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I think it’s a good habit to remind yourself and others about times when you’ve been wrong. Admitting error is an instinctively bitter pill to swallow, so it’s useful to practice it. Framing admission of error as a good mental habit makes you less likely to double-down and put on the blinders when you’re wrong. To be self-critical about the whole exercise, this framing also lets you pat yourself on the back a little for being wrong. A spoonful of sugar to help the medicine go down, if you will.  I’ll go first.

One area where I was wrong about this recession is the extent to which unemployment was being affected by underwater homeowners leading to decreased mobility. I’ve changed positions and been on board with those skeptical of this argument for some time but a new JEP paper from Raven Molloy, Christopher Smith, and Abigail Wozniak provides a useful occasion to draw attention to my wrongness. In short, evidence has continued to mount that housing lock-in has not been a significant cause of housing mobility declines or unemployment, and the observed decreases in mobility are a long-run trend that preceded the recession.

Here is one useful result they report:

We have estimated a number of regressions to explore possible connections We have estimated a number of regressions to explore possible connections between the housing market and mobility since 2005 or 2006. However, we found between the housing market and mobility since 2005 or 2006. However, we found no meaningful correlations between, for example, the share of homes with negative no meaningful correlations between, for example, the share of homes with negative home equity and mobility in state-level data. We also find no evidence that migration fell more in the recent period in states with larger declines in housing market tion fell more in the recent period in states with larger declines in housing market activity as measured by sales or prices.

In the end they summarize their results thusly:

In summary, we i In summary, we find little evidence that the decrease in migration since 2006 is related to demographic, socioeconomic, or cyclical factors.. The small roles for the labor and housing market should not be surprising, because the recent change migration appears to be a continuation of a downward trend rather than something specific to the recent period.

The story of housing lock-in led labor mobility declines and labor market impacts is theoretically and intuitively appealing, but it must be said that the evidence has strongly rejected it so far. If there is an argument in favor of housing lock-ing that rebuts the evidence in the JEP paper I’d be glad to read it because… well, I’d rather be right than wrong. But so far it’s not looking like this is the case.

From San Fran Fed

This evidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio. Figure 2 compares the actual and model-implied P/E ratios for the sample period ending in 2010. We calculate the path for the model-implied P/E during the sample period by feeding in actual M/O ratios.

Projected P/E ratio from demographic trends

Noah Smith asks

So here’s the question: what if our slow rate of innovation is due not to an inexplicable slowdown in the arrival of new ideas, but from the fact that China has made the discovery of those ideas less urgent?

My answer. Yes.

What should we do about it – tentatively nothing.

I think there is less daylight between us all Mandel, Cowen, Noah, myself than might seem on first glance.

That we should expect investments in the technology of globalization rather than in the technology of more specialized capital and better products is natural.

That this should produce a different set of winners and losers is natural.

That any increase in productivity should see gains accrue to unskilled labor was a happy coincidence.

That unskilled labor in China is experiencing many of the current gains is a happy coincidence.

I still don’t know why this line of research didn’t go further but its important to remember that privatizing the retirement system doesn’t do anything stop mal-effects of a generational bulge.

Rather than government budget problems, you simply have the problem that lots of people are trying to buy stocks at the same time, driving the price up and then on the back end lots of people are trying to sell stocks at the same time, driving the price down.

I think that sometimes lay people get confused and think that a private retirement system implies that people will only be paying in and thus adding to the capital stock. They forget that on the opposite end people will be extracting and thus depleting the capital stock.

The “investment bonus” is only the time between when the money goes in and when it comes out. I wish I could go into more detail, but you actually get the exact same effect from a Social Security trust fund. Less borrowing by the government – and hence a higher capital stock – when money is going in. More borrowing by the government – and hence a lower capital stock – when money is going out.

Altering retirement plans from a claim on the future earnings of labor (Social Security) to a claim on the future earnings of capital (401k) does nothing to change this basic dynamic

One of my favorite fiscal policies through-out the crisis has been to cut the payroll tax. I would have cut both employer and employee and indeed, cut them to zero at the beginning of the recession.

Given that either employers would have used the money to hire or to offest credit losses and retain liquidity. And, that employees would have used the money to spend or pay down debt, I really don’t see how we could have lost from that.

It would have required extremely rapid expansions in the deficit. My proposal would have added an extra $1 trillion a year on to the deficit on top of what already was there. However, it would have provided a punch many times more powerful that what we got.

Anyway, that is history. What is on the table now is an extension of the payroll tax cut put in place by President Obama. The GOP opposes this. Lets not waste time with why.

Lets think about how we can get them not to oppose it. Is a matching or perhaps larger cut in the employer side temptation enough? Is a cut in the corporate rate temptation enough?

These are the ideas I hope folks are kicking around.

So I finally saw “Inside Job.” I actually thought that in terms of giving a sense of the crisis it did a darn good job. It gave a fair sense of what CDOs were and the role they played. It gave a decent description of CDS. Its didn’t really get into the concept of Synthetic CDOs and SIVs, but that would have been pretty amazing to pull off in a Hollywood film.

They didn’t really dig deeply into the fundamental “Other People’s Money” issue – that you can’t repossess strippers and cocaine, but they did mention it. It was in a moralizing, look how bad these guys are way, but still the fact that high levels of consumption create a fundamental problem in credit management were acknowledged.

The thing is – and this is what is weird/interesting about this whole thing – is that I am on the side of the truly bad guys in this movie. That is Larry Summers, Alan Greenspan, Paul Rubin, etc. Though, I don’t think about him much anymore Eliot Spitzer was like my enemy of enemies.

I think that fact that the film clearly gives a pro-Spitzer, anti-deregulationist slant leaves a bad taste in people mouth.

However, the most honest response to that is not trying to denigrate the filmmakers but the Caplanesque – “yeah, but still.” That is, everything you are saying is true, but I just have other reasons for believing what I believe that I think outweigh your argument.

Life is not a Manichean struggle between the forces of light and dark. Issues are genuinely confusing and good people can come to different answers.

