system functions poorly, and international corporations are often more capable of enforcing efficient laws throughout their supply chain than anyone else. This can be, to some extent, due to pressure from U.S and other western customers to “behave ethically”. This can be good both because it enforces efficient and desirable laws, and because getting a supply chain to be able to conform to any standards, whether they are quality, ethical, or efficiency standards, is a necessary step in moving up the manufacturing value chain. One example of this would be how Walmart is able to enforce environmental laws that are likely closer to efficient than what the local governments enforces. Pollution can do a lot of costly and unfortunate damage to health and the environment in developing areas with weak rule of law.

Another benefit of corporation enforced standards, which applies to environmental, labor, and other kinds, is that corporations are more likely to find the least cost ways to comply. A corporation with a broad goal can be more efficient than specific government mandates.

Friedman argued that shareholders, workers, managers, or CEOs can contribute to social causes with their own money outside of the corporation. But stakeholders of Walmart can get far higher social return for $1 spent within the company than outside it. And as Friedman agrees in his essay, if a manager loses money for a corporation by behaving with social responsibility, free markets will ensure that it comes out of their wages.  So if it is CEOs making the decision to sacrifice $1 of profits for $10 of social returns, then the corporation will take that $1 back through lower compensation, creating $9 of value. But if a CEO  chooses to operate outside the corporation, it may cost him $9 to get the same $10 of return, creating only $1 of net value.  Consider the example of a CEO who refuses to sign off on $1 million in pollution to save the company $100k. In contrast, if the CEO allows the spill to happen and then tries to clean it up with his own money it will probably cost closer to $1 million than $100k.

This argument requires efficient markets for executive wages, and an obligation to not hurt society to save yourself a fraction of the cost. Nothing too radical. Importantly, such spending will often be far more profit maximizing than is assumed, so the $1 of nominal cost to the company is often much less when private returns, for example marketing value, are considered.

Despite these positive aspects of corporate standards and social responsibility, when these corporations are responding to the demands of U.S. and other western customers there is a downside risk that they will enforce standards in accordance with our preferences that are less in accord with the citizens of the affected countries than if they simply profit maximized. This is a real concern with respect to labor laws. People tend to have the misconception here that our standards of living are disproportionately a result of our labor laws, and that the way our jobs became safer, healthier, and higher paid is mostly about regulation instead of mostly about economic growth. People also tend to believe that we have “exported” bad jobs to China, rather than understanding that as far as manufacturing jobs go in China, working for foreign corporations, including Apple, are above average quality. If American companies were very responsive to consumer demands, labor laws in China would very likely be far too strict.

Even when the labor laws come from the developing countries themselves than can be problematic. Here is what Tim Culpan, who has been covering Foxconn for 10 years, had to say about what he sees there:

In our reporting, as “Inside Foxconn” detailed, we found a group of workers who have complaints, but complaints not starkly different from those of workers in any other company. The biggest gripe, which surprised us somewhat, is that they don’t get enough overtime. They wanted to work more, to get more money.

Why would these young workers want to work what look to us like extreme amounts of overtime? Culpan explains:

Rather than forced labor and sweatshop conditions, workers told of homesickness and the desire to earn more money-two impulses that seemed to drive each other for workers planning to go home once they’d earned enough.

If labor laws mean that workers can’t do as much overtime as they’d like, one of the unintended consequences of this looks like it could be to force these workers to stay at the factories for a longer period of time before they earn enough to go home. Should labor laws, either domestic or imposed by foreign corporations, prevent workers from taking on as many hours as they are willing?

Maybe, I suppose. These are young workers after all, and maybe there is a clear level of hours beyond which health is clearly at risk. But you have to know an awful lot about the workers, the factories, the local culture, and a lot of things that American consumers probably don’t have a very good grasp of. Furthermore, the journalists who have spent years in China and know the most, like Adam Minter and Tom Culpan, seem to have the least criticism for Foxconn and the manufacturing in China for international corporations.  I am reminded of what Freddie DeBoer wrote about Libyan intervention:

What interventionists ask of us, constantly, is to be so informed, wise, judicious, and discriminating that we can understand the tangled morass of practical politics, in countries that are thousands of miles from our shores, with cultures that are almost entirely alien to ours, with populaces that don’t speak our same native tongue. Feel comfortable with that? I assume that I know a lot more about Egypt or Yemen or Libya than the average American– I would suggest that the average American almost certainly couldn’t find these countries on a map, tell you what languages they speak in those countries, perhaps even on which continents they are found– but the idea that I can have an informed opinion about the internal politics of these countries is absurd…

…A colossal, almost impossible arrogance underpins all interventionist logic. Beneath it all is a preening, self-satisfied belief in the interventionist’s own brilliance and understanding. So I ask you, as an individual reader– are you that wise? Are you that righteous? You understand so much? When was the last time you read a Libyan newspaper? Talked at length with a Libyan? A year ago, what did you know of Libya and its internal struggles?

Labor laws aren’t war, and Apple critics aren’t Neocons. I don’t want to take this analogy too far. But some of the criticism Freddie makes here apply to arguments about demanding companies in China comply with U.S. labor standards. You can counter that all that is being asked is that the companies comply with Chinese laws, but this is not always the case. Furthermore, the decision to not enforce a law is also a legitimate decision a nation may choose to make. And to the extent workers wish to not comply with the laws, we are asking companies to override their wishes. Just as we should have humility about our ability to know what is best for another country, we should have humility about a country’s ability to know what is best for workers and their employers.

Freddie elsewhere wonders:

Would Ira Glass ever allow his children, when grown, to work 60 hours a week? In those factories? In those conditions? Of course not.

But these aren’t Ira’s children, and he shouldn’t act as if they are. Neither Freddie, nor Ira, nor I really knows what Chinese workers want. Even within this country, let alone across the world, people have vastly different preferences with regards to how many hours they want to work, what risks they are willing to take for what compensation, and all of that. I don’t think Ira would allow his children to be crab fisherman in the United States either, but that does not mean we want these jobs to be regulated until they are safe enough and well paid enough that Ira Glass would send his children to work there, or until they are regulated out of existence, which in many cases are the same thing.

From the Washington Post

As calculated by federal statisticians, the productivity growth of U.S. factories has seemed quite impressive. Between 1991 and 2011, productivity more than doubled, meaning that a single worker today produces what two did 20 years ago, according to Bureau of Labor Statistics figures.

Except that it doesn’t mean this. And, unless there is just some weird co-incidence, it never has and never will mean this.

It means the ratio of output-to-workers has doubled, which could be achieved by lots of means – not least of which is simply changes in the composition of output.

