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Bloomberg’s Joshua Zumbrun smells what’s cooking

For all the attention given to almost $4-a-gallon gas, the biggest threat to containing U.S. inflation may be the shift away from homeownership, which is pushing up the cost of leases across the nation’s 38 million rented residences.

Shelter represents about 40 percent of the consumer price index excluding food and energy and accounted for almost one quarter of the 1.3 percentage point rise in April. That share has grown as falling home prices shake Americans’ confidence in housing as an investment.

The last sentence doesn’t quite make sense. Perhaps, the author doesn’t realize that Owner Equivalent Rent is also in the BLS inflation measure. That’s not meant disparagingly. Lots of folks get tripped up on this stuff.

In any case the point is that rents are rising, and rents are hefty portion of inflation.

Bill McBride and Tom Lawler are still digging through the Census data on homeownership and vacancy

If 2010 headship rates and homeownership rates for each age group had been the same as in 1990, the US homeownership rate would have been 66.7% instead of 65.1%. If 2010 headship rates and homeownership rates had been the same as in 2000, the US homeownership rate would have been 67.3%!

In fact, the aggregate data suggest that in 2010 the homeownership for most age groups was probably below 1990 rates!!!
Last week’s report, then, was clearly the BIGGEST STORY ON US HOMEOWNERSHIP in many, many years.

. . .

CR Note: This indicates that the age adjusted homeownership rate has fallen below the 1990 homeownership rate. All my previous analysis was based on the HVS data, and now that Census 2010 data has been released, the previous analysis is unfortunately incorrect (I need to think about the implications)

My baseline remains that the overbuild in housing was mild. The rise in vacancies appears to be driven in large part by a collapse in homeownership and seemingly a strong rise in household size. Kids still living with their parents. More older singles sharing places.

However, these trends are not likely to reverse themselves strongly as the recession eases.

It also means that we should expect increases in core inflation in the near term.

Noah has been thinking about Patterns of Sustainable Specialization and Trade, and makes some observations that have also struck me as important

This opens the door for a hugely expanded role for government (or other large, centralized actors) in the macroeconomy. If global patterns matter as much as local prices, then an actor large enough to perceive and affect the overall pattern might be capable of nudging the economy out of a bad equilibrium and into a better one. Dani Rodrik has been saying this for a long time in connection with newly developing economies, but the same may be true in rich countries when faced with disruptive technological change or globalization.

Is it possible that fiscal policy is really just industrial policy? Could it be that World War 2 ended the Depression not because it represented a sufficiently large Keynesian stimulus, but because it deliberately created new industries and new technologies that formed the basis of a new sustainable pattern of specialization and trade? After all, the modern U.S., German, and Japanese automobile and aircraft industries look suspiciously like the same firms that supplied their countries’ war efforts seventy years ago. And Annalee Saxenian will tell you that Silicon Valley got its start from World War 2 weapons research and shipbuilding.

Government policy is an interesting handle on it. More consistent with my interest is the role of the financial sector.

We know that the financial sector is making huge claims on US and to some extent global output. How are they managing this.

The uneasy consensus from Tyler Cowen to Mark Thoma, seems to be that they are more or less stealing it.

That just doesn’t sit well with me. However, the notion that there are massive returns to industrial policy because of network externalities and that the global financial sector is largely involved in private for-profit industrial policy makes more sense as a baseline.

There is obviously much more to be thought and said, but this seems like it could be going somewhere.

I’ll be helping to fill in for Ezra Klein this week at his WaPo blog.

We’ve had some technical difficulties getting the graphs up but I think I am going to do some sector by sector dissection on the last 10 years of the US economy.

If I have a chance I’ll do some health care/bias rationality, though the health care space seems to be pretty full.

Occupational licensing is often a tool that a more politically powerful supplier of some service uses against a politically weaker, competing kind of supplier. For instance, dentists use licensing to restrict competition from dental hygienists.  A recent working paper by Chevalier, Harrington, and Morton looks at how licensing in Florida has been used by funeral directors to protect them from competition from direct disposers, who offer cheaper “no frills” cremations. It’s an excellent case study for how these regulations work.

Funeral directors used to be the only ones allowed to perform cremations in Florida. But the state changed it’s licensing laws in 1979 to create a new type of worker, direct disposers, and a new type of firm, direct disposal establishments, who would be allowed to specialize in a much simpler cremation with less regulatory burden.

Both occupations have required a license, but becoming a direct disposer is easier than becoming a funeral director. Direct disposers only need a high school degree and a few courses, which means one could become one in a few months. In contrast, funeral directors are required to have some college, mortuary school, and an apprenticeship. The difference in crematorial services that each could offer is that direct depositors can not include viewing or memorial services.

As a result, by 1999 direct disposers performed around 20% of cremations in Florida each year. In response to the increased competition, the Florida Funeral Directors Association lobbied for licensing changes that would end direct disposers.

What they got was a series of regulatory changes starting in 2000 that severely reduced the competitiveness of direct disposers. These included setting facility requirements, preventing disposers from operating at the same location as a funeral home, and requiring that disposal facilities have a licensed funeral director in charge. The last one was the nail in the coffin (or lid on the cremation jar?) for direct disposers. The tying of the lower-skilled occupation to the higher-skilled one is analogous to the requirements used to protect dentists from competition from hygienists, and doctors from nurses.

These restrictions have been a success from the point of view of the Florida Funeral Directors Association. As shown in the chart below, they have helped funeral homes regain market share, cutting the market share of direct disposers nearly in half over the past decade. Note that this does not even reflect the 2010 change that requires each disposal facility be managed by a funeral director. The authors speculate that this regulation will increase funeral home market share back to 100%, killing off disposers completely.

 The result of this decrease in competition is that prices have predictably increased. The authors estimate that people are paying 9% more for cremations than they would be without these laws, and that the total impact was to increase cremation expenses by $9 million a year. What this amounts to is tax on grieving families to protect one kind of worker at the expense of another, less educated worker.

This is an understudied economic issue relative to other labor market regulations like unions or minimum wage, so it’s good to see more research in this area.

Yglesias pushes back on my notion of radical exurbanism.  What I mean by radical exurbanism is a supermassive sprawl of loosely connected and socially independent towns. No place that is recognizably “rural” but no place that is recognizably “the core”.

None of this is well thought out at this stage I am just thinking about how emerging trends could come together to create a new paradigm.

I see lots of techs that are in promising stages that could make a big difference in how we live because they lower the cost of distance.

Telecom: I mentioned this before but want to come back to it. We have a sense about what it means to interact face-to-face versus virtually that is limited by our communication technologies. We see these rapidly expanding.

Thinking about 3D-Skype is clearly not way out of the box.

Here is Kinect used to project 3D

Here is the Kinect device used to capture 3D

Of course we already have 3D without glasses TV.

What makes this significant is we are talking about an already mass produced techs being at the center of this. That makes a low cost usable device in the near future (5 years?) seem not crazy.

Combining them all could give us 3D without glasses interface that captures you in 3D and give you back in 3D.

This seems like the sort of thing that changes the nature of what face-to-face means.

Solar: Lots of people see solar as a possible greenhouse gas solution and it is potentially that. However, what comes to my mind is cheaper power. Solar that is cheaper than coal is significant in that it displaces coal but its also significant in that it is cheaper than coal.

Which means we can potentially think about living arrangement that more energy intensive, not less. That possibly means more transportation. Which is why the next innovation is important

Diver-less Cars: Material goods will presumably still be made in factories and shops. Pizzas will still be made in crappy pizza chains. However, the ability to deliver these items at extremely low cost would change things.

Matt brought up pizzas

In a radical exurban community there might only be the population base for a Papa John’s.A larger community that supports a Papa John’s, a Pizza Hut, and a Dominoes will be better able to match idiosyncratic customer preferences with available variety of crappy national chain pizza. Consequently, the larger community has higher productivity in the crappy chain pizza sector (for the record, Papa John’s is the right choice).