That doesn’t mean that we should be satisfied with disagreement. Honest, truth-seeking people can never agree to disagree. However, it doesn’t mean that conscious intentional deceit on the part of our intellectual opponents should be our explanation for failure to reach agreement.

I’ll leave the depth of this argument to my next exchange with Robin Hanson. I’ll try to side step the political landmine by responding to some of my fellow economists. According to CNBC, the National Association of Business Economists:

The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts.

The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases.

As for how to reduce the deficit, nearly 40 percent said the best way would be to contain Medicare and Medicaid costs. Nearly a quarter recommended overhauling the tax system and simplifying tax rates and exemptions. About 15 percent said the government should enact tough spending caps and cut discretionary spending.

Which is all well and good and we can have a deep conversation about about radical entitlement reform. Though I am skeptical about large scale real-world change, on the blackboard I am sympathetic to arguments that the entire Industrial Planning system surround medical care should be abandoned.

That means in part getting rid of Medicare, Medicaid, health care tax deductions. But, of course more importantly, it means getting rid of the FDA. It means legalizing the production and distribution of all drugs.

It means undoing medical and pharmaceutical licensing. Undoing any qualifications whatsoever for practicing medicine or surgery.  Removing any implied responsibility to provide the highest quality service. Removing any implied responsibility to “first do no harm” and generally allowing the medical industry to become a free market.

If you want to buy it and someone wants to sell it, then Godspeed.

Now somehow I think this plan is unlikely to become law anytime soon. However, the same can be said for a plan that dramatically cuts the actual benefits that retirees receive. And, ultimately thats the issue. The reason medical care in the US is expensive is because people use a lot of medical care. If you want it to be cheaper people have to use less.

Good luck with that.

No one has ever done before. People have however successfully raised taxes. I am betting that tax increases are how this gets done.

Legend has it that during a mid-work lunch at Los Alamos national laboratory Enrico Fermi asked “So where is everybody” referring to extraterrestrial life.

The problem is simple. Given the size and the scale of the universe  it seems likely that life has evolved many times over. If life has evolved enough times then some of that life is likely to have become intelligent enough to leave the planet.

And, once it left the planet the exponential growth would leave us to suspect that this life would spread out across the universe. Indeed, that’s the future that many scientists envision for humanity.

However, what are the chances that we are the very first? And, if we are not the first, then well “Where is everybody?”

There are lots of attempts to answer this question but I don’t know if anyone has offered this:

Realizing that the growth of any life is inherently exponential and realizing that the resources of the universe are finite we should expect that in “the end” life will be constrained by resources and that one intelligent species will prosper only at the expense of the others.

Now, we are in a growth period where our technology is advancing so rapidly that resource constraints are actually falling away. We can do ever more with less. However, this is not forever. There is an ultimate limit to our ability to do this.

Practically its probably well below the theoretical limit but at the very least there is so lowest energy way to reorganize subatomic material. Once we have discovered this way, technological advance is no longer possible. We can transform anything in the universe to our liking, with no waste whatsoever.

However, there is only so much universe to be transformed and only so much usable energy with which to transform it. Thus there is an inherent struggle over whether the universe will be tuned to the needs of humanity or to the needs of our some other species.

Knowing this we can anticipate a struggle. Once, we hit the final constraint we will have to take more or the other species will have to take more. Knowing this we should strike before they do. Knowing that they should strike before we do. If we back the entire game up to the beginning then the first one to have the ability to destroy the other should take it.

Yet, we are not destroyed. We are reading and writing blog posts. This implies that no one has the ability to destroy us. Since we have the ability to destroy ourselves we should predict that no species with in weapons range of us has our level of technology.

What’s more this will be true for almost any species that can ask the question “Where is everybody” If you can ask the question you are intelligent and hence a threat. Yet, if you can ask the question you also haven’t been destroyed yet. Thus, if the very fact that you are able to ask the question should lead you to believe the answer will be “Not here . . . yet”

The Japanese Stagnation has become the classic macro case study. For at least a decade it was featured so prominently on our PhD Comprehensive exams that one of my fellow graduate students asked “If the Japanese economy ever recovers does that mean we don’t have to take Macro anymore”

Yet ever now again people ask, maybe macro policy Japan isn’t that bad. Maybe its all structural. They are an aging population after all. 

Matt Ygleisas considers the question

I sometimes think Japan may just be Texas in reverse. The Texas economy is growing sharply because people are moving there, which seems to have confused Richard Fisher into not noticing that it’s in the same severe recession as the rest of the United States. Japan’s labor force is shrinking because of low birthrates, very high life expectancy, and an unusually severe case of aversion to immigrants. Japan also clearly did have a very real recession in the 1990s after the stock market crash. But at first blush it doesn’t seem obvious that present-day Japan actually does have large quantities of idle resources. Japanese firms seem to have coordinated around expectations of sluggish growth and investment, but why wouldn’t growth be sluggish if the workforce is shrinking?

I don’t think that can explain it. Here for example is growth in Japan’s working age population versus growth in employment. Population in blue, employment in red.

FRED Graph

In addition, I think some of the deterioration in working conditions is hidden by the fact that Japan is becoming older and older people have lower unemployment rates.

Here is unemployment for younger people in Japan

FRED Graph

We call it a lot things: bonds, debt, paper, loans. I prefer to call it fixed income in part because that’s what its called in the analyst community and in part because that its most salient feature. In all cases, however, what it seems to be to most people is confusing.

I can distinctly remember reading as a younger man “the corporate bond market is no place amateurs.” At the time that made it sound really elite and sexy. I wanted to learn more.

As I did, however, it seemed like there wasn’t a lot there, there. The formulas could get tedious at times but the basic concepts were bone simple. People agree to pay you a certain amount of money in the future. There is some chance they wont. There is some chance you’ll wish you had bought something else. That’s about the long and the short of it.

I filed it away as intellectually unimportant. Along with a lot of monetary economics by the way. But, that’s another story.

I went on with life.