So, if people were consuming  mostly processed food which required a lot of labor per output, but over time the consumption share moved to laptops which require much less labor per unit of output then productivity would rise, even though nothing at all has happened to any manufacturing process.

Indeed, this is possible even if labor productivity in each sector actually falls. Also, the reverse is true, labor productivity can fall even if the productivity in each sector rises.

This is in addition to the fact exploiting comparative advantage to ship US jobs overseas raising productivity and that innovation that raises the value of the output raises productivity.

Likewise if a cashier at a jewelry store rings up one $10,000 item an hour then he is more productive than a cashier at a grocery store who rings up 1000 $5 items an hour. This is despite the fact that by all appearances the cashier at the jewelry store is accomplishing less in the course of an hour.

This is because the statistics productivity is just not congruent with the common notion of being productive.

The piece goes on to discuss import price bias which would underestimate the total value of imported products

Critically, Houseman and others have shown that the price savings that U.S. factories have realized from outsourcing have incorrectly shown up as gains in U.S. output and productivity.

. . .

The federal statistical agencies, which have helped fund Houseman’s work, agree that the bias exists, though they say there might be other problems that are off­setting.

I don’t know for sure if this is what the agency heads were trying to communicate, but an important point is that while import price bias can produce granular statistics that do not measure what they claim to measure, they must do that at the expense of something else happening.

So, for example, if proper accounting shows that the real value of an IPad is 70% foreign rather than 50% foreign, then something has got to go the other way to explain how 50% of the revenue shows up in Apple’s bank account after supply chain costs.

Its not immediately clear what that thing is, but it has to be somewhere because by design these numbers all have to add up consistently.

Ultimately I really think the problem is that increasing productivity sounds like something that should make you feel good, but some of the results of the process  make most people feel bad.

And, so the argument is really over: should we feel good or bad about this evolution of events.

I get the sense that one reply to the Mike Daisey scandal is that “well, he may not have seen what he says he saw, but those things are happening and well documented”. But Daisey did not just take the reality conveyed in other accurate reporting and pretend that he saw it with his own eyes. No, because the stories he tells aren’t just made up, they also fail to characterize the situation correctly. You can see this importantly in how widespread and obvious he makes underage workers at Foxconn look. Here is how Daisey reported it in the monologue portion used in This American Life:

And I say to her, you seem kind of young. How old are you? And she says, I’m 13. And I say, 13? That’s young. Is it hard to get work at Foxconn when you’re– and she says oh no. And her friends all agree, they don’t really check ages. I’m telling you … in my first two hours of my first day at that gate, I met workers who were 14 years old, 13 years old, 12. Do you really think Apple doesn’t know?

This is not just a story about Daisey meeting underaged workers, but a claim about how easy it is to find them. And as you can see in the transcript from the retraction episode of TAL, Daisey’s claims are in contrast to what his translator says:

Rob Schmitz: Do you remember meeting 12 year-old, 13 year-old, and 14 year-old workers here?

Cathy Lee: No, I don’t think so. Maybe we met a girl who looked like she was 13 years old, like that one, she looks really young.

Rob Schmitz: Is that something that you would remember?

Cathy Lee: I think that if she said she was 13 or 12, then I would be surprised. I would be very surprised. And I would remember for sure. But there is no such thing.

Ira (narrarating): She’d be surprised, because she says in the ten years she’s visited factories in Shenzhen, she’s hardly ever seen underage workers.

As TAL reports, Apple has been aggressive about underage workers and they are rare:

In fact, underage workers are sometimes caught working at Apple suppliers.  Apple’s own audit says in 2010 when Daisey was in China, Apple found ten facilities where 91 underage workers were hired … but it’s widely acknowledged that Apple has been aggressive about underage workers, and they’re rare.  That’s 91 workers out of hundred of thousands.  Ira asked Mike about this on the This American Life broadcast, and he admitted it might be rare, but he stuck by his story

This is not consistent with anyone being able to walk up to Foxconn and within two hours be talking to underage workers. The story Daisey tells is one where Apple is negligent to an obvious and easily solved problem, whereas the facts TAL reports are of a company trying to stop underage workers and failing on relatively rare occasions. This kind of lie is not telling the story of the truth through a fictional narrative, but creating a fictional narrative that contradicts the bigger truth.

There are opposing narratives about the Apple, and Chinese labor and manufacturing. One sees the issue as black and white, simple, and easily solveable. Another sees it as a complex issue with no easy solutions, and that requires real tradeoffs. The former is how Mike Daisey tried to portray things, and the latter is how people like Adam Minter see it. In fact on an episode of On Point with Warren Olney, Adam Minter argues:

“….you’ve got a far more, far more complicated story than what is being presented in just the new york times and especially the This American Life Story”

In contrast, Mike Daisey appears on that same show and says “Lets stick a knife in this whole complicated thing for starters, because this isn’t actually that complicated”. That is the biggest fiction Mike Daisey was selling.

The New York Times has updated it’s Mike Daisey op-ed with the following:

Editor’s Note: Questions have been raised about the truth of a paragraph in the original version of this article that purported to talk about conditions at Apple’s factory in China. That paragraph has been removed from this version of the article.

Here is the paragraph that they excised, which I was able to find here:

I have traveled to southern China and interviewed workers employed in the production of electronics. I spoke with a man whose right hand was permanently curled into a claw from being smashed in a metal press at Foxconn, where he worked assembling Apple laptops and iPads. I showed him my iPad, and he gasped because he’d never seen one turned on. He stroked the screen and marveled at the icons sliding back and forth, the Apple attention to detail in every pixel. He told my translator, “It’s a kind of magic.

As the press release (pdf) from This American Life confirms this is one of the stories that Daisey’s translator denies ever occurred. So I think Daisey perhaps needs to expand his apology which says his only regret is allowing This American Life to excerpt from his monologue, which was theater and not journalism:

What I do is not journalism. The tools of the theater are not the same as the tools of journalism. For this reason, I regret that I allowed THIS AMERICAN LIFE to air an excerpt from my monologue. THIS AMERICAN LIFE is essentially a journalistic ­- not a theatrical ­- enterprise, and as such it operates under a different set of rules and expectations. But this is my only regret.

Writing an op-ed for the New York Times is also not theater, so I’m thinking we will not remain his “only regret” for long.

I’m hearing a lot of people say the real tragedy is that the things Daisey pretended he saw actually do happen and this whole debacle does a disservice to that truth. I side more with the wise Adam Minter, who is quoted here by Rob Schmitz, the journalist that caught Daisey in the first place:

“People like a very simple narrative,” said Adam Minter, a columnist for Bloomberg who’s spent years visiting more than 150 Chinese factories. He’s writing a book about the scrap recycling industry.