And this same dynamic applies to a wide range of face-to-face services in a way that militates in favor of some kind of metropolitan living.

So lets consider how that would work in this scenario. Imagine that I order a pizza online. It is put into a driverless delivery vehicle that’s tiny and electric. The vehicle travels 50 miles at 150 miles an hour to where I am to deliver the pizza and comes back.

If the computer can drive at that speed without being a threat; the vehicle is electric and has that kind of range; and is cheap to produce – since it has no occupants to protect or comfort – then this seems like a potentially low cost operation that can serve huge swaths of land.

We can think of other real goods being delivered in this way, lowering the costs to distance.

From Gallup

Just your best guess, what percent of Americans today would you say are gay or lesbian? 2002 and 2011 Trend

As you can see 52% of US adults answered that more than 20% of Americans are gay or lesbian.

About 3.5% of Americans identify as gay, lesbian, bisexual or transgendered.

By contrast roughly 2.2% of Americans are ethnically or religiously Jewish and 4.8% of Americans are Asian.

That is to say that LGBT folks are about 50% more common than Jews and 33% less common than Asians. Those give good anchors around what you would expect to see.

On the other hand, most Americans believe that there are significantly more gays and lesbians than blacks (12.6%) or Hispanics (16.3%) and 35% of Americans believe there are as many or more gays than Catholics (~25%)

What makes this interesting to me is not that people are bad at demographics.

Its that I would assume that people’s immediate experience is influencing their estimate of all of America. Yet, 52% of America can’t be experiencing anything like: 1 out of every 5 people I know is gay.

So my guess is that most people don’t really get what these numbers mean in terms of their daily life. Of course, to some extent we already knew that but it always interesting to see it come out in actual data.

Can you guess who this is responding to an interviewer?

Q: Salinger’s protagonist is driven mad by the ugliness in life. What drives you nuts?

A: The human predicament: the fact that we’re living in a nightmare that everyone is making excuses for and having to find ways to sugarcoat. And the fact that life, at its best, is a pretty horrible proposition. But people’s behavior makes it much, much worse than it has to be.

The answer is here.

So there is a little hub-bub over the the Buffalo sentence which I have never liked.

I prefer Fish Fish Fish Fish Fish, because not only is it grammatically correct but true.

Some sticklers – read a-holes – want to say that fish is actually an intransitive verb, but not where I come from. If my uncle tells people he’s gone to fish trout everyone knows what that means. 

So Fish who are Fished For by other Fish, Fish for yet other Fish.

Moreover,  the Law of the Ocean is that the sentence has infinite regress.

So the fish who fish for fish that are fished for by other fish -you know those guys  – well they fish for fish that are fished for by fish who fish still other fish.

or as I like to say

Fish Fish Fish Fish Fish Fish Fish Fish Fish Fish Fish

And well, we’ll stop there

Mike Mandel is hard on the press, and implicitly me, for suggesting that manufacturing is doing well.

“Humming”? There is no sense in which U.S. factories are “humming”, unless you consider being buried underground the same as being aboveground. Industrial production of manufacturing, ex high-tech, is still 12% below its 2007 level.  (see chart below). Total manufacturing is about 9% below its 2007 level.

This is the difference between thinking in levels and thinking rates. As I noted before business folks have a natural tendency to think in rates, those more concerned with labor market, levels.

Here is industrial production in manufacturing in levels

FRED Graph

Here is the same data in rates

FRED Graph

Looking at the rate of change you see stronger growth that you have in the past ten years. Indeed, lets go all the way back

FRED Graph

This is late 90s level growth.


Now how you look at this actually has interesting consequences for your world view.

In my mind sharp drops in Industrial production is the biggest sign that something has gone wrong in the economy. Its also a sign that recessions really are different.

That is to say, its not as if some times are good, sometimes are bad and sometimes are really bad. We just label the really bad times recessions.

Looking at the Industrial Production data it really looks like regime changes.

FRED Graph

There are periods were with bumps growth proceeds at a more or less constant rate and the boom it turns around and goes down, then it starts growing again at a constant rate.

Also, its just hard to make sense of the story that letting manufacturing capacity simply go dark is consistent with smoothly functioning markets. People, maybe you can tell a story. I don’t find them compelling but there is a story – people would rather not work and when there is not good work to be done they don’t.

However, machines. This story is much harder to tell. It seems like the last thing you would want to do is shut the machines down. Move people out of marginal work like baggers at grocery stories or something. But, why is it that the machines shut down.

That story is much harder to tell. There have to be frictions somewhere, markets failing to clear.

I know that a lot of people are upset about the growing power and influence of the wealthy. In and of itself this does not bother me. If the pie was growing for everyone I would be inclined to view the concentration of capital into fewer hands as a good thing.

Here is one reason why. From CNBC

Influential hedge fund manager David Einhorn has called for Microsoft Chief Executive Steve Ballmer to step down, saying the world’s largest software company’s long-time leader is stuck in the past.

Einhorn’s Greenlight Capital hedge fund has been a recent buyer of Microsoft stock, which at under 10 times expected earnings is regarded by many as undervalued.

Einhorn is buying up Microsoft with the intention of firing Ballmer and getting the company to do something constructive with its pile of cash. Perhaps, pay it out to investors who can put it to use elsewhere? One can only hope.

However, even if they actually bring in some new folks who can drag Microsoft into the 21st century that’s a win.

In a world owned by Index Fund 401(k)s this sort of thing isn’t possible. Investors with an interest in actually allocating capital are a key part of this whole capitalism thing. That almost necessitates a concentration of wealth.

Why this has to be inconsistent with a quality education system, high investment in domestic infrastructure and decent state-provided retirement package for Joe Six-pack, I have no idea.

If there were any grand bargains to be struck wouldn’t this be the one we want?

Unemployment Claims and GDP revisions are out today. My readers have probably seen the charts elsewhere so, let me give a little commentary.

Unemployment Claims

They are on the rise. This is an unambiguously bad sign.  Not only have they crossed back above the level consistent with payroll growth but the momentum seems to have shifted in the wrong direction.

Key questions: What sectors are seeing the layoffs? Is this gas related? Is this Japan related? Is this Euro related? Answers will be tough coming but the JOLTS report should help. At this point this raises uncertainty considerably.

My baseline is still moderate growth consistent with about 250K in payroll growth. Yet, I now expect surprises to be the downside.


Unchanged at 1.8% and the fundamentals are decidedly mixed.

Personal Consumption Expenditures were weaker. This is of course the largest component of GDP and the one that is the determinate of jobs. Yet, it is the one from which we can extract the least information.

Lets look at some investment factors. While investment is a smaller portion of GDP, investment is the business cycle.

Equipment and Software was unchanged from its strong initial estimate, this is a good thing.

Structures, both residential and commercial were revised up. This is not clearly a good thing. We have enormous real time data on structures. We know structures are in the crapper. We know that we are setting up for a rebound.  Commercial coming soon, residential I am still guessing at the 18 month range.

In some sense the further down they were the more rebound we had in us

Inventories. Inventories builds were slightly stronger than originally estimated. A mixed signal. I tend to take inventory build as bad growth at this point in the cycle because it suggests businesses were overestimating demand.

Government. There is not a lot to say here. It is subtracting. It continues to subtract. I’ll let the professional pundits yell at each other about.

Net Exports Though the net was unchanged both imports and exports are strong. This is a good sign generally. It also supports data suggesting the non-oil import gap is dropping.

I still expect Q2 to be stronger. Macroeconomic Advisors has revised down. I haven’t looked at what they are revising down on, but I am guessing it is imports and PCE due to gas prices.