Along the way I had friends who had problems with debt. I never really paid much attention to it, however. I loaned a few money when I thought I’d get it back. A loaned others money when I knew I wouldn’t.

However, I had never actually been in debt and the extent to which it haunted many of my friends never sunk in. More a reflection of my denseness than anything else.

I didn’t  understood how most of the world sees debt until I got into long term relationships and my significant others would worry about it. A lot.

Why? I would ask, autisticly. Zero is just a number.

By that I meant that liabilities were simply negative assets. To have $3000 in assets is better than to have $1000 in assets. Likewise to have $1000 in assets is better than to have $1000 in liabilities. Yet, I didn’t see any distinction between those two positions. Debt is just negative assets. You cross zero, but so what? Zero is just a number. You don’t get all bent out of shape when you cross 37.

What’s so special about zero?

I’ve talked to a lot of people since then. And, I know that you are supposed to respect zero. I know that it is emotionally important for almost everyone. Sadly, I still can’t say that I really understand. Not in the way people seem to understand each other.

I tell myself little stories like “well zero is a meaningful amount of food or water to have, and so maybe this is like some sort evolutionary hold over” But, that doesn’t really mean anything. Its Ev-Psych story telling and it only serves to help me pretend like I can identify.

I’ve considered the fact that maybe I am just missing something in the analysis, something about the money itself. The problem is all the people I talk to seem to be horrible with fixed income. They don’t understand that you can make money by borrowing it. They don’t understand the significance of carry. They are consistently paying interest out of their nose for no reason and seem to have to think a minute before realizing that paying less interest and being paid interest are equally profitable.

And, to be quite frank, I wound up with a lot more money than them simply by playing with debt.

If I were a better man I might spend more time focusing on teaching financial literacy. But, to be honest, its hard enough for me to understand what my friends and family are talking about; to wrap my mind around their emotional connection to negative numbers.

I have to get better on this though, because of the way its warping our politics and becoming a national obsession. I see people arguing as if debt were obviously the biggest evil. And, then I see others saying, no unemployment is more evil.

No one, that I know, is salivating over a 0,9% carry on cash for five years and no liquidity constraints. That in a world where inflation expectations are much below it. Its like facing a the female cast of Nine, after they’ve chased you down to investigate rumors of your unparalleled virility

I understand the government is supposed to be an honest and chaste broker but good man are you completely immune to temptation. You a sell a trillion in bonds, you buy a trillion in real yielding capital and you just milk the crap out of it for free money.

Even if there is no specific financier to benefit it seems like such a tragedy to leave the deed undone. As if Marion Cotillard were crying herself to sleep for lack of company, its simply something a just god would never allow in a just world.

It’s a license to steal and only one agent on planet earth has been granted it – the US government. Yet, that government sits impotent, unable to see the bounty laid before it. And, the beauty sheds tears for a lover who can’t grasp that she pines for him.

He writes

I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn’t work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work.

The Moore household is a small open economy, where imports and exports exceed GDP. Its constituents have almost no internal currency denominated trade and hold no assets or liabilities against one another. It does not have its own central bank. It does not operate in its own currency and its does not float bonds backed by the Central Bank in whose currency its bonds are denominated.

These are important characteristics of the Moore household that do not apply to the US economy. I only have a few minutes but lets start the thought of experiment of slowly, one by one applying the characteristics of the US economy to the Moore household.

The question should never be Theory vs. Common Sense. It should be what factors do I have to include to make theory and common sense overlap.

I won’t be able to keep these up every day, but I still can’t sit by and let it ago.

Lets imagine a major Presidential candidate had said the following.

If the CIA kills Osama Bin Laden before the 2012 election that would be playing politics with national security and I would consider it treasonous.

Would we stand for this?

Then we should not stand for Rick Perry’s equivalent comments on monetary policy.

He writes in reference to the holding of AAA mortgage traunches by banks

In other words, it was not “too big to fail moral hazard and it also was not venal corporate incentives.  It was possibly some regulatory arbitrage but also just plain, flat stupidity and complacency

He bases this on a paper by Erel et al, that I am sure is highly sophisticated but I have not read.

I based my conclusion on raw concurrent observation and the powerful but widely ignored fact that if you ask people why they are doing something usually they will tell you.

In the run-up to the crisis there was a lot of concern by those who follow the financial industry about the structured debt situation. If nothing the issuance of many largely synthetic CDOs was new territory. To say nothing of the Lucas Critique problem that was at the core of this entire enterprise.

If you asked people in favor of the idea they would say: we think it will work. We think the computer models will hold. We think CDS will function just as well as a traditional sell model.

There was no reason to think they didn’t believe what they were saying.

Felix Salmon reports that despite the fact that it’s extremely easy to get around the New York Times paywall, many people are nevertheless paying for the online subscription:

But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.

Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip…

At first glance one is tempted to celebrate what appears to be irrationality. Economists are fond of advocating rational behavior, but with the New York Times paywall we have behavior which is seems individually irrational, yet helps preserve a commons. With tipping, if you presume that it is the most effective system of encouraging efficient service, then again you have individually irrational behavior that preserves the commons (the commons here is the system itself). Of course behaviors like this aren’t actually irrational, because people value fairness, and the are willing to pay more in order to feel fair. Here our sense of fairness leads to welfare improving outcomes: people feel better because they are behaving in accordance with fairness, and a commons is preserved.

On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them  (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.

With respect to intellectual property, fairness can cut both ways. It is possible for most people to circumvent music copyrights with very little effort. Yet, for many a sense of fairness prevents them from “stealing” music. Sometimes this is efficient and sometimes it isn’t. There are many small bands for whom small drops in album sales could lead them to produce less albums and perhaps leave the industry all together. When people pay for their music rather than illegally download it out of a sense of fairness, the outcome is efficient.  There are others who produce less output because the wealth that copyrights afford them means they don’t need to create as much. For example, I’ve argued you could possibly include Stephen Malkmus in this category. Thus buying his music out of a sense of fairness, rather than illegally downloading it, can lead to less efficient outcomes. Fairness can be good or bad in this context.