He says the reality of factory conditions in China is complicated—working at Foxconn can be grueling, but most workers will tell you they’re happy to have the job. He says Daisey’s become a media darling because he’s used an emotional performance to focus on a much simpler message:

“Foxconn bad. iPhone bad. Sign a petition. Now you’re good,” Minter says. “That’s a great simple message and it’s going to resonate with a public radio listener. It’s going to resonate with the New York Times reader. And I think that’s one of the reasons he’s had so much traction.”

And Minter says the fact that Daisey has not told the truth to people about what he saw in China won’t have much of an impact on how the public sees this issue.

Minter’s criticism of the overly simplistic story that misses the complicated reality of China’s factory conditions was true before Daisey’s lies were exposed, and they are true still.

Some commenters are pushing back on my previous post by suggesting that the GM bailout was desirable and the AIG bailout wasn’t.  I don’t have hard evidence for this, but I’m pretty sure economists in general are more supportive of the bailout of AIG than the bailout of GM. For one thing AIG is a financial company whose failure would have brought down many banks, and we have known for over 100 years that preventing banking panics is an important function of central banks. Justifying bailouts of manufacturers on the basis of economies of agglomeration does not fit within the well understood and commonly agreed upon tenants of central banking. Regardless of the end desirability of the GM bailout, it is certainly a more controversial thing for a central bank to do.

More importantly though, the issue here is that Treasury issued a notice that exempted companies which the government became an owner of in a bankruptcy preceding from the established section 382 of the tax code. Are those who criticize the AIG tax benefit but not GM really arguing that this ruling should be amended so that whether section 382 applies is subject to the discretion of the Treasury? For one thing I’m not sure that would be legal (somebody who knows more can tell me if this is the case). But even if it were it strikes me as pretty undesirable to give administrations that level of discretionary taxing power, essentially allowing the President to provide a potentially massive tax benefits to companies it bails out if it feels like it. No, I would rather not give Presidents more arbitrary bailout power, especially of the kind that tends to be hidden and unreported.

Via James Pethokoukis, comes a statement from Elizabeth Warren and three other former members of the TARP Congressional Oversight Panel with some harsh words for the special treatment given to GM:

“When the government bailed out GM, it should not have allowed the failed auto giant to duck taxes for years to come. That kind of bonus wasn’t necessary to protect the economy. It also gives GM a leg up against its competitors at a time when everyone should have to play by the same rules – especially when it comes to paying taxes”

Actually Warren didn’t quite say this. Despite the fact that AIG, GM, and Citigroup all benefitted from a special Treasury rule that allowed them to, as Warren puts it, “duck taxes”, Warren only called attention to the money given to AIG. Here is the phrasing actually used:

“When the government bailed out AIG, it should not have allowed the failed insurance giant to duck taxes for years to come. That kind of bonus wasn’t necessary to protect the economy. It also gives AIG a leg up against its competitors at a time when everyone should have to play by the same rules – especially when it comes to paying taxes.’’

The basic issue is this. When a company has a net operating loss (NOL) in one year, they can carry these losses forward into later profitable years to  lower their tax bill. Normally, when a company goes bankrupt and ownership stake is changed by more than 50%, the NOLs disappear. According to a paper by  Mark Ramseyer and Eric B. Rasmusen, GM had $45 billion in losses, with a book value of $18 billion, that the Treasury’s special exemption allowed them to keep. According to Warren the exemption has provided AIG with $17.7 an extra billion in profits. It’s unclear why you would complain about AIG receiving this tax bailout and not complain about GM doing the same.

Am I missing something here? It’s quite possible. I’m not a tax lawyer or an accountant. But from where I’m sitting, James Pethokoukis is correct that it is strange to complain about AIG and not GM. The only reason I can see why Warren would do this is that she is a politician running for Senate and she doesn’t want to alienate liberal voters and unions who support the GM bailout, including the part that lets them “duck taxes”.

It’s worth noting that, hypocrisy aside, Warren is right these secret bailouts are a bad idea. People tend to ignore these costs when considering bailouts, indeed many pundits seem completely unaware of them, which bailouts them seem cheaper then they really are. I don’t think we’ll ever be free of the problem of bailouts, and letting politicians hide billions of dollars in costs makes it more likely that the bailouts we get will be even bigger.

Dean Baker dismisses them

In fact, measured productivity numbers are unlikely to pick up the full gains that may be associated with lower populations. Large populations and crowding put enormous stress on the environment. Imagine having commuting times cut in half, if smaller populations eliminated rush-hour congestion. This would not be picked up in productivity measures.

Similarly, increased access to desirable locations, such as lower prices for waterfront property, would not be picked up by conventional measures of productivity. And, of course, the reduced pollution, including lower levels of greenhouse gas emissions, would also not be picked up in standard measures of productivity.

. . .

In short, there is no demographic problem facing wealthy countries. The only problem is that people with poor math skills and imperialistic designs hold positions of influence and power.

The problem of flat population growth is more serious than Dean imagines.

Folks concentrate on the problems associated with the Welfare States but ironically that is simply because the Welfare State has better accounting practices.

The core problem is that folks want to transfer good and services into the future. This is a fundamentally difficult thing to do.

However, one trick is to construct buildings and then to rent those buildings out to future generations. This is what the vast majority of the capital stock in America is devoted to.

However, in a world where population is declining this trick will no longer work.

What that means is that the real interest rate that establishes full employment can easily go negative in times of stress. This confuses policy makers who are so ingrained that savings ought to pay, because that’s how we get more wealth.

In truth savings can just as easily be a socially costly endeavor as a socially profitable one. There is nothing written into the laws of the universe that say it should be one way or the other.

Nor will productivity growth alone do it. Even in the best of times the productivity growth ‘spread” is small and can be overwhelmed by risk spreads, as no one actually knows ahead of time what investments will be complimentary to productivity growth.

The surer thing is per capita depreciation, since its much more likely that in the future people will continue to at least have some affinity for the things they wanted in the past. However, when the per capita part goes away all you have left is the depreciation part and for a huge portion of the capital stock, that rate is quite low.

A speed limit makes sense because driving too fast or too slow puts other drivers on the road at risk, thus the decision how fast to drive can create an externality. But how should policy makers set the right speed limit? Engineers can weigh the costs of higher speeds (more accidents) against the benefits (getting places faster), and determine the optimal level. But in reality they are set at discrete levels that don’t vary nearly as much as the optimal speed on various lengths of road would appear to vary. Furthermore the optimal speed clearly depends on the preferences of the drivers, the current weather, and other factors that shift by hour of the day.