Going Forward

The fundamentals still look better and better. Payrolls have shown the right momentum for some time now. Government is of course a persistent drag, but private employment is doing well and the fundamentals for structural investment are steadily building.

All that having being said these are not the kind of real time numbers that you want to be seeing. The manufacturing indexes were all down, which is highly disconcerting.

Color Commentary

Yglesias has called this the conservative recovery. Its more than that, it’s the liquidationist’s recovery. What recovery there is, is powered by equipment and software.

If you want to look at higher line numbers, which many people will, then you could say that Investment was about as large a contributor to growth as Consumption. And, of course government continues to be negative.

Digging a bit deeper a liquidationist might say that the consumption is coming back in line and the bloated segments  economy, construction and government, are shrinking. What’s going is investment in better capital and technology.

…Brad Delong has it:

In 20 years, historians will interview the then-aged monetary, banking, and fiscal policymakers of the 2000’s. They will ask them why they did not take more aggressive steps to return nominal incomes and demand to trend levels when they were sitting in the hot seats. I already wonder what their excuses will be.

I don’t care much for what the fiscal policymakers will have to say…I’ll be largely interested in the state of monetary policy-making in 20 years, and how our crisis will look through that future lens. Will this chart haunt our current monetary policymakers’ future nightmares?

In response to my last post a commenter says

The issue is that the Ryan plan’s chances for passing during this Congress were sunk from the start. There are clear benefits to pushing through an unpopular policy that you believe in if it has a real chance of passing. The Democrats did this last Congress and though they lost a lot of seats, they did end up getting their policy passed in the end.

The Ryan plan never had that chance. The budget had pretty much zero chance of getting 50, much less 60, votes in the Senate and even if it did somehow pass, it would have been vetoed by the President. The only real way for the plan to ever pass would be to focus on doing well in the 2012 elections and passing it then.

I think this is a slight-of-hand approach. What you are saying is that this we are going to accept that this measure is unpopular but wait until we have the majority on some other mandate, pass it and then cross our fingers.

This seems plausible but I think in context it doesn’t look so great.

The problem is that people disagree in principle with what you are trying to do. If you pass it as a one-time shot then that really stacks the deck in favor of the Democratic party surging back to power and reversing the measure.

However, if you stake out a claim that this is what you are about then you can try to build genuine support. Hardcore partisans will be strongly motivated to find arguments in favor of the position. If you keep pushing it the media will keep talking about it. Think tanks will mobilize around it.

Moreover, suppose the idea is just out there as a major plank and everyone knows it. Then if at some point folks decide that they just can’t take the Democrats anymore, then they are implicitly saying, okay I willing to swallow RyanCare in order to get rid of the Dems.

On the other hand if they are shocked then suddenly they will pull back.

I am not saying this is the strategy, but it makes sense as a strategy.

So I know a lot of people are scratching their heads over why Paul Ryan is making the GOP vote on his budget proposal when the predictable outcome was this


Now, again, I am just an outside the Beltway academic but it seems to me that if you really want to replace Medicare without a voucher system then you have to get people to vote to replace Medicare with a voucher system.

If you can’t get people to take this vote or you can’t build a congressional majority of people who would be willing to take this vote then your chances are sunk.

Moreover, time is not on the GOP side here. Not only are demographics moving in the Democrats favor but the general ethos towards universal health care is growing.

Even Tea Party folks that I talk to on the ground tie themselves in knots over this issue. They say things like: of course no one should have to go without chemotherapy because they can’t afford it, but . . .

My long point is that the moment someone says that the analysis is over. You simply must be willing to let people go without treatment or there is no real issue.

No slight of hand or rearranging pieces on the chess board is going to change the fact that if you devote real resources to medical care you will devote fewer to other things.

Further there is no close at hand innovation to make us think that people are going to stop getting sicker as they get older. Thus no matter how effective any one treatment is you are always fighting an uphill battle of increasing costs.

All of that being said, I really didn’t think the Ryan plan was going to work. However, if you did think it was going to work it makes sense to go all in. And, really to keep going all in no matter how badly you lose.

What else are you going to do? What would be the point of winning if you couldn’t accomplish this?

He says

I disagree on worrying less about the overall level of taxes. In my view, the low quality of the U.S. public sector reflects a complicated tangle of political economy challenges that are best addressed through spending discipline, transparency, decentralization, and incentives for improving public sector productivity. To not worry about the overall level of taxes is to cede the argument to those who want to more generously fund dysfunctional public programs that benefit incumbent providers more than the intended beneficiaries.

I want to make the point that this is an argument about government consumption not marginal taxation. In representative agent taxation models they are arguments about the term T.

I understand why in common intellectual discourse these two things get conflated, but I do want to make the point that they are not the same.

There is a point about incentives – this is one thing

There is a point about the size and influence of the state – this is another thing.

At least on some level we should recognize that they are separate even if in the day-to-day tug between liberals and conservatives they must be conflated.


Let me give you a real world example, though of how they might be actually come untangled.

Suppose that the government was blessed with some natural resource – say oil – that allowed huge amounts of government consumption without taxes. My point is that this would depress the productive economy.

Suppose, another government raised taxes in order to pay down a huge debt –say incurred by fighting WWII – that would not depress the real economy.

UPDATE: Both Lane Kenworthy and Reihan Salam were speaking about the overall level of taxation in a country.  This is different from the direct effects of increases in Marginal Tax Rates. For example, you could get higher taxes from eliminating tax loopholes.

I just read Offshoring Bias in U.S. Manufacturing, by Hausman et al. It was illuminating, especially in relating the offshoring bias to the outlet bias in the CPI, an issue that I understand.

A brief update for readers

The outlet bias is the problem of Super Wal-Mart and everyday low prices. Do these prices really mean that shoppers are getting a better deal or does Wal-Mart offer lower prices because it’s a worse place to shop.

The way the BLS adds things up it assumes the latter, however, some economists have argued this doesn’t make sense.


  1. Some of the goods are really indistinguishable and the price difference would have to amount to an enormous difference in quality of shopping experience
  2. When Wal-Mart comes into town everyone else lowers their prices. If Wal-Mart’s prices were lower because its an inferior place to shop this wouldn’t happen
  3. Wal-Mart drives other folks out of business. If Wal-Mart were inferior this wouldn’t be happening.


Ok so now lets more to international relations and think of China as the new Wal-Mart. When China moves into a sector the prices drop. Is this because Chinese goods are worse or because they are just cheaper.

All the reason that make us think Wal-Mart is just cheaper make us think China is just cheaper.


But here is where I still have questions?


For consumer goods its clear that this matters because we are comparing dollars to utility. Its not totally clear why it matters when we are comparing intermediate goods, which is what offshoring is about.

Lets give an example, this is fictional though though real names are used to implicate the guilty.

Apple Starts out building its own Ipods in California.

It pays $200 for product manufacture and sells the device for $250. That’s $250 of American GDP.

Now Apple figures out that the device can be made in China for $50. It still sells the device in America for $250.

How much American GDP is that. Is it $200. That is the $250 sale price minus the $50 import price.


Is it $50 of GDP.  The Chinese manufacturing only cost $50 but it is the same as $200 worth of American manufacturing.  Thus we really imported $200 worth of stuff and sold it for $250. So that’s only $250 – $200 = $50 of GDP

Mike Mandel and the Haussmann paper seem to be arguing the later. However, the former still seems right to me.

In this case the value-added of retailing the product simply shot up.

It seems that this has to be the case because otherwise the consumer price of the Ipod would have fallen to $100.

If Apple is capable of selling a product that cost only $50 to manufacture for $250 then it must be producing value somewhere.

Now there can be a robust argument about where. Maybe it all comes from supply-chain management rather than traditional innovation. Yet, if so that is a skill.