On the margin, the public’s demand for fairness in copyright laws is probably inefficient. Of course how much the current laws are a function of voter demand versus regulatory capture is a matter for debate. But even if left to popular vote without industry interference, I believe we’d end up with an inefficiently strict regime.

In the same industry, to give one more example, market demand for what is perceived to be fair ticket selling policies certainly leads to inefficient outcomes: scalpers are left with the surplus instead of the artists, thus no extra output is incentivized. The market outcome is of course bolstered by legal restrictions on resales, resulting in part from fairness.

Maybe this is a trivial point that only economists need to be reminded of, but I think it merits keeping in mind. Sometimes fairness leads us to more efficient outcomes, like preserving the commons, and sometimes it leads us to inefficient outcomes, like copyright laws. Be skeptical of fairness, but do not toss it aside completely.

So it feels awkward because people are piling on Perry for all sorts of reasons, mostly political. However, he made what I feel is an open assault on the core economic institution in America.

An assault, that I should add, was very different from Ron Paul. Ron Paul has a philosophical and theoretical problem with the Fed. That is definitely not what Rick Perry suggested. Matt Yglesias says it well

I’ve been tracking hard moneyism for a couple of years now, and the main thing about it is that most of its exponents claim that monetary stimulus would be bad for America. Since they’re mistaken about this, the arguments they offer are often confused, confusing, or somehow nonsensical. But the basic premise is always that monetary easing will lead to some bad result. That’s most emphatically not what Perry said. What Perry said was that he was worried that Ben Bernanke would “play politics” by engaging in monetary easing before Election Day. Which doesn’t make much sense as a position unless Perry agrees with me that monetary easing would boost growth. If monetary easing hurt the economy, then it would hurt Obama. But Perry’s concern is that monetary easing would work well, and he was putting Bernanke on notice to avoid it because he wants to win the election. That’s a very different view.

Couched in terms of “not wanting to play politics with the Fed” Perry blatantly and publicly played politics with the Fed.  He essentially warned them that if they did their jobs correctly, a man who might very well be their new boss will be none to pleased.

And, again, its not just that he did this. Its that he did it publicly. He did it in a way that anyone who knows monetary policy would be unmistaken about his point. He did it in front of cameras and he has refused to back down.

That sets the unacceptable precedent that it is okay for strong Presidential contenders to bully the Federal Reserve. We just can’t let this go.

Ok so, the Philly Fed manufacturing report came in really, really badly. Unfortunately I don’t have time to completely dissect but here is the chart

A quick quote

The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month.

Firms’ responses suggest a deterioration in the labor market compared with July. The current employment index fell 14 points, recording its first negative reading in 12 months. About 18 percent of the firms reported an increase in employment, but 23 percent reported a decrease. The percentage of firms reporting a shorter workweek (28 percent) was greater than the percentage reporting a longer one (14 percent). The workweek index fell 9 points.

There is just no good way to look at this. Maybe more later if I get a chance, but double dip odds are strongly rising.

Off the cuff initial claims look OK. They are up and the revision from last week is up. Still the 4-week moving average is headed down and a fair pace. Had we gotten a decrease from last weeks advance estimate of 395K, that would have been very nice. As it stands its OK.

There is nothing that stands out to me in the inflation report either. I was looking for a pick up in rents but it doesn’t seem to be here yet. We do see a continuously strong price growth in lodging. That matches with the decline in lodging vacancies that we’ve seen. This is good news for Las Vegas, I would imagine.

However, I don’t think we are in an environment where we can expect a lot of new hotel projects anytime soon. So, as for the larger economy that not much of gain.

The price growth for used cars is still reasonably strong, though predictably it has moderated for new cars. I would not have been shocked to see new car prices fall in the wake of Japan being cleared up. All in all, while the long term outlook is still for used car price growth to push more people in new cars, we are not there yet.

So, this mostly a set of wait and see reports.

So, I was pretty interested in Casey Mulligan’s long term thesis but now I suspect that this is just a giant case of us talking past one another. In a summing up post Casey states

There is still no evidence to confirm the fundamental Keynesian proposition that supply doesn’t matter.

That was the fundamental proposition? I don’t think we had to go through all of this to see that this isn’t true and I am not sure who really thinks it is.

Here we go: Its 2008. The global economy is entering recession and arguably a liquidity trap. Suddenly a virus breaks out in Silicon Valley that spreads like lightening, killing every person there.  Steve Jobs is dead. Mark Zuckerburg is dead. Sergey Brin and Larry Page are dead. All of their engineers and programmers are dead. And, the same holds for every company, university and laboratory in Northern California.

Effect on America? Show of hands for no effect whatsoever?

I’ll just assume that no one raises their hand.

In contrast I thought the question we were trying to answer is: how is it possible that output can collapse without an apparent decrease in supply?

How is it possible that the US can have the same number of machines, the same number of workers and the same technological know-how yet nonetheless is producing less of the things that people want then it was a year before?

This is the core question.

So, I notice the Texas job story has been getting a lot of attention.

My answer, not unexpectedly, is that we don’t really know. There are some obvious contributing factors, but sorting out the strength of all of those factors is no easy task.

While answering the full question of “What’s Up With Texas” is well beyond the scope of a few blog posts, the Texas story is fascinating because it run counter to both major trends and easy narratives. These are the cases that really make our understanding.

Lets start, however, with a few stats that aren’t that anomalous.Here is year-over-year job growth in Texas compared with the US as a whole.

FRED Graph

We can see that Texas is typically higher, but that this difference is most pronounced during booms. When the economy turns around it turns hard in Texas.

We can also seem some suggestive differences. In two spots Texas does no better than the nation, 1998-99 and the dot-com bust.

The first, I’d guess was the fallout from the Asian financial crisis and the resulting oil bust.

The second suggests that IT as a major part of the Texas story. That makes sense, Texas Instruments, Electronic Data Systems, Dell Computing and AT&T are a few names that immediately spring to mind.