Variable speed limits, in contrast, present a more flexible, even Hayekian, way of setting the speed limit. One example is Interestate 80 in Wyoming, where sensors detect driver speeds, which are then used in an algorithm, along with weather conditions and other factors, to set speed limits that vary. An interesting article, via Radley Balko, provides more information on this road:

Drivers’ speeds are tracked by sensors embedded in the pavement and installed on markers alongside the highway.

However, that’s just one element the Wyoming Department of Transportation uses to calculate and set variable speed limits.

Other factors include weather, road condition and recommendations from Wyoming Highway Patrol troopers and department maintenance operators

According to Wikipedia, variable speed limits date back to at least 1965, with a road between Munich and Salzberg able to have a speed limit of 60, 80, or 100 km/h. These speeds were set by individuals who monitored traffic speeds, but today computers can do this automatically. This seems like the kind of law/technology that should would be more widespread, but speeding tickets mean government revenues. And at the local level, research shows that towns that are undergoing fiscal problems are more likely to issue traffic tickets (yes, traffic tickets are countercyclical). In addition, I think people suffer from a general fear of allowing safety to be at the mercy of algorithms.

But if it is true that the variance of traffic speed matters more than the average in determining the probability of an accident, then it would seem sensible to let speed limits vary with drivers perceptions of what is optimal, making adjustments for the externality of driving too fast. After all, a speed limit to far below the “natural level” probably creates more variance.

I had considered oil prices to be the primary threat to an accelerating recovery. I do think the fundamentals are ripe for an accelerating job creation rate. 300K+ a month is not fundamentally unrealistic at all.

I know believe, however, a panic-y federal reserve and an over-obsession with keeping inflation expectations moored is the biggest threat.

For now I think it should be the mission of every Journalist to harp on Fed Officials as to why they are willing to tolerate half a decade of unemployment above 5% and the devastation and loss of skills associated with that but they are not willing to tolerate Core-PCE rising above 2%?

Maybe there is something I just don’t get but folks seem to be taking the seasonal adjustment issue way too seriously. For example, DK at Alphaville writes

FT Alphaville has written a fair amount about seasonal distortions in economic data but thought this latest piece of research from Nomura was worth highlighting (mostly because it involves time-travel).

It pokes a small but important hole in the surprisingly low 348k new US claims for unemployment insurance which were filed in the week ending 11 February, the fewest since March 2008.

. . .

Nomura thinks as much as one half of the decline since early January this yearmay reflect distortions in seasonal adjustment.  Looking ahead, the best guess is that distortions are likely to be neutral in the next couple of months, and then turn modestly negative in the spring:

That the seasonal adjustment factors were distorted by the sharpness of the post-Lehman drop was an interesting observation but its not a huge deal. If absolutely nothing else just chuck the seasonally adjusted numbers and use the unadjusted ones.

FRED Graph

What do see there: The 2010 to 2011 peak is a softer decline than either the 2009-2010 or the 2011 to 2012 peaks. This is consistent with the basic observation that the recovery slowed in 2010 but picked up again going into 2012

You can also see the summer the last two summer peaks show very little difference, reinforcing the general sense that summer 2011 was particularly off track data wise.

That there is a pattern here makes it kind of interesting but in terms of importance I think falls under the heading: There Be Noise.

Rising oil price remain my principle concern regarding the recovery.

My thesis is that rising oil prices are a monetary contraction because the funds are just parked in T-Bills.

Imagine for example if rising oil prices caused Oil Producing countries to buy more Boeings or Catepalliar Equipment. Would we expect oil prices to be contractionary?

Or would they simply shift production away from consumption and towards exports? Economists naturally think of international trade as pure exchange but of course its not. Dollar denominated assets are accumulated. This means it has monetary effects particularly at the zero lower bound.

If we were in a normal world the appropriate response to higher oil prices would be to cut interest rates as T-Bills are seeing higher demand. Otherwise, the Fed will have to slow the growth of the money supply in order to maintain the Funds rate – which must wash with the T-Bill rate – and would otherwise fall.

However, we at the ZLB we do not have this option. We do still have the option of using the statement.

My advice would be to go with something like this

Higher oil prices represent headwinds for the US economy and may justify more accommodative action to prevent job growth from slowing.

Note that this alone will convey to markets that the higher oil goes the longer the funds rate will stay low.  This is the opposite of what they believe.

Yes, there will be freakout. Yes, people will say we are entering a new era of inflation. My advice is simply to ignore them.

A relative of mine who is a litigator often uses the phrase, “Say it with cash.”

Think of the markets as speaking with cash. The talking heads may say what they want. Even high ranking financial executives may speak out. However, if the breakevens don’t move then no one is saying it with cash and so ignore them.

Paul says

But I’d also like to stress a related point. Brad doesn’t actually fall into this fallacy, but you often find people writing about the Great Recession and subsequent Lesser Depression as if they were largely about trying to find a place for all the people formerly employed in construction. And the fact is that this just isn’t right. As Larry Mishel shows, the unemployment rate would be almost as high as it is even if we ignore everyone in or formerly in construction.

This was much the subject of my much talked about – primarily by me – presentation at GMU were I attempted to “Address Austrian Economics on Its Own Terms”

The basic story is one of misallocation of resources, but you can slice the resource picture dozens of ways and not get anything that could plausiable be called mal-investment.

You can see this in part by the fact that the price of houses didn’t even rise that much. The price of land rose. Further, renovations are hitting record highs even as new construction is hitting record lows. This story is all about land as the option value and collateral value of land – not fungible real resources.

In anycase I would present my slides had someone – who will remain nameless thought not photoless – maliciously and with dastardly wicked and boundlessly evil aforethought destroyed my data files.

First of all I think there is this chart which should but this baby to bed Yes, those little blue dots you see are residential constructions contribution to payroll growth

FRED Graph

And even still the timing is wrong

FRED Graph

The peaks and troughs are different and the recovery is fundamentally different.

Residential construction is an import story about the last 8 years of the US economy but it is by no means the story of the Great Recession.

The condusion I believe comes from a rampant inflation of price and output.

A couple of quick notes and then some thoughts that I hope I have chance to build on over time.

GDP growth came in of course at around 2.8%. But, what does that tell us? Not much.

For example, personal consumption expenditures were weak at a 2.0% growth rate, but this is largely because Services came in a 0.2% which in turn is because Housing and Utilities Services declined by 13 Billion dollars. And, that is almost certainly due to a warm winter and lower than expected heating bills.

So, what does that tell us about the direction of the economy? Essentially nothing. We can say that Housing and Utilities will likely pop back in the spring meaning that Consumption expenditures could easily grow by 2.5 – 3.0%.

However, information wise that just piles nothingness on top of nothingness. It was strangely warm today, it will likely be less strangely warm tomorrow. That’s what you get from that data.