You might say “doesn’t it come from China” but if it did come from China then why doesn’t either competition drive down the consumer price or drive Chinese export prices up?

I am open on this but at this point I still need some help seeing the point.

Arnold Kling:

Keep this in mind when someone tells you that other countries have shown how to reduce the cost of health care. No other country is as fanatical as we are about doing cancer screening. My guess is that it is not the magical efficiency of single-payer health care that holds down spending in other countries. Instead, they have chosen not to budget for cancer screening to the extent that we have.

If we adopt a single-payer system here, my guess is that we will not cut back on cancer screening. If anything, we may do more of it.

This reasoning does not sit well with me. I have been skeptical of economics attempt to boil everything down very obvious incentives but one does have to ask – why does America choose to do more cancer screening?

Perhaps, its because its not immediately clear that screening costs come from the public purse.

The coarse, real world observation is that public services seem less well funded than private ones.

The Hansonian explanation is that one cannot signal status by buying expensive public goods.

If Health Care became publically funded doesn’t that at least suggest it would become starved for funds.

Tyler Cowen has famously talked about the innovation slowdown. Paul Krugman for years derided the internet as a diversion.

Some of what’s going on is misinterpretation of what progress looked like.

To put it in really abstract terms the mechanical revolution turned about the be a really big deal. The fossil fuel revolution took it even further.

However, part of what happened is that the made a big difference in the world you could see. The built environment just looked a lot different.

People, however, don’t really exist in the built environment. People exist in their minds. Nozick aside, it is the consistent generation of felt experiences that matter. Whether they have some strong analog in the outside world, whatever that might mean, is kind of beside the point.

The outside world only matters because it seems to present limits to the ability of our minds to function. Cold minds, can think of nothing but getting warm. Hungry minds can think of nothing but getting food. Dead minds cannot think at all.

This forces us to deal with the external world. However, imagine that we conquer hunger, cold and other extreme conditions. In more common terms lets say our basic needs are taken care of.

Then the mind is free to explore as it wishes and we should expect an economy of the mind.

This is in some sense the economy of Tech and Ed. Modern information and communication technology is about interacting as directly as possible with minds.

We have sights and sounds delivered directly to us. We are able to communicate with friends and family around the world. We can build relationships and share ideas. Relationships in particular are what minds really want to do.

All that physical stuff was just a crude means to that end. It would not be surprising if that part of the economy languished almost forever more.

Indeed, on a slightly different note, I am wondering if there is not a significant “backslide” in our near future. As virtual communications become more powerful and ubiquitious it makes sense that the value of physical face-to-face communication will fall.

By no means has this happened yet. Indeed, it appears that in many areas the value of physical face-to-face communication has risen. Yet, this just doesn’t seem consistent with the long term fundamentals.

Are we in a face-to-face bubble?

This is what fuels my growing interest in radical exurbanism. The idea that developments in telecommunication will allow people to live far away but still have business relationships.

We might then imagine living arrangements evolving solely around being near family and friends. A sort of extensive network of small towns, each containing people highly sorted to wanting to live within the norms of that small town and with the people of that town.

If there is cheap transportation, this makes this even more possible. Imagine driverless electric autos transporting physical goods between these areas at very low prices.

Yet, even if we’ve gotten a long way past hunger and cold, we are not far past death. This still leaves open the door for a world in which Med grows in importance.

Now its actually possible that the force of Med will drive the geographic economy in the opposite direction, as downtowns are defined as the centers of medical activity. I don’t know.

A few comments on this piece by Alyssa Katz, made less charitable by their brevity.

Her thesis comes through more or less here

We now know that it’s possible to lend to high-risk, low-income borrowers with minimal chance of default. Yet the kinds of loans that help those borrowers succeed are precisely those that are now most endangered. The North Carolina team found that just three perverse loan features overwhelmingly determined whether a borrower would default: a loan is sold by a mortgage broker; has adjustable interest rates; or imposes pre-payment penalties on borrowers who seek to sell or refinance.

It sort of depends on what you mean by high risk but if what you mean is that it is theoretically possible to lend to an unemployed black man in a string vest, while enjoying low levels of default, then we have sort of always known that.

Indeed, not only that but some folks were wildly successful at it for a time. We called them subprime brokers.

It was not for rank stupidity that people got into this business. It was not for obsessive greed that they lost 100 year-old financial empires.

Lets check the tape.

Notice that not only are delinquency rates falling but foreclosure rates are collapsing.


I obviously have much much more to say about this entire issue but the core fallacy is that bad consequences proceeded from bad actions.

If only we had done the “right” thing, things would have been different.

I have found basically no level from the man on the street to the most sophisticated analyst were some form of this thinking is not driving his or her conclusions.

Yet, the world just is what it is. Shit happens. We can talk about why shit happens, and if – and I mean if – anything can be done to mediate that. We can and should have longer conversations about what to do to help people after shit has happened to them. 

Yet, there should be no presumption that awfulness is avoidable and certainly avoidable by individuals behaving in a “good way.”

Crime is still falling

The number of violent crimes in the United States dropped significantly last year, to what appeared to be the lowest rate in nearly 40 years, a development that was considered puzzling partly because it ran counter to the prevailing expectation that crime would increase during a recession.

Kevin Drum beat me to the biological determinism podium

the cohort effects from lead abatement efforts and the introduction of unleaded gasoline probably continue to make themselves felt, so this might not be as mysterious as it seems.

Apropos of Adams early post: Maybe 15 years ago I was a hardcore Tabla Rasa supporter. There was no way I could imagined myself waking up, believing anything different.

Today, I frequently say: crime and poverty in the first world are biological diseases and one day they will have a biological cure. Our purpose right now is to ease the pain of all those afflicted.

Ironically, I think liberals tend to be less accepting of biological determinism, but it was my acceptance of it that led me to be increasingly in favor of efforts to help the first world poor.

If these are biological effects, genetic or environmental, then by what moral compass can we compound their suffering through our public policy.

The Future of Humanity Institute recently reported the results of a survey conducted at their 2011 Winter Intelligence conference. The survey asked participants, who came from fields like philosophy, computer science and engineering, and AI and robotics, several questions about the future of machine intelligence, and one of the results is somewhat worrying. Participants were asked the following question:

How positive or negative are the ultimate consequences of the creation of a  human‐level (and beyond human-level) machine intelligence likely be?

They were asked to assign probabilities to: extremely good, good, neutral, bad, and extremely bad. Here is a box-and-whisker plot of the results.

The most likely outcome is extremely bad. Eyeing it up it looks like a good outcome of any degree (extremely good + good) is less likely than a bad outcome of any degree (extremely bad + bad).  Given that these experts think that the result is most likely very bad, why do we hear such little discussion about how to stop intelligent machines from being invented? In response to a question about what kind of organization was most likely to develop machine intelligence, the most probable was the military. This means we have something of a lever with which to try and slow them down. Should DARPA be shut down?

Participants were also asked when human-level machine intelligence would likely be developed. The cumulative distribution below shows their responses:

The median estimate of when there is a 50% chance is 2050. That suggests we have around 40 years to enjoy before the extremely bad outcome of human-level robot intelligence arrives. The report presents a list of milestones which participants said will let us know that human-level intelligence is within 5-years. I suppose this will be a useful guide for when we should start panicking. A sample of these include:

  • Winning an Oxford union‐style debate
  • Worlds best chess playing AI was written by an AI
  • Emulation/development of mouse level machine intelligence
  • Full dog emulation…
  • Whole brain emulation, semantic web
  • Turing test or whole brain emulation of a primate
  • Toddler AGI
  • An AI that is a human level AI researcher
  • Gradual identification of objects: from an undifferentiated set of unknown size- parking spaces, dining chairs, students in a class‐ recognition of particular objects amongst them with no re‐conceptualization
  • Large scale (1024) bit quantum computing (assuming cost effective for researchers), exaflop per dollar  conventional computers, toddler level intelligence
  • Already passed, otherwise such discussion among ourselves would not have been funded, lat alone be tangible, observable and accordable on this scale: as soon as such a thought is considered a ‘reasonable’ thought to have

There you have it. These are things to look out for, which may foretell a robot disaster is on the horizon. Of course if that last respondent is right, it’s probably too late already.