I am going to borrow a quick chart from Krugman that helps me make another observation. This is apparent in the chart above but even more so here.

In both cases the red line peaks in 2007 while the blue line doesn’t peak until just after the start of the recession. Maybe some of that is Mining related and is a blip but its important for my ongoing inquiry into the question “are recessions really different.”

To be more clear here is one view: One might think that sometimes the economy does well, sometimes the economy does poorly. The economy also has a lot of inertia, so when its doing well it tends to continue to do well and when its doing poorly it continues to do poorly.

We call the times when we are doing well booms and the times when we are doing poorly recessions.

An alternative view is that recessions are fundamentally different. That something deep changes about the economy that pushes it into a new regime. Therefore, recession isn’t just a term for when things are going poorly but describes a binary phenomenon that is either taking place or it is not.

Related is the question: are recessions a general decline in economic activity or a decline of economic activity in general?

The first view is implicitly held by theorists who use “GDP factory” models. That is economic models in which we assume that households make one good called GDP, which they can use for either consumption or investment.

This view is held tentatively but explicitly by myself. That is, I tend to think that this is not just a convenient way of modeling the economy but the correct way. That a general phenomenon is a foot which affects all sectors to a greater or lesser degree.

The opposite view is pushed by for example, Arnold Kling. Kling is opposed to the GDP factory notion and instead sees economic activity as a network of individual trade relationships, whose connections are determined primarily by factors relating to the sustainability of those connections.

Texas is interesting because it had a slightly different path than the rest of the economy. When I look at the charts I say look – there was weakness in 2007 caused by the original foreclosure crisis. Because of Texas’s laws they avoided that.

However, in 2008 the dynamic changed. A new force took hold that Texas was not immune to despite everything going well for them as an individual state.

Obviously there are different ways of reading this data but its all interesting.

Crazy Pills asks

So here’s a question back to Smith: Which of the potential candidates, if they garnered the nomination and won the Presidency, would wreak more havoc upon the world than Barack Obama’s predecessor George W. Bush? Bush is a man described by a good number of historians as the worst president of all time.

I would not consider a repeat of GW Bush’s first term as an acceptable risk. Its true that even if Bush continued to govern and govern as badly as his first term, the overwhelming likelihood is that the country and the world would not completely fall apart.

However, though small the probability is still too high. The War in Iraq was a really really bad call. Draining our ability to combat recessions by excessively cutting taxes during a relatively stable economic period was a really bad call. You can’t keep making those calls decade after decade and be confident that the US and the World stay intact.

Now admittedly there were some pretty good moves in the second term, not least of which was the appointment of Bernanke and Paulson and their subsequent efforts to stem global collapse. Nonetheless, we need to do better than just another GW Bush.

Erica Grieder is frustrated by some of the discussion surrounding Rick Perry


Ironically I was penning a post on how I was excited about Perry’s entrance into the race when he came out with his anti-Bernanke statement. Lets leave that aside for the moment. What had me feeling up was one of Erica’s posts

The key lines

I was inclined to give some credence to the critics, and to see Perry as a guy who had fluked his way into the governor’s mansion and stayed there.

I soon came to see that I was wrong. And I think a lot of people, even in Texas and certainly around the country, continue to be wrong about Perry in just the same way. The governor himself is largely responsible for that; he hasn’t needed a majority of Texans to like him to get re-elected, and in a way, it suits his purposes when people discount him. But having watched Perry closely for four and a half years now, and interviewed him on several occasions, I am convinced that he’s actually quite smart about politics and that he’s not much of a far-right ideologue.

Right now, Obama is in the high-30s/low-40s on approval. There is a reasonable chance the economy will take a leg down in the next 12 months.  Thus, there is a fair likelihood that we will have a new president come 2013.

My primary concern as always, is that this President be able to govern. It would be nice if the President’s hopes and dreams for the country coincided with mine, but I don’t think it necessary.

What is necessary is that the Global Financial system is stable; that the geopolitical realm is as calm as can be managed; that both the Enlightenment and Global Capitalism continue to thrive. And, as a bonus that the First Republic of the United States still stands.

If we can have all that, I am going to call it a win.

Sadly, however, only three GOP candidates gave me confidence that they could contribute to this result. Those were Mitt Romney, Tim Pawlenty and Jon Huntsman. Tim Pawlenty dropped out. Jon Huntsman is going nowhere fast. That pretty much just left Mitt Romney.

That’s a lot riding on one man. A man who – despite his mannerisms – is a flesh and blood human being and subject to human weakness. He could have a heart attack. He could get hit by a bus. He could say something really really dumb. Then where would be?

Not in place I would be comfortable with.

So enter Rick Perry. A man who also seemed like he could meet the basic criteria. A man who also seemed like he could win the GOP nomination. This is great news.

Then of course, he goes and threatens the Fed Chairman and shakes my confidence in his ability to hold together the global financial system. He was already sketchy if tolerable on geopolitics, so this is not good. Not good at all.

Dave Wiegel tells me its all bluster and not to worry. If this is true I need more people telling me this. Another post from Erica Grieder might help.

Here is a data point you may want to keep in the back of your mind when discussing financial literacy:

In a recent consumer study, 21 percent of individuals surveyed – including 38 percent of those with income below $25,000 – reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (Consumer Federation of America and The Financial Planning Association, 2006).

Some may be tempted to interpret this as the Death of the American Dream, and evidence that people are hopeless about their economic futures. But winning the lottery as the best retirement strategy for all Americans? I chalk this up to the phenomenon that no matter how stupid a belief is, if you know one person that ascribes to it then a survey will show that 1/4 to 1/3 of the population probably does as well. This includes the existence of witches and werewolves, and the fact that Saddam Hussein planned 9/11. That, and I blame the fact that people don’t understand the concept of a fair bet and thus, of course, an unfair bet. Talking about insurance with the average person can be shocking and illustrative. This is why auto insurance companies run commercials promising to be forgiving of accidents and generous with benefits and this is somehow persuasive to customers. “Where does that money come from?” I want to ask them…. “where does that money come from?”.