Autos did well, but we knew that already. Indeed, expenditures on all goods did well.

There is also a bit of handwringing over the fact that inventories contributed so much to GDP growth. But, what does this tell you. Most of this is autos. During the summer there was a major slowdown in parts from Japan. So Hondas and Toyotas started getting lean on lots. Now, they are coming back. That’s inventory adjustment.  But, it tells us little about the underlying economy.

The one real surprise I saw was a decline in non-residential structure investment. I am guessing this means less oil drilling or natural gas fracking, since that’s over a third of all investment in structures and it’s the entire source of growth.

Why that slowdown occurred I don’t know because Census is slow on getting construction data out. However, it will be interesting to see. A change in oil and gas extraction would be a big deal.

Companies continued to buy computers and software. Not really a shocker. Medicare and Medicaid continued to fund money to hospitals and doctors. Not much of a shocker there either.

Government was surprising rough as well and I wonder if their won’t be some revisions there.

In any case I just don’t think there is a whole lot of here, here.

As a quick note, though I can tell by the way business folks talk across twitter there is the sense that the economy is more complicated than it really is.

I mean what do you do. You probably have a house, a car, some clothes and a computer. Chances are you also eat food, sit on chairs, and have a relative who is or was in the hospital. That’s the private sector right there. If you went to school, that’s the public sector.

Done and done. There isn’t much more to it because there is just not that much to people and people are the foundation of the economy.

As per usual I am going to co-sign something that Matt Yglesias wrote.

I don’t exactly want to "defend" the Federal Reserve from the scorn that’s been heaped on it after the release of the 2006 FOMC transcripts, but it is worth paying attention to the timing. . . .

[Residential Construction] enters negative territory in the last quarter of 2005. Then it stays negative all four quarters of 2006, and during all this time the FOMC members are makign statements about how the economy should survive the housing bust. Then it’s negative for four more quarters throughout 2007. And then for the first two quarters of 2008. And all that time from the latter part of 2005 through all of 2006 and 2007 and through the beginning part of 2008, the Federal Reserve is basically doing its job correctly.

Watching at the time it was clear that the US Housing Bubble Burst, the 2008 recession and the Global Financial Crisis three related but definitely distinct things.

Indeed, here is Private Fixed Residential Investment over the boom and bust. Its not my favorite indicator but its denominated similar to what I am going to compare it to. We get a familiar picture.

FRED Graph

Now I am going to layer over-top of that the inverse of net exports. Which is in fact net imports, and subtracts from GDP.

FRED Graph

And, here is the two summed together for the net contribution to GDP growth.

FRED Graph

You can see that by the time the recession hit the Housing-Export complex was actually adding to growth.

Now, why is this an important complex to look at?

Because, as many commenters have noted the boom in residential construction was in large part financed by large external deficit. We borrowed money from the Chinese (and Germans and Japanese) to build a bunch of homes in the United States.

However, the way you borrow money from other countries is by running a trade deficit. As residential construction shrank, so did the trade deficit. This provided the economic offset that kept the economy from going into recession in 2005 as residential construction rolled over.

By the beginning of 2008 though other sectors of the economy – notably non-residential construction and manufacturing, were beginning to weaken. This tipped the economy into recession.

Here is nonresdential fixed investment, a category that includes both nonresidential construction and equipment and software, plotting along with the sum of durable and non-durable goods consumption.

FRED Graph

Both turned downward in late 2007 which brought on the recession proper in 2008.

Both the consumption of services and the government sector peaked after the recession began.

FRED Graph

The growth in both is so strong its hard to see the change, so this is a zoom in.

FRED Graph

You can see the both kinking in the 3rd quarter of 2008. Government goes from slow to an outright fall. Services goes into a much faster fall which it sustains into 2009. That’s the Global Financial Crisis.

We only have real service data going back to 1995 but we can see how different the service and government sector response was this time around as opposed to dot-com.

FRED Graph

In the 2001 recession the hit to government and services is barely noticeable where in this recession there has been essentially stagnation since the middle of 2008.

And, the two sectors together are quite large, accounting for about 2/3rds of GDP.

So, we can see the three events, residential construction collapse, recession proper and Global Financial Crisis all as distinct events.

Will Wilkinson has a must-read post on libertarianism, why he’s more of a liberal than a libertarian, and how he’d rather argue more with liberals than libertarians. He also condemns Ron Paul about as well as anyone could in a paragraph of his usual rhetorical genius:

Somebody’s going to ask “Isn’t Ron Paul making a difference?” So I’m going to say, “Yes.” None of this is to say that right-fusionism of the Ron Paul variety isn’t now having an influence, or that none of it is good. I’m glad to see Paul spreading a few profoundly important ideas about foreign policy. But that doesn’t mean Paul’s decades of bilking paranoid bigots with bullshit prophesies of hyperinflationary race war was really a stroke of strategic genius after all. Or maybe it means it was. But that doesn’t make it right. I don’t think Paul would be where he is today without all those years of vile fear-mongering. And I don’t think anyone ought to get away with climbing up that evil ladder, kicking it away, then pretending he was born a thousand feet off the ground in the pure mountain air right there next to heaven. He knew what he was doing, chose to do it, and none of it can be justified by a little TV-time for salutary anti-imperialist and free-market ideas. I’d rather not be affiliated with a “movement” that includes him in even a conflicted way.

I am not quite persuaded by Will’s rejection of the term libertarian to describe himself. Or rather I am not persuaded by his rejection of the term to describe ourselves, since I share a lot of the beliefs he says differentiate him from libertarians. Will appeals to the prevailing public understanding of “libertarianism”, but I think that this is more about the relative importance of a high level of economic freedom to both freedom overall and general welfare than about which rights and liberties are “off the table”.

Maybe I am biased because I don’t want to surrender libertarianism to those I see as the radicals among us. But then again maybe Will is biased because it’s easier to persuade liberals when you call yourself a liberal.

Is this the worst paragraph about economics, at least from a major newspaper, in 2011?

North Dakota currently has the nation’s only state-run bank. Supporters point out that the state is the only one to have had a budget surplus since the economic crisis began, and has an unemployment rate below 4%.

I don’t consider the idea of public sector bank or something like it to be completely absurd, but for this reporter to allow even the hint of a connection between a public sector bank and North Dakota’s economic success is just terrible, irresponsible journalism. Perhaps North Dakota’s recent oil boom that has included a tripling of output over the past few years has something to do with the budget surplus and low unemployment rate? Or maybe it was the state bank that has existed since 1919. I guess it could be either.

One question I want to ask about public sector banks is this: would the financial positions of fiscally troubled states be better or worse if they had public sector banks over the last 15 years? What would the financial position of the State Bank of Illinois be?  I know where my bet is.