Robin Hanson continues the theme

Here are the reviews I found on cancer screening:

Breast cancer:

Colorectal cancer:

Prostate cancer:

Lung cancer:

While cancer screening does consistently lead to more cancer detection and more cancer treatment, it consistently doesn’t lead to lower mortality.

There are about 200 Million adult American citizens.

Suppose in 2008 the US government just credited every single one of them with $100K and floated $20 Trillion in debt to cover it.  A few questions

  1. Could the US have floated $20T in debt. On one level the US can float as much debt as it wants so long as the Fed is targeting the Fed Funds rate. So the question is: would this lead to hyper-inflation?I don’t know. I doubt it but it depends on how much would have gone to immediate spending versus paying down debt/savings.
  2. Lets say 90% went to savings/paying down debt. Then that’s an immediate fiscal stimulus of $2 Trillion. Not bad and certainly not hyper-inflationary.
  3. Lets say that $18 Trillion went to savings/paying down debt. That is enough to get America of the balance sheet crisis caused by the crisis. We lost about $18 Trillion in wealth, top to bottom.

FRED Graph


Okay now but you would have a huge increase in government debt. Looking at 2008 levels we would have gone to just under 30T in government debt

FRED Graph

Assuming that a huge stimulus and a repair of US balance sheets fixed the recession we would be looking at a GDP of around 17 Trillion today and so a debt-to-GDP of 175%.

However, given the huge income boost that had just come, it would have been feasible to let the Bush tax cuts expire on everyone. That combined with lower public assistance and a larger tax base should have tipped the US towards budget balance.

This means that the Debt-to-GDP ratio would begin falling fairly rapidly. At a rate of about 5% per year.

If we look at the total debt in the year 2030 would we it be higher or lower for having pursued this strategy? Its not clear that we would be higher.

I am not arguing that this would have been workable politically or otherwise, but just as a theoretical exercise it seems interesting.

We might want to ask though: how could we get something from nothing? How could we borrow a bunch of money and still owe less.

The two part answer would be

A) that we are employing resources that were idle

B) We are exploiting the fact that the US government can issue credit at lower cost than the US people collectively, even though the government is the people. Indeed, at lower rates than essentially any individual American.

Interesting stuff.

If there is genuine interest here I will go into more detail but right now I should lay out some brief responses.


In the future there will be robots. These robots will have their wages driven down to subsistence level. Yes, robots will have wages. Yes, they will have a “subsistence level.” Just go with it.  If doesn’t make sense we can take care of that issue in later posts.

Matt Yglesias says

If the “robots” are really mere machines, then it should be easy to peacefully divide up the surplus more-or-less equitably, we’ll transition to socialism and everyone will be happy—it’ll be like Star Trek. If the robots are sentient beings, then we’d presumably be looking at an eventual slave revolt and Communist revolution.

Bryan Caplan responds

Yes, the robots will be mere machines.  But these mere machines will be owned by people.  And though these people will be awfully rich by our standards, even rich people rarely take the "transition to socialism" lying down.  They (or their robot stewards) will have every reason to resist expropriation like any other capitalists.  In the short-run, that means investing less and consuming more – and capital flight if the transition to socialism looks serious.


So I am just going to stake this out hardcore. The robots will be people. The will not be Stems, the term I use. Stems are flesh and blood people like you and me.

The robots will be EMs. But, they will be as much a person as you or I. Indeed, they will likely remember having been a Stem.

This is because the most feasible way of making a robot is to just copy a flesh and blood human brain. Since we don’t know how the brain works, we have to replicate it wholesale to get a robot brain just as powerful.

You are going to want a robot brain as powerful as a human one. Sub-human robot brains will be driven out of the market.

This means the robots get the ability to feel jealousy right along with the ability to engineer new products. Unless, someone figures out how to separate one from the other, we are getting both.

However, the analogy isn’t as Matt suggests a return to the late 1800s. It’s a return to the 1600s. The Stems won’t be capitalists. Indeed, robots will probably own and control most of the capital, and earn relatively low profits doing so.

There is an issue with intellectual property but I am betting that the intellectual property rights are significantly weakened in the wake of the Em revolution. Many minds means that thinking is much cheaper and the monopoly rents from IP will be less tolerable.

The Stems will be landed gentry. Their wealth will come from the fact that Stems own the natural resources of this world and those will be in extremely high demand.

I am willing to bet that all Stems will enjoy some level of extreme wealth because it will be given to them by other Stems. Not as high as the richest Stems, of course, but far far above an EM. Being wealthy will likely be seen as a Stem birthright; something that differentiates us, from them. Since, this birthright is cheap to confer and it supports a status hierarchy I think it is likely to evolve.

Further, the EMs will likely not be slaves because there will be no reason to enslave them. The rent on land will exceed the profits from running a slave operation.

Lastly the EMs will not revolt because there will be little to gain. The enormous wealth of the Stems comes from the fact that there are so few of them in comparison to the EMs. If land commands no larger fraction of world income then it does today, it would be trivial to redistribute it.

However, if world population is literally billions of times higher, then STEMs are extremely wealthy because you are taking a tiny slice of a huge amount of economic output and then giving it to an incredibly tiny fraction of the population.

Lastly, I haven’t bounced this off of Robin, but I tend to think democracy goes the way of the Great Abundance. That is, into oblivion. There is no reason for the common EM to bother being involved in politics when no policy can change the basic living standards of your class.

The future is oligarchy.

Ezra Klein quotes Christina Romer on the dollar

At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries. But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.

This is more or less the economic-y answer; the one I learned sitting on the intellectual knee of the good and the great.

Yet, I have come to doubt it recently. There will be a couple of strand of thought here. As usual you are getting undigested musings and analysis.

First, as Michael Pettis points out – if a strong currency is so good, how come so many countries are reluctant to receive this bounty. We could say – as is typical in economics – different strokes for different folks. But, when everyone seems not to want what you’ve got this should at least make you stop and wonder.

Second, all of sorts of things that the public feels are “bad” come from a strong dollar. Manufacturing jobs are more scarce. The public and private sectors are encouraged to run-up more debt. There is “overconsumption.”

Now, yes I have the natural economist tendency to scoff at all of this and tell the public that these are great things. If we can make cars with a printing press rather than with autoworkers that’s a good thing, not a bad one.

That is, foreigners want to hold dollars. However, for them to get dollars some American has to give them dollars. How do you make an American do that? Well, one way is to sell the American a car. He or she will then give you thousands of dollars in exchange.

However, since what you want is the dollars themselves and not US goods and services, the American has essentially gotten the car simply by using the printing press. The printing press shoots offs some dollar bills. We give the dollar bills to foreigners, they give us a car and everyone has a nice day.

This is appealing. But, why do people persistently act as if this is undesirable? Maybe they all simply misunderstand the world. Or, maybe our analysis is incomplete. Maybe the problem is that the dollars must originally come through increased borrowing by someone. The Fed is not just handing out Benjamins after all.

Maybe the fact that all of this has to run though the Financial System implies that the financial system is able to capture all of the benefits, leaving the average American only at a competitive disadvantage employment wise.

I don’t know, but I am interested.

Third, I have been thinking about preferences over beliefs. Bryan Caplan awoke me from my dogmatic slumber over this issue. People want to believe certain things. Rational irrationality and all that.