Via ABC News

“If this guy prints more money between now and the election,” Perry said, “I don’t know what y’all would do to him in Iowa, but we — we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion.”

When asked in a follow-up interview whether Perry thought that the Federal Reserve was playing politics to try to help President Obama, he replied: “If they print more money between now and this election, I would suggest that’s exactly what’s going on.”

I am short. My wife is short. Chances are my son will be short. Here’s a question – why?

At this point in human history, height in the Western world is mostly genetically determined. Yet, as far as I can tell the advantages to having tall genes outweigh those to having short.

Even in a preindustrial environment this seems to be true. This is likely why taller people, especially men are more attractive and have higher status.

So, why did genetic shortness persist?

Industrial Production surged last month as I expected, growing at over a 10% annual rate. The upward revisions in the manufacturing component from pervious months, I did not expect.

Industrial production advanced 0.9 percent in July. Although the index was revised down in April, primarily as a result of a downward revision to the output of utilities, stronger manufacturing output led to upward revisions to production in both May and June. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent and production elsewhere moved up 0.3 percent.

This is good news but it was already backed into the cake, as it were. A failure of industrial production to surge after the Japanese supply disruption was fixed would have been very bad news.

So this is good news, but not super good news. Again we will be looking closely at the manufacturing surveys as they roll out.

The interbank lending rate on Swiss Francs is now negative

The less realistic it is for you take delivery of a currency, the lower negative nominal interest rates can go.

Suppose I am an investor in Spain, how I am actually going to get my hands on, let alone store 10 Million in paper Swiss Francs?

As a note to more recent readers: the Yes Virginia, is a running theme from my old blog at blogspot years ago. During the very beginning of the financial crises there was a debate over whether or not interest rates could ever be negative, with some serious Wall Street types as well as academics scoffing at the idea.

My side was vindicated in late 2008 when the yield on US Treasuries briefly turned negative.

HT: Tyler Cowen, chart via FT

Ezra Klein praises Rick Perry’s book

This is not a boring book. More to the point, it’s not even a book about Rick Perry. It’s a book about Rick Perry’s ideas. And his big idea is that most everything the federal government does is unconstitutional.

The book is fundamentally about the 10th amendment: that’s the one that says, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

I think radical federalism is not as unworkable as you might think. As Ezra suggests it takes the United States in the direction of the Eurozone, but with a few crucial difference.

First, there is a US Treasury bond. That means the central government can issue debt independent of the several states. Which in turn means that US banks can hold Treasuries rather than state debt. This makes a state default less of crisis than national default in Europe.

Second, the US labor market is far more integrated. Language is the same across the states. The educational system is the same across the states. These standards are not likely to change.

Also, I think you would see more regional collaboration in the absence of a strong national government and that would provide for co-ordination and economies of scale on most issues. You would probably see the Northeast Corridor form into its own mini-nation. Similarly along the Pacific cost.

In the long run I don’t know if the organizational structure would make a huge difference either way but to be sure I don’t think its unworkable.

From the New York Fed

Business conditions weakened for
New York State manufacturers
for a third consecutive month in
August. The general business
conditions index fell four points
to -7.7. The new orders index also
fell, inching down to -7.8; the
negative reading—the third in a
row—indicated that orders had
declined. The shipments index held
steady at 3.0, a sign that shipments
were slightly higher over the
month. The unfi lled orders index
continued to drift down, falling
three points to -15.2


None of that reads well and it weakens hope that the deterioration we saw in the last couple of months was a blip.

I see Manufacturing Surveys this month as critical. Three straight disappointing months makes a trend. If they call come out badly it’s a pretty clear sign that manufacturing is weakening.

This is troubling given that manufacturing was providing strong support during the recovery. The slight upward trend in manufacturing jobs was in contrast to 15 years of downward trend.

While it was always going to be the case that the downward trend was likely to reassert itself, I would have hoped that it did not do so before construction turned around and state and local government stabilized.

Tyler Cowen calls sticky wages a weak and embarrassing paradigm

Often when this topic comes up I feel I am playing a game of whack-a-mole.  Most of all, I am struck by how little attention people pay to their own sticky nominal wage hypotheses.  Ifthat were the problem, and if unemployment were today’s biggest issue (a totally plausible claim), you might expect people to blog the microfoundations of nominal wage stickiness very, very often.  You might expect ethnography.  Micro-level data.  Lots of juicy anecdotes and journalistic features, not just on the unemployed but on the stickiness itself.  Perhaps some micro-level advice.  Dozens, no hundreds of blog posts on the all-important microfoundations of the #1 social problem of our time.

But no, there’s not much of those to be seen.  At some level it is understood, if only implicitly, that the sticky nominal wage theory is an embarrassment — when it comes to the unemployed across the longer run (but not the employed).  It doesn’t get too close a look.

So growing up in the New Keynesian paradigm I learned that sticky wages don’t make sense because the real wage is pro-cyclical. That is, in contrast to Keynes’s suggestion labor is actually cheaper during recessions than during booms.

This moved the story to sticky-prices. Here the core idea is that the economy is dominated by firms with some measure of market power.  Such firms always want to sell more at the market price than the market will demand.

This makes a lot of sense in causal empiricism because almost no business seems indifferent to more customers. A perfectly competitive firm would not really care at the margin if it had more customers.

However, in practice almost all firms are constantly consumed with how to get more customers. This only makes sense if they have some sort of market power.

However, if they do have market power then sticky prices mean that when aggregate demand falls, firms can have increasing amounts of excess capacity.

The question is why would prices stick.

One idea is that there are menu costs or a limited number of time that a firm can adjust prices.

Another is that adjusting prices often imposes real costs for customers.

Another is people have limited attention and/or price increases trigger search.

Another is that there are some prices which are especially sticky for special reasons and this sticks the whole system – that’s part of my interest in real estate.