The most common sin of economists is to take a point which is true in part and mistake it for one which is true in full. We so enjoy being contrarian and refuting sacrosanct beliefs with the clean and frictionless logic of economics that it doesn’t quite satisfy to point out that these beliefs are simply less true than people think, but must insist that they are fully false. Case in point is this Steven Landsburg post, which Robin Hanson praises, in which he argues that misers are just as admirable as philanthropists:

In this whole world, there is nobody more generous than the miser—the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar’s worth of goods and didn’t consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner….

Landsburg’s point would be completely valid and convincing had he simply argued that the miser is more like a philanthropist than is commonly believed, but to fully satisfy the economist itch he must argue that the miser not morally distinct from the philanthropist. What’s missing from Landsburg’s analysis is the common sense fact that the world is full of areas where the social gains from a dollar spent are much larger than a dollar. Whether it is giving the global poor mosquito nets, education, vaccines, other medical care, or just cash, it is clear that it is easy to spend the money in ways that generate huge social gains. Likewise it is not hard to identify areas of basic research with large spillovers that are underinvested in. Of course Landsburg knows there are many ways to spend money and generate much higher social returns than burning money or putting it in the bank, which is why his article in Slate advising people how best to donate to charity didn’t simply advise them to burn it.

In reply to Landburg, Karl argues:

This is because the miser is withholding his assessment of the most utility maximizing uses of his money and that assessment is a valuable thing. Even if the miser knows very little he knows something and as always ignorance is not abdication.

I agree, but I would go a step further than this: the miser is not simply withholding his assessment, but he is signaling that he does not care that the money could generate massive welfare gains, and so he does not care about massive welfare gains. This is because it is simply not credible for a miser to argue that he cannot identify areas where there are large social benefits, or use the money to hire people to identify areas with large social benefits, therefore the only option that remains is sociopathic indifference.

In reply to Karl, Robin argues that he’d “still guess that the miser does more good than the average rich-nation philanthropist”. Surely there are many philanthropists who are terrible at philanthropy. Someone who spends millions creating a public museum filled with Damien Hirst sculptures is generating lower social returns than if he were to miserly put the money in a bank or burn it. But this simply reinforces my original point: Landsburg could’ve made a truer and more persuasive argument had he simply gone with a more modest version of it. That is, he should have said misers are better than some philanthropists. The problem is that most people are already pretty capable of identifying low value philanthropy and begrudging it as a waste of money. If you explained to them that putting the money in the bank or burning it is similar to giving it away to society at large, they would agree that some this is better than some philanthropy. But the contrarian victory there would not be enough to satisfy an economist, and so the argument is oversold.

Europe continues to hang over our heads as does the potential failure of Congress to extend the payroll tax cuts. Nonetheless, the near term trajectory of the economy is meeting or exceeding my expectations.

From CNBC

Sales rose an estimated 6.6 percent to a record $11.4 billion on Black Friday, typically the busiest shopping day of the year for Americans, while the traffic at stores rose 5.1 percent, according to ShopperTrak.

The day’s sales growth was the strongest percentage gain since 2007, when sales rose 8.3 percent on the day after Thanksgiving, said Ed Marcheselli, chief marketing officer at ShopperTrak, which monitors retail traffic.

The fundamentals for a US recovery are in place. Without trip-ups we should be looking at accelerating growth through 2012 and the potential for an enormous boom.

There will also be inflation. Pay no attention to those saying that inflation cannot pick up unless wages pick-up. It can and it will. What they miss is that labor’s share of national income will fall and probably at a slightly faster pace than before the recession. Just my baseline guess.

Nonetheless, the point is that the inflation will be generated by greater corporate profits and much higher returns to natural resource extraction.

Eventually the natural resource extraction returns will fall as capital and technology flood into that sector but I expect that the increase in corporate profits as a fraction of national income will continue for the foreseeable future.

FRED Graph

I pick on Tyler because he is probably one the sharpest voices for what I see as a deep misunderstanding of the issue. Though, I think this misunderstanding is incredibly widespread – as holiday gatherings make clear.

Tyler says

Maybe these markets simply will shut down soon.  There is so much talk about what the Germans should do, but I don’t see the viable options.  With Germany’s own credit status now in doubt, eighty percent debt to gdp ratio, massive welfare state, and unfavorable demographics, are they supposed to endorse — going to endorse — ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries?  And is that inflation then followed by a subsequent deflation?  Or does it continue forever?  And would Germany have to move to a regime of wage flexibility for the professions too?  How politically feasible is that?  I don’t see how the Germans benefit from going down this road, even if you think, as I do, that the alternatives are quite dire.

Germany doesn’t need to experience any of these things. Germany only needs to agree to letting the ECB stand as Lender of Last Resort.

I haven’t spoken with Tyler personally on this but from my conversations over the holidays I can see that the difficult thing to understand is that what is at issue here is the distribution of private claims over private resources.

On one level you can see this by noting that part of the reforms which Mario Monti is putting in place are to decrease tax evasion. Yet, taxes are simply the forcible extraction of private resources by the government. Its not as if taxes represent the government producing something or even government officials or government pensioners consuming less.

Taxes represent the transfer of resources under the threat of imprisonment. Now, if this could possibly solve your problem then you know that at root the problem has to be about who holds private claims over resources.

You can attack the problem in another way by seeing that Italy is roughly in primary budget balance. This means current borrowing exists only to repay past lenders. Again, this is an issue over the distribution of private claims.

To make the point more clear – this is explicitly not the case for Greece. From a budget standpoint Greece faces a more fundamental issue. It is currently in primary deficit. It would have shift resources from private control to public control in order to balance the budget given the current economic environment.

It is true that Greece’s economic environment is primarily the result of a fundamental mismatch in monetary policy between it and the core countries and so could be solved if Germany were to endure more inflation. However, Greece does face an immediate adding up constraint that Italy does not face.

A third way to see this is to imagine what would happen if Italy repudiated its debt vs. Greece. Italy would then be able to support itself on tax revenue. Greece would not. Greece would have to go back into the bond markets somehow and get more money.

Why is all of this important?

Its important because it means Italy doesn’t actually need anyone to transfer real resources to it. It simply needs someone to manage resource distribution among bondholders. The ECB can do this at virtually no direct cost.

Again that is because nothing actually has to be produced or transferred. Debt just has to be managed.

Perhaps, a fourth way to see this is by noting that you only need new savers to agree to step in where old savers were. This is ultimately a co-ordination issue between groups of savers. Its breaking down because there is a musical chairs issue. No one wants to be the last saver who can’t find someone to whom to transfer his savings.