(Yes, some of my family and friends will complain that I floated the phrase rational rationality well over a decade ago but that had a different meaning. It was about issues that now come under the heading of limited attention.)

Anyway, people have preferences over beliefs. Well then shouldn’t those preferences count for something? And, if so how do we count them? Suppose everyone just wants a strong dollar. No reason. They just want it.

Is that somehow less meaningful than wanting to eat a burrito? If so why?

Now if that ain’t twisted enough, exactly what are we doing if we convince them not to want it? Are we doing good? Are we helping people? If it is good to help people achieve their preferences then is it bad to alter their preferences towards something they have not achieved?

I realize that the effect here might be small in comparison to the massive effects of movements in the dollar but it reminds me other issue and I think the issue is at least intriguing.

Here are some related and powerful insights from Robin Hanson over the past few years where he identifies a bias that motivates much more of our thinking that we’d care to admit. The general theme is that our we are biased in our beliefs because they are more than just beliefs to us:

Don’t Believe

In my experience “I believe X” suggests that the speaker has chosen to affiliate with X, feeling loyal to it and making it part of his or her identity. The speaker is unlikely to offer much evidence for X, or to respond to criticism of X, and such criticism will likely be seen as a personal attack.

Feel the warm comfort inside you when you say “I believe” – recognize it and be ready to identify it in the future, even without those woods. And then – flag that feeling as a dangerous bias. The “I believe” state of mind is quite far from being neutrally ready to adjust its opinions in the light of further evidence. Far better to instead say “I feel,” which directly warns listeners of the speaker’s attachment to an opinion.

Bias: The Evil Pleasure: 

We feel a deep pleasure from realizing that we believe something in common with our friends, and different from most people.  We feel an even deeper pleasure letting everyone know of this fact.  This feeling is EVIL.  Learn to see it in yourself, and then learn to be horrified by how thoroughly it can poison your mind.  Yes evidence may at times force you to disagree with a majority, and your friends may have correlated exposure to that evidence, but take no pleasure when you and your associates disagree with others; that is the road to rationality ruin.

There is another old post of Robin’s I think about often but cannot seem to find that offers a way to check yourself against biases like these. Since I can’t find it, I’ll try to summarize it.

Think about beliefs that you hold and imagine yourself changing your mind. Literally imagine waking up tomorrow with a changed mind and imagine how you would or wouldn’t discuss changing your mind with people you know. Feelings will be strong for beliefs that are important to our identities or that we value for some signaling purpose, like signaling affiliation with some group. Can you actually imagine yourself with these changed beliefs, or is it unthinkable?

In his post Robin argued that people often convince themselves that they truly reconsider their strongly held beliefs, but what they do is false reconsideration with the real purpose of reassuring themselves and strengthening the belief. Before it was just a strong belief, but after false reconsideration it’s a strong belief that they’ve really, definitely, seriously reconsidered. But if you can’t  imagine yourself going through the day holding another set of competing beliefs than you never actually reconsidered it.

To provide a concrete example, I think many religious people tell themselves that they truly reconsider some of their deeply held religious beliefs. But can they imagine waking up tomorrow a non-believer and telling their significant others, parents, friends, children, and people in their church that they are now non-believers? If not, can you at the very least picture lying to these people about your beliefs for the rest of your life? If you can’t seriously tell yourself you could do one of these, you should be skeptical that you’ve ever really reconsidered your beliefs.

Conservatives, could you imagine becoming someone believes that higher taxes and unemployment insurance don’t hurt economic growth or employment? Liberals can you imagine becoming someone who believes that that minimum wages decrease employment and fiscal stimulus doesn’t work? If the answer is no, you should think about whether it’s because holding such a belief would conflict with your identity or affiliations.

Sorry for the many posts but things keep occurring to me that need to be made explicit to make sense out of taxation.

When you do basic economics you use what are called Marshallian demand curves. These represent the real world relationship between the price of an item and how many will be sold.

When economists think about the choice to work, they think that it is basically the inverse of the choice to buy leisure. Imagine that the baseline is you will work as much as your body can withstand. This isn’t actually that far off from the way some humans have lived.

Now imagine that as you get richer you choose to buy something and one of things you “buy” is not working. The reason you buy not working is because every hour you don’t work you lose some amount of money that you could have earned.

So there are two types of things you can buy regular consumption and leisure. Leisure is our term for “not working.”

Given this labor supply, is just the mirror of leisure demand. If people buy more leisure they are buying more “not working” and so they are selling less labor. If people buy less leisure they are thus selling more labor.

Now, Marshallian demands can be “decomposed” into income effects and substitution effects. When the price of something goes down you buy more of it for two reasons. First, because it is cheaper relative to other things. That’s substitution effect. Second, because you are now effectively richer, thats the income effect.

Usually income and substitution effects go in the same direction and magnify each other.

There are a few cases when they go in opposite directions.

One is inferior goods. We won’t go into that right now.

The second is leisure. That’s because the price of leisure going up is the same thing as your wage going up. That means a higher price of leisure makes you richer not poorer.

This is why labor supply is thus has both income effects and substitution effects.

Okay, but here is the rub.

Economists are also very concerned about efficiency. Many efficiency losses can be represented as deadweight losses. You may have learned about calculating deadweight loss by looking at harbinger triangles between the demand and supply curve.

There are a number of problems with this analysis. But, we will focus on one.  Marshallian demand curves trace out not only changes in what you choose to do, but changes in your opportunities.

Strictly speaking inefficiency is when you choose to do something that is worse than something else you could have chosen to do. However, if what’s happening to you is that you just don’t have as many opportunities in life and are adjusting to that fact, then that’s not inefficient. That’s just sucky.

To adjust for that economists created what are called Hicksian demand curves. Hicksian demand curves pretend that you are in a world where your possibilities for happiness stay the same, but the prices of things move.  The way it works is that if prices move in a way you don’t like you are given enough money to make up for that fact.

Because labor supply is the inverse of leisure demand we can imagine a Hicksian labor supply curve.

If we want to measure the “true deadweightloss” then we have to use Hicksian labor supply. However, because Hicksian labor supply compensates you for any income effects then you are just measuring the substitution effect.

Okay – all of that out of the way.

When we think about policy what policy makers are concerned with is Marshallian labor supply and that makes perfect sense. Its not a misunderstanding of welfare economics.

Suppose that an increase in tax rates had no change in Marshallian labor supply. So the labor market looked basically the same before and after the tax increase. The difference is now the government is using more of your money to pay down debt.

We might even see economic growth pick up depending on where we are in the business cycle.

Yet, if we measured the true deadweight loss using Hicksian demand we would see that it is still there. Its just that the loss is coming all out of lost leisure rather than lost consumption.

The reason that policy makers don’t need to think about this as an “economic effect” is because that deadweight loss is captured by the taxpayer’s desire not to pay taxes.

For example, someone with a mortgage and kids might have a huge income effect that causes them to actually work more. They will express this. “I’ll have to work nights to pay for this tax increase”, they will say. “It will be horrible. I’ll never see my kids.”

They are describing welfare loss of forgone leisure in words and stories. These stories are not lost on policy makers. Thus policy makers do not need economists to remind or correct them about those type of effects.

Most people “get”  the welfare loss of taxes when they see immediately that it would be insane to tax your neighbor in order to send you a check and then tax you the same amount in order to send your neighbor the same sized check.

To make sense taxes must buy something special, like aircraft carriers, schools, roads, or checks for people who pull our heart strings like the poor, elderly, sick and disabled.

This implicitly acknowledges a welfare loss to taxation. If there was no welfare loss then it would be neither here nor there whether we taxed you to give to your neighbor and taxed your neighbor to give to you. People would say, sure as long as I end up with the same amount in the end, what do I care. Yet, no one says that.