Another is that debt is nominal and solvency constraints cause stickiness. Lower your prices too much and you can’t pay your debt. This latter point makes a whole lot of sense but it suggests that adjustable rate debt should stabilize the system where in fact it seems to be destabilizing.

Yglesias highlights a paper from Diamond and Saez on optimal taxation.

As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be τ*=1/(1+1.5 x 0.57)=54 percent while the optimal top tax rate using a broader income base with no deductions would be τ=1/(1+1.5 x 0.17)=80 percent. Taking as fixed state and payroll tax rates, such rates correspond to top federal income tax rates equal to 48 and 76 percent, respectively.

I see some confusion on this issue so I just want to point out the following. The optimal tax rate, the peak of the Laffer Curve, and the tax rate that maximizes GDP are all different things. Moreover, they can have almost any relationship to one another.

That is it could be that the optimal tax rate is 20%, the Laffer Curve could peak at 40% and GDP be  maximized at 60%.

To get GDP maximization higher than the Laffer Peak and the optimal tax rate requires unusual set up, but if – similar to China – you are using the tax rate to perform financial repression on households, it is possible.

In a recent post, Karl offered a theory as to why house prices are sticky downward. In short, he argues that house is worth less when it is being sold in a neighborhood with a lot of foreclosures than when it is being sold in a neighborhood with few foreclosures. Foreclosure sellers in an empty neighborhood are in effect playing a game of chicken then, where each wants to be the last to sell so that they can sell into a fuller neighborhood.

This is an interesting theory, and I’d venture it’s going on to some extent. I’m pretty sure you could find a way to test it. However, I think nominal rigidity can be found even in areas where foreclosures are relatively low. The literature on foreclosures suggests they have an impact in the neighborhood of 1% on house values within 1/8 of a mile. Given the costs of holding real estate, including the depreciation, maintenance, and lost value of the flow of services, I doubt it would be profitable for banks to play this game very long in areas with few foreclosures. Second, if the current owners are owner-occupiers, then the houses aren’t vacant, so there is no “empty neighborhood” effect. This means some homes must be owned by non-owner occupiers. It seems unlikely to me that in areas with few foreclosed homes and few non-owner-occupied homes you’d observe a lack of nominal stickiness. Nonetheless, I would not be surprised if this effect explained some nominal stickiness.

To understand how stickiness can happen, it helps to conceptualize the housing market as a matching market. Homes and buyers are highly heterogeneous, and there is no “market price” per se. Rather there is a price for a pair of buyers and sellers. This means that a seller can, ceteris paribus, always hold out longer for a buyer with a higher valuation of the house. The question is, why do sellers wait too long sometimes, and why wait longer for better matches when the market is down?

There is some literature on this that provides evidence for few hypothesis. a 1997 AER paper from Genesove and Mayer argue that the issue stems from a sellers desire to sell at a high enough price to get a 20% downpayment on their next home. Consistent with this, they find that sellers with higher LTVs are on the market for a longer time, set a higher asking price, and in the end get a higher price.

A 2001 QJE paper from Mayer and Genesove chalks up some of the problem to loss aversion. Sellers have a nominal number they paid for their house, and they are willing to wait for a possibly non profit maximizing amount of time until a high valuation buyer comes along. They find evidence that sellers with nominal losses have a longer time on the market,  set higher list prices, and attain a higher selling price. They also find evidence that of the LTV effect from the aforementioned paper, although after controlling for nominal loss aversion the LTV effect is less strong.

So what can be down about this? Countercyclical or subsidized downpayment requirements could also be of use. This provides support for those who have argued that a downpayment subsidy should replace the mortgage interest tax deduction.  Encouraging insurance that protects against nominal losses would encourage homeowners to sell sooner. Of course the best policy to fight nominal loss aversion is simply inflation.

Looking at the Long Depression, the Great Depression, the Japanese Depression, the Great Recession and contrasting that to shorter episodes including Korean Armistice Recession and the Dot-Com recession I am starting to speculate that the key sticky price is land or real estate more generally.

Not only is there of course a strong association between land bubbles and the size and scope of a recession but real estate appears to be very very sticky in transactional price, more on that. And, there are some strong reasons why one would expect it to be.

So real estate prices move relatively slowly. We know that. The “bursting” of the housing bubble was a three plus year event that may not have ended yet.

However, even that grossly overstates the speed at which the market actually comes to equilibrium. The volume of transactions collapses during the burst and both market and shadow inventory builds up. There are units which buyers would like to sell but are not willing to lower the price on – why?

We all know this phenomenon. People even going so far as to take a house off the market and wait until a better time to sell. This is fantastic price stickiness. Between waiting to put on market, waiting for an offer, attempted buy and holds, etc a decade could go buy before a single property clears to its equilibrium owners at its equilibrium price.

Now why would we do this? Part of it could be sticky mortgages of course. But, I am starting to think that’s not it. Part of it could be irrationality, but then its hard to see how vulture capital funds could be profitable by buying and holding.

What I suspect it is, is a fight over agglomeration rents. The last one to sell out takes the rents and each player is holding on to be that individual.

Imagine an extreme case. An entire neighborhood goes into foreclosure and everyone is kicked out.  The banks sell off the properties to investors who simply pay a portion of the amount owed on the mortgage. You might think we have cleared the market and everything can go back to normal.

But, no we see neighborhoods where the houses stand empty. What’s going on. Well, a house in an empty neighborhood is worth less than a house in a full neighborhood. In fact, each family to move into the neighborhood raises the value of the neighborhood.  However, to get the first family in you have to offer a price equal to the value of an empty neighborhood.

No investor wants to be the one to do that. Each one wants to be the very last investor to sell, the one who sells into a full value neighborhood. However, since they can’t all be last and one must be first, there is a standout.

The lack of credible communication between investors only makes this problem worse. The best they can do is just hold out for as long as they can hoping to get as much as they can.  This causes an extremely slow movement towards equilibrium.

Most cases aren’t this extreme. However, home owners have the same sense. They know that selling in a down market or at a “bad time” is different than selling at a “good time” They are reluctant to be the first to take loses.  As more potential sellers pile up each one is hoping that he or she will be able to out last the others; to sell after the market has bottom out and is on its way back up.