The ECB can assure this doesn’t happen because the ECB controls the total amount of borrowing from European banks. It can constrict the amount of borrowing to make sure that someone steps up to take the transfer of Italian debt.

All of this is to say that Germany doesn’t have to suffer any near term economic bad effects. What Germany loses in supporting a move like this is the ability to pressure peripheral governments into changing their ways.

In theory one could agree to a new system, along the lines I have proposed, in order to keep the pressure on. The problem, of course, is that if you are even considering offering Lender of Last Resort status then you have signaled that you do not have a complete commitment to irrationality, in which case it immediately becomes in the interest of the peripheral countries to dig in and refuse to change unless Lender of Last Resort status is offered up front.

“We’ve seen six straight months of year over year gains for new vehicle sales, which shows positive momentum for the auto industry, ” said Jesse Toprak, Vice President of Industry Trends and Insights for TrueCar.com.  “There is a strong possibility that we could reach a 14 million SAAR next month.

Link. HT Calculated Risk

Paul Krugman has some words for job creators and other high skilled people: we don’t need you.

…textbook economics says that in a competitive economy, the contribution any individual (or for that matter any factor of production) makes to the economy at the margin is what that individual earns — period. What a worker contributes to GDP with an additional hour of work is that worker’s hourly wage, whether that hourly wage is $6 or $60,000 an hour. This in turn means that the effect on everyone else’s income if a worker chooses to work one hour less is precisely zero. If a hedge fund manager gets $60,000 an hour, and he works one hour less, he reduces GDP by $60,000 — but he also reduces his pay by $60,000, so the net effect on other peoples’ incomes is zip.

First let me just say that the extent to which what people earn is equal to their marginal product is greatly unappreciated, so before I disagree with Krugman I just want to pause and point out that this is truer than most people think. But it’s not true everywhere and always. Note that Krugman does not go so far to say that marginal product *does* in fact equal income, but that “textbook economics says that in a competitive economy…”, and that job creator praise is not “something that comes out of the free-market economic principles these people claim to believe in”, and that “Even if you believe that the top 1% or better yet the top 0.1% are actually earning the money they make…”.

He doesn’t actually say “people earn what they make”, nor does he say how good of an approximation to reality marginal product theory is. But in his economics textbook with Robin Wells, they are a bit more explicit, and do call the marginal product theory a pretty good approximation:

The main conclusion you should raw from this discussion is that marginal productivity theory is not a perfect description of how factor incomes are determined, but that it works pretty well. The deviations are important. But, by and large, in a modern economy with well-functioning labor markets, factors of production are paid the equilibrium value of the marginal product -the value of the marginal product of the last unit employed in the market as a whole.

This is a really important point, and I don’t disagree. But I think that many high skilled, high paid workers, and job creators in the U.S. can be an important deviation from this general rule. Many of these people work at moving the productivity frontier forward, and thus increasing the marginal productivity of other workers. After all, one of the important things that entrepreneurs do is find ways to increase the productivity of other workers so they can underprice their competitors. The process of creative destruction is not manna from heaven. I won’t pretend to know have all the answers about what drives this process, but entrepreneurs, job creators, and high skilled people are an important part of it.

Consider, for instance, that if we suddenly kicked out the top 10% of high IQ people (or 10% most productive people, or 10% most creative people, or whatever) in the U.S.. It strikes me as fairly likely that the total output of the remaining 90% would go down. Krugman seems to argue that this would not be the case. But even if you disagree with me in the short run, in the long-run the productivity increasing innovations these people would have made won’t show up, and the rest of us would have lower productivity as a result.

Now, instead of kicking out the top 10% of workers, just make them work less as a result of high income taxes.  See my concern?

Lowered incentives of job creators and other innovators should be considered as one of the likely downsides to higher taxes.

Note that if you don’t think this is true, then what business do we have subsidizing higher education? If workers capture the entirety of their higher productivity, then I don’t see who gains by giving young people money to go to college rather than just cash.

The group tasked with finding a plan to cut the debt by $1.5 trillion or more has failed to come to an agreement. If you’ll recall, two of the the ratings agencies, Moody’s and Fitch, recently reaffirmed the AAA status of U.S. debt, while S&P downgraded them one notch to AA+. Will the Super Committee’s failure lead to more downgrades? Well nobody is downgrading immediately, but this certainly doesn’t help the odds of preserving AAA status.

S&P has already announced that they will not downgrade as a result of the Super Committee failure, which is not a surprise. In their original downgrade statement S&P cited the debt panel failure part oftheir down-side scenario that they would regard as “consistent with a possible further downgrade to a ‘AA’ long-term rating”. However, that down-side scenario also included other bad things occurring, like higher nominal interest rates for U.S. Treasuries, which have not surfaced.

However, it’s hard not to see the failure of this committee as reaffirming one of S&P’s chief concerns, which is essentially that politicians can’t come to agreement. As they said in their downgrade statement:

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt  burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated  sovereign peers (see Sovereign Government Rating Methodology and Assumptions,”  June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging…

If you’re concern is that the government is unable to work together and come up with the right solutions to long-term debt problems, it’s my position that the super committee failure should make you more worried. But it’s not necessarily the case that S&P sees it that way. And I see nothing in their August downgrade statement that commits them to further downgrades now that the super committee has failed. If some or all of the automatic cuts end up being nullified, then S&P’s previous statements certainly indicate the risk of a downgrade will go up. How much remains to be seen.

How about Fitch? I’ve read some commenters saying that the failure to come to agreement is actually good news, but Fitch does not see it this way. In their previous statement affirming AAA status they committed themselves more explicitly than S&P:

An upward revision to Fitch’s medium to long-term projections for public debt either as a result of weaker than expected economic recovery or the failure of the Joint Select Committee to reach agreement on at least USD 1.2trn of deficit-reduction measures would likely result in negative rating action….

Agreement and passage into law of a credible set of deficit-reduction measures of at least USD1.2trn by end-2011 would be consistent with Fitch’s own fiscal projections and demonstrate that a sufficiently broad-based political consensus can be forged on how to reduce the budget deficit and provide a platform for the additional measures that will be required over the medium to long term. In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the Administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the US ‘AAA’ sovereign rating and Stable Outlook will be forthcoming despite the USD1.2trn of automatic cuts that would follow.

So even if the automatic cuts go through as planned, Fitch has previously committed to being “less confident” in the maintenance of the AAA rating. While one can read S&P’s downgrade statement as being concerned about the kind of inability to agree that the Super Committee failure represents, Fitch has come right out and said that they would regard it negatively. Their statement that the failure of the committee would “likely result in negative rating action” is certainly suggests to me that a downgrade will be forthcoming.