Just another quick reply to something Reihan wrote

Basically, I think the evidence that MTRs have efficiency costs is pretty clear. The question is whether or not these efficiency costs are worth bearing. If raising revenue is our goal, there are far less costly ways to do it, e.g., eliminating tax expenditures. 

Part of the issue here, incidentally, could be a disagreement regarding what is and is not “bad for the economy.” I don’t think that small increases in MTRs are in themselves “a disaster,” and I’ve never suggested otherwise. Rather, I think that high MTRs create work disincentives that dampen labor supply and reduce the overall level of economic activity. If these revenue gains can be achieved through less costly measures, which is to say measures that create less in the way of deadweight loss, I’d much prefer that we pursue those measures.

That MTR have efficiency losses and that they create deadweight loss is clear.

This is not the same question as whether they create GDP loss.

If someone works more because the MTR made them feel poorer that is inefficient, but it could cause a gain in GDP.

Reihan Salam replies

The view that higher tax rates have very little effect on the economy will continue to persist, regardless of the arguments and evidence we bring to bear. I do recommend reading Arpit Gupta’spost on reconciling Edward Prescott’s macro estimates with the work of Raj Chetty et al. on Danish tax records:

On some level that is of course right but I do think there is room for constructive debate. As a point of evidence, I would offer that I used to believe the exact opposite of what I know believe, so some change is possible.

Also, what I think of as a very GMU-y approach to the subject helped solidify my present perspective. That is, say the model we are thinking about is true. What does that tell me about the world generally? Do those observations seem to be true?

I’ll note that this cuts opposite ideological ways on two big economics controversies.

First, the minimum wage. Its just going to take a lot of work to convince me that the minimum wage does not depress employment opportunities. Its not impossible, but you are climbing a steep hill and to my mind Card and Krueger and their intellectual decedents just haven’t gotten there yet. They might get there but there is a serious “lying eyes” problem.

The second, is the issue at hand – marginal tax rates and labor supply. Here the hill is likewise large and the evidence so far weak. You have to beat back enormous amounts of introspection, basic observations of human behavior and 200 year trends in work habits. That’s a big hill.

The evidence presented so far just doesn’t get very far up that slope.

Let me talk a little bit about Prescott’s work because its similar to stuff I have done myself. Chetty’s paper is a tour de force and the issue of frictions is important. However, its not clear to me that in the case of marginal taxation there is really anything to be explained.


Prescott uses the following utility function


Which is similar to the one I model with. The separable log is attractive because it the right properties and is analytically relatively easy.

However, with this function almost all of the effect of a larger government sector is done through government spending or in modeling terms Transfers (T). In his later equation it is this element.


If you work the problem that way then you are basically pushing down the income effect through the use of the term T.

The built-in assumption is that the government taxes money away from you and then gives it right back to you. So, the net effect is essentially only the substitution effect.

If I remember correctly following is true:

Once you have chosen to use separable log utility the income and substitution effects necessarily cancel out. That is, an increase in the real wage must increase consumption and leisure by the same out. The distribution of time between consumption and leisure is determined only by (1) the co-efficient on the leisure’s log term, in this case ALPHA; (2) the amount of hours in your endowment, in this case 100; and the exogenous income, in this case T.

The relative price between labor and leisure cancels out.

Now all of this is actually the origin of my position that its government benefits, not taxes that cause the decline in labor supply. However, when you start to think of this in a human context it makes sense as well.

Its also consistent with broad observations about taxes raised to in an effort to cut deficits. Since, in that case the labor reducing effects of Transfers would have already occurred.

Josh Barro writes

The United States has tremendous available fiscal capacity, as demonstrated by significantly higher tax burdens in most other first-world countries. The real risk of elevated spending is that we’ll adopt a permanently higher level of taxation.

That is a risk, but not a catastrophic one. While there is a link between government spending and economic growth, it is not as strong as conservatives like to believe. For example, Mueller and Stratmann find that a one percentage point rise in government spending as a share of GDP will tend to reduce annual GDP growth by a bit under one-twentieth of a percentage point.

I think Josh’s points are well and good but they present an opportunity for me to make another point.

To spend may be to tax but taxing and spending are not the same thing. There are many reasons why but an important one is the effect on economic growth.

For a lot of reasons it makes a lot more sense to think that increased government spending will slow economic growth over the long run than increased taxes.

That is, suppose that the government raised taxes and used them to fund a truly profit seeking sovereign wealth fund. This is probably not possible in diverse democracy like the US but for either ethnically homogenous countries or non-democracies it might be possible.

In that case taxes go up, but government consumption does not go up. It makes a lot of sense to think that GDP growth might actually increase under this scenario.

Higher tax rates might very well cause people to work harder as more are pushed into poverty. The taxes are then extracted and put into investment which increases the size of the capital stock, further spurring growth. Even if those capital investments spill out into other countries that will drive down the value of the nations currency and drive up the output of the high productivity tradables sector.

You may have noticed by now that some countries have more or less done this.

Yet, what works for sovereign wealth also works for deficit reduction. Paying down the deficit by raising taxes may very well increase economic growth through the same mechanisms.

Moreover, increasing government spending through debt might slow down the long term growth rate of the economy even if no taxes were raised.

Lastly in my view not enough studies control for the fact that high tax jurisdictions are often high regulation, high union, high occupational licensing and restrictive on immigration. All of these factors are likely to be fairly important.

Real Economic Growth: This concerns our ability to rearrange the molecules and atoms. There is no such thing as true creation. You can’t make something from nothing. Everything that is was already here. You can just rearrange existing stuff into a configuration that is more pleasing to you. This is the beginning and the end of real economics.

Any real economic effect you want to talk about has something to do with why the configuration of molecules and atoms is not as pleasing as it could be.

This is also why technology is a really freaking big deal. It allows us to rearrange with more molecules with more precision.

Finance: This concerns our ability to make promises to one another. Promises are important because they allow us to cooperation and freedom to exist simultaneously. Without that you are stuck either with no-cooperation or coercion.

A key feature about promises is that the extend throughout time. This allows the unusual feature of events in the future affecting things in the present through finance.

Indeed, there is nothing deeply special about this. The distinction between past and future ultimately revolves around entropy and promises serve to lower the entropy of some localized area of the future, thus making it more past-like.

If promises were absolute and never broken then you would be able to remember some portions of the future.

Conversely this is why no complete and stable financial system can ever be created. It would violate the second law of thermodynamics and allow the future to be seen as clearly as the past.  

Government: This concerns the ability to coerce. Contrary to anarchists’ notions there is no such thing as a world without government because there is no such thing as a world without coercion.

In theory we could can have perfectly decentralized coercion, which is the Hobbesian state of nature. However, not only is that not preferable its not consistent with evolutionary psychology. Left to their own devices children, chimps and Chihuahuas will form coercive hierarchies.

Kevin Drum basically gets this right. He says a unnamed blogger is leaning heavily on the work by Saez and others on how much extra income you get from increasing taxes.

I am pretty sure I know who that blogger is but I suppose he has his reasons for remaining nameless. Anyway Kevin looks at the research and responds

In other words, when taxes go up on the rich, they do report lower incomes. But that’s mostly because they’re fiddling with the tax code to report lower incomes, not because they’re actually earning any less.

This all gets mixed up because of identity politics and such. I teach the Laffer Curve in my class. I explain that there is maximum rate of resource extraction that even the tyrannical government can achieve.

All of this is really straight forward. People don’t like you taking their stuff and will do what they can to avoid it.

This is very different from saying the real economy will decline.

Now if people are constantly rearranging their affairs or not availing themselves of the judicial system because they are concerned about hiding money from the government this can cause real problems.

However, lowering the marginal return is not what is at stake here.

What is a stake is that it is more profitable to abandon the property rights system than to play within it. Because the property rights system creates economic efficiencies abandoning it creates loss.

Ezra Klein says

The problem with health-care costs is that they rise faster than wages, GDP or most anything else. That’s why balancing Medicare and Medicaid’s books through straight cost-shifting, as Ryan does, entails such savage cuts in care, and why balancing their books through straight tax increases, as Egan suggests, would be such a disaster. You wouldn’t just need to raise taxes. You’d need to raise them again and again and again, because every tax increase would soon be outpaced by Medicare’s growth.

So suppose that Health Care right now represents 16% of GDP. Suppose also that GDP is growing at a real rate of 3% per year and health care costs are growing at 6% per year. What does that imply about our future.


We can do the same thing in percentage of GDP terms


Is it possible that Health Care is 160% of GDP?

What this is telling us, is one way or another health care costs will not continue to rise faster than the overall economy.

If no other way then because health will eventually become the economy and the two will thus move in lock step.

This is unlikely. If we left things completely to the free market then the individual budget constraint will constrain growth. People simply won’t be able to afford to buy more health care and cost growth will stop. If we fund medicine publically then eventually the public budget constraint will bight. The government will not be able to raise more money to pay for health care and so cost growth will stop.

In either case, however, you don’t have to do anything in particular to make the cost growth stop. No panels. No better technology. No incentives. No focus on primary care. It will stop on its own.

The question before you is, do you want the world where health care is limited only by our collective ability to pay for it. What many elites don’t face up to is that if you asked this question to the person on the street he or she might very well say yes.

I am constantly aware of this because a persistent source of tension between myself and my family is their feeling that it is not just ok but morally imperative that personal budget constraints be hit in the purchase of medicine.

When I explain that it is better to risk death than to pay money to the doctor the response is outrage. This even happens when it is my life that is at stake.

Thus we are not facing a tragedy of the commons scenario where everyone is trying to get for themselves. People are – in my mind foolishly – attempting to give things away to me and to go into debt to do so.

This is a problem that the old ways of thinking about government and society are not prepared to deal with and at this point are not even thinking about how to deal with.

Making the case for less health care spending is making the case for abandoning the sick and the needy. If you want a world that does not proceed on autopilot you need to be gearing up to make that case. Slight of hand about cost-savings or market efficiencies is not going to do the trick.

Ezra Klein responds to my post on tax incentives. He comments

Smith thinks the income effect is stronger. But he’s not thinking about it like a Republican.

Which is interesting in itself, given that I spent much of my adult life as a strident Republican.

Ezra goes on

I recently spent some time listening closely to Republican rhetoric on taxes, and it’s important to realize that when they talk about the way in which even minor tax hikes will destroy the economy, they’re not talking about you and me. They’re talking about the rich. “You can’t tax the people we expect to invest in the economy and create jobs,” explains John Boehner. “Class warfare may be clever politics, but it is terrible economics,” Paul Ryan warns. “To stimulate GDP growth, a tax cut has to cut the marginal tax rates upon which the decision-makers in the economy base their decisions to work and, above all, to invest,” arguesthe Club for Growth’s Louis Woodhill.

The thing is I agree with Paul Ryan’s comment. I think Boehner’s statement is a little shakier and Woodhill’s is essentially wrong.

Ezra has talked to them so maybe he can clue me in, but what I’d have to guess what’s going on here is that Ryan and the other Republicans are believe that you are either for the wealth creators in which case you want to make life easy for them, or you are against the wealth creators, in which case you want to make life harder.

Yet, there is a difference between the idea that the wealth creators do all of these wonderful things for us and the empirical conjecture that marginal tax rates will drive down growth.

These ideas are conflated because paying taxes hurts and it seems like common sense that you wouldn’t want to hurt the people who are providing you with these wonderful things. Perhaps, ironically economics is supposed to help us get past this confusion between good intentions and good consequences.

This issue is a lot more complex than the issue of work incentives, but I think there is reason to doubt that marginal tax increases – in the range that are being discussed – will have major effects on growth rates.

Let me walk through one of them here.

There relationship between taxes and profit-seeking is complex. Evasion, emigration and risk-aversion are important issues to consider. However, I want to start with a simple story on marginal rates, so you can see they may not be as important as you might think.

Lets imagine that wealth creators have two choices: create wealth and pay the taxes or don’t create wealth and forgo the taxes.

If you go with the first option then that’s obviously worse than creating wealth and not paying taxes. However, its likely to be better than the second option, not creating wealth at all.

A concrete example: creating Facebook and making a Billion is cool. Creating Facebook and only taking home 500 million after taxes is significantly less cool. However, its still way cooler than not creating Facebook and not taking home 500 Million.

This example generalizes to a range of options. Think of all the options you have to get rich. Now, think of the one with the highest possible payoff. That’s the one you want to pick and that’s the one that in a perfectly functioning market would be best for society.

Now, take all of your options and cut the return in half, because that’s what you’ll owe in taxes. It turns out that the option with the biggest return before is still the option with the biggest return now. Its still the best thing for you to do and it’s the best thing for society.

If we want to get all fancy town we would say that any monotonic transformation of the payoff set preserves ordinality.

That monotonic transformation bit is a big deal and that’s why we can have much longer and more detailed discussion over wringing inefficiencies out the tax code. However, the marginal rate itself is not what is at issue.

Again, marginal taxes can be very uncool. A Billion is a lot better than 500 Million. However, it doesn’t mean that creating Facebook or Wal-Mart is no longer your best shot at getting rich.

A chart from Jared Bernstein


For those keeping score at home, the idea would be that declining inflation causes unemployment by pushing up real wages. Labor become more costly during a recession because employees expect raises and balk at wage cuts.

Yet, when prices are falling this means that labor actually costs companies more and they cut back.

In any case I am skeptical about this. Not to offend Bernstein but I have to ask whether his wage data accounts for composition effects. More lower income folks got the axe, which would artificially boost the average wage.

Lisa Belkin at the New York Times reports on paternalism aimed at making parents more paternalistic:

…other states have already enacted laws aimed at improving parenting. Alaska fines parents for a child’s truancy. In California, a misdemeanor charge can be brought against a parent if the truancy is flagrant enough. California is also the first state to allow judges to order parents to attend parenting classes if their child belongs to a gang.

I’m going to take the lazy route and sidestep the whole issue of whether these types of policy are a worth trying, and just say that probabilistically, I think Belkin is correct:

In the end, then, all these “punish the parents” paradigms will probably take their historical place as just one more shift of the pendulum in the sweep that already includes contradictory certainties like “children are being allowed to grow up too quickly” and “children are being infantilized too long.” Like every other new way of thinking, it will eventually be looked on as a well-intentioned but flawed reflection of a moment in time.

From HuffPo

LONDON — After Rob Summers was paralyzed below the chest in a car accident in 2006, his doctors told him he would never stand again. They were wrong.

Despite intensive physical therapy for three years, Summers’ condition hadn’t improved. So in 2009, doctors implanted an electrical stimulator onto the lining of his spinal cord to try waking up his damaged nervous system. Within days, Summers, 25, stood without help. Months later, he wiggled his toes, moved his knees, ankles and hips, and was able to take a few steps on a treadmill.

"It was the most incredible feeling," said Summers, of Portland, Oregon. "After not being able to move for four years, I thought things could finally change."

If anything this recession has been unusual in the breath of sectors and workers that have been hard hit. Can all of this be explained by balance sheet effects?

Here are retail sales vs. balance sheets over the last cycle.

FRED Graph

Here are non-goods producing jobs versus balance sheets over the last cycle.

FRED Graph

As I mentioned before recession are usually mild on non manufacturing, non construction producing industries. Here are year-over-year growth rates in non-manufacturing, non-construction jobs since the 1939.

FRED Graph

The problem with a pure balance sheet hypothesis, however, is that net worth has been growing much more rapidly in recent years than jobs, by any measure.

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