All I’m seeing from Moody’s right now is a statement that this news is “informative but not decisive” in it’s decision whether or not to downgrade. This seems to approximately sum up the position of the other two agencies as well, although Fitch’s previous statements look to me to be the most hawkish in terms of how they will view this. I’m in agreement with the ratings agencies, I don’t think this failure is good news.

Via David Wessel, I see that the University of Chicago has a new website with a panel of elite economists answering weekly questions. Tyler is skeptical, but I am already finding it interesting. Here, for instance, is one of the first questions posed:

Federal mandates that government purchases should be “buy American” unless there are exceptional circumstances, such as in the American Recovery and Reinvestment Act of 2009, have a significant positive impact on U.S. manufacturing employment.

The results are overwhelmingly against the statement. Of the 41 respondents, only 4 agree. One of them is Daron Acemoglu who, cites the work of David Autor:

4 years ago I would have disagreed. Recent evidence (Autor Dorn Hanson) suggests yes.Caveat: costs from higher prices & other inefficiencies -see background information here

Yet a few positions down in the experts panel, Autor himself disagrees, and seems to disagree that his study is useful analysis here:

Hard to believe this does much at all. But I’m speaking based on my prior. I’ve not seen any rigorous analysis.

I would like to see more from this website. A great follow-up to this would be a conversation between Autor and Acemoglu about the extent to which Aturos’ work is applicable to the question.

In response to Karl’s post, commenter Th points us to a 1996 article from Krugman where he pens a 100 year retrospective from the point of view of someone 100 years in the future. There are so many interesting things in there, but I just wanted to point out some of the more interesting predictions.

First, Paul predicted the trend towards suburbanization would reverse, which in fact is starting to happen:

During the second half of the 20th century, the densely populated, high-rise city seemed to be in unstoppable decline. Modern telecommunications eliminated much of the need for physical proximity in routine office work, leading more and more companies to shift back-office operations to suburban office parks. It seemed as if cities would vanish and be replaced with a low-rise sprawl punctuated by an occasional cluster of 10-story office towers.

But this proved transitory. For one thing, high gasoline prices and large fees for environmental licenses made a one-person, one-car commuting pattern impractical. Today, the roads belong mostly to hordes of share-a-ride minivans efficiently routed by computers. Moreover, the jobs that had temporarily flourished in the suburbs — mainly office work — were eliminated in vast numbers beginning in the mid-90′s. Some white-collar jobs migrated to low-wage countries; others were taken over by computers. The jobs that could not be shipped abroad or be handled by machines were those that required a human touch — face-to-face interaction between people working directly with physical materials. In short, they were jobs done best in dense urban areas, places served by what is still the most effective mass-transit system yet devised: the elevator.

Here Paul predicts the rise of many small subcultures, and many small celebrities:

Luckily, the same technology that has made it possible to capitalize directly on knowledge has also created many more opportunities for celebrity. The 500-channel world is a place of many subcultures, each with its own heroes. Still, the celebrity economy has been hard on people — especially for those with a scholarly bent. A century ago, it was actually possible to make a living as a more or less pure scholar. Now if you want to devote yourself to scholarship, there are only three choices. Like Charles Darwin, you can be born rich. Like Alfred Wallace, the less-fortunate co-discoverer of evolution, you can make your living doing something else and pursue research as a hobby. Or, like many 19th-century scientists, you can try to cash in on a scholarly reputation by going on the lecture circuit.

The whole thing is really interesting. I wonder the probabilities Krugman would place on these outcomes, and if he has changed his mind at all. He certainly paints a picture of a world where inequality is not such a big problem. Sure there are still the super rich, who made their fortunes off of land and natural resources. But celebrities are both more common and serve a smaller audience, PhDs make as much money as people with a year or less of vocational training, white collar jobs are the ones most commonly replaced by machines. How long does he expect it will be until inequality starts to reverse due to these trends? Or was it just a bit of fun speculation about a possible future world?

 

Modeled Behavior regular Becky Hargrove asks

Can you make a place in your categories for a quick reference to this discussion related to NGDP

 

Sure.

I’ll  do this quick and graphically and see if it makes sense

image

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image

Since economic evolution is right up my alley, I thought I would continue the theme of Karl’s recent post on the subject explaining while a plethora of old, small businesses is a sign of market failure, and specifically respond to a comment left by Jazzbumpa, which includes a common sentiment among the left, that is not at all a feature of a market economy:

So the natural evolution of capitalism is for each business segment to ultimately become a near-monopoly. This is economic growth, and it is a good thing.

And Private Equity funds accelerate this process, making it an even better thing.

http://www.asymptosis.com/ows-how-wall-street-capital-destroys-capitalism.html

I’m starting to get it. Who do think will eventually own the whole world – General Electric or Cerberus?

Cheers!
JzB

Let me ask you; are you afraid of dominance and market power of British-East India Company? If the above were an actual concern, you would be. B-EIC had the mother of all market positions, and not even just in the 17th and 18th centuries — but a position that would make any company today envious. It was largely horizontally integrated in trade goods, and fully vertically integrated (even featuring its own army and navy). B-EIC had a captive market of nearly 1/5th of the entire population on earth, and had was specifically handy at brutal oppression.

However, despite all of the advantages one could hope for, B-EIC went out of business in 1873. Which highlights what should be a fundamental law of economics (but is not):

All competitive advantage is temporary.

Billions of gallons of ink has been spilled chronicling the rise of giant firms, and detailing how their businesses were run to be “in it for the long haul”. However — and ironically — billions of gallons of ink has also been spilled chronicling the same companies’ fall from grace as quickly as a decade later. In fact, of the original Forbes 100 list of largest US companies, only eighteen sustained their performance to the 50 year mark…and if my memory serves me correctly only two are still there (one being Exxon).

In fact, with an increase in the level of competition, economists Robert Wiggins and Timothy Ruefli find that the ability of a single firm to remain in a position of competitive advantage shortens precipitously. This is just another way of saying that he “S-curve” of deductive tinkering/technological innovation has been compressed.

To sum it up: a healthy market is characterized by relatively easy entry to new participants, a healthy level of competition between firms, and the ability for firms to die gracefully. Large firms will come and go, and some may be quite intimidating (like IBM, Microsoft, or Google, for example)…

…their time, too, shall pass.

I want to use this chart from EPI for my own evil purposes.

Safari

Lots of people want to focus on the right end of this graph. I want to focus on the left.

Look at the entire period of the 70s. Stagflation, awful economy. However, look how few businesses are reporting “poor sales” as a problem. That’s because they weren’t.

Which is why its important to point out that poor sales is not simply a way of saying the economy is doing poorly. It refers to a specific kind of doing poorly and that is on the demand side.

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