Questions to be answered:

If this is the origin how does the disruption spread throughout the economy?

The non-housing related busts were fast in (korea, dot-com) were quick and shallow respectively in GDP terms but not in job terms, how do we square that?

How does this tie into the rational inattention and stickiness literature?

The Ghost Town of Ordo in Northern China

Most of the analysis on China from insiders makes perfect sense to me:

  1. That China’s rapid growth is ultimately a function of household repression
  2. That massive accumulation of US Treasuries or some foreign asset is necessary to make this scheme work
  3. That easy lending is necessary to make this scheme work.
  4. That the transition towards a more balanced economy will be “tricky” to say the least.

What I don’t quite get is the common presumption that China’s investment must be overinvestment or even “malinvestment”. For the most part the Chinese are building the types of things that we strongly suspect human being will want to use: houses, roadways, office buildings, airports, trains, etc.

There are also lots of people in the world. Many of those people currently don’t have those things. If they did they would be far more productive than they are today. It seems the key is getting the people to the things.

What makes this even more puzzling is that it is my understanding that many of the poorest people in the world live in rural China. This makes them excellent candidates for getting together with the capital.

Many of the rest live in rural India. Obviously there are some cultural and political obstacles in the way of getting those people to the capital. However, over the grand sweep of history its not clear that they are fundamentally insurmountable.

Moreover, it seems possible to use international trade to do a bit of a two-step. Moving more people out of rural China could bid up agricultural prices, making intensive farming more profitable all around the world. This would then produce enough food to allow for the emptying out of more of rural China.

This to me is what makes “catch-up” growth different. You don’t have to guess at what people might want and how to produce it cost effectively. You can turn on the TV and look at Europeans and Americans. Then you can just give people that. You can even invite some Europeans and Americans over and let them show you how to build it.

All you need to do is have the people. And, if its one thing China has, its people.

I want to draw attention to this analogy of Eli Dourado’s from a few months ago because it has stuck with me, and I find myself thinking about it often. In it, he says that our restrictions to immigration are attempts to preserve our advantaged positions and are similar to those who sought to preserve aristocracy:

It is perhaps unsurprising that those who think they benefit from the current system wish to keep it. They trot out all kinds of practical-sounding excuses for why we cannot completely open the border. All of these reasons have analogs in the system of class-based privilege. Most of us, I imagine, would like to think that if we were aristocrats of centuries past, we would see through the lameness of the arguments for using the state to keep down the lower classes. Yet the widespread opposition to open borders today shows that we are not that good.

I only disagree with this to the extent that I don’t think it applies to all opponents of open borders. My own opposition, for instance, is I think not grounded in any desire to preserve privilege, and fairly strong on cosmopolitan utilitarian grounds. Nevertheless, for many immigration opponents, I think his charge holds and that more people should consider it.

Bryan Caplan is quoted as having said the following about Robin Hanson:

 “When the typical economist tells me about his latest research, my standard reaction is ‘Eh, maybe.’ Then I forget about it. When Robin Hanson tells me about his latest research, my standard reaction is ‘No way! Impossible!’ Then I think about it for years.”

I disagree with Eli often -although in the grand scheme of things we are not so far apart- but I think something similar could be said about him, in that his ideas often sound radical at first pass, but they stick with you and provoke much thinking.


Ross Douthat’s “Waiting for a Landslide” has received more than a few approving nods from the blogosphere. I am in general agreement with his core thesis except probably much more so. Ross says,

Thus the assumption, on the left and right alike, that every presidential election is the most important in our lifetime — except for the next one, which will be more important still.

Like most commentators, I’ve indulged in these kinds of sentiments myself. American politics really is riven by fundamental divisions. Our recent elections have had dramatic consequences. It will make a tremendous difference whether the next enduring majority owes more to Barack Obama’s liberalism, Tea Party conservatism, or some other worldview still.

Have they and will it? It doesn’t seem so to me.

Its not fashionable for economics bloggers to show their entire political hand but I think it helps to make my point to let you know who I supported for President since I started closely following politics. This is for both the Primary and the General. The letter indicates my personal party affiliation at the time.

In some cases I didn’t actually get to cast a vote for this person because either they didn’t make it far enough or I was not old enough to vote.


1992   Primary: George HW Bush (R)          General: George HW Bush (R)

1996   Primary: Richard Lugar (R)               General: Bob Dole (R)

2000   Primary: John McCain (R)                 General: Al Gore (R)

2004:  Primary: Anybody But Dean (I)        General: John Kerry (D)

2008:  Primary: Hillary Clinton (D)               General: Barack Obama (D)


I’ve backed the winning primary candidate once – twice if you consider Anyone But Dean – and that was an incumbent President. I backed the winning general election candidate once and that was a decidedly unusual election.

So, as you can see, I am always disappointed. My primary candidate has never won the general election. And, that’s to say nothing about the selection of candidates to begin with. The men and women I would most want to see in the White House have never even run.

Yet, with only one Commander-and-Chief and primarily during only one of his terms did I ever feel like the country was being poorly presided over.

This is made, perhaps, even more significant by the fact that I have almost always voted against the transformational candidate. I voted against the one who wanted to remake America. You’ll notice the change in support during the 2000 campaign. Al Gore had me at “lockbox.”

The only exception was Barack Obama, whose “change you can believe in”, I took to mean drawing down US troop levels in Iraq and ending the Bush Tax Cuts. That is to say changing things back to the way they were before they were changed the first time.

Still, I think we’ve had mostly decent administrations.  Unfortunate choices were made in the wake of 9/11. Given their permanence, however, I am not even sure how much of that can be laid at the feet of the President at the time.

So I am hard pressed to see how any of these elections could be confidently called the most important in our lifetime. Looking back, one will likely emerge – if only by weak comparison – as the most important. But, none are big enough to make that pronouncement now.

Here is an idea I don’t have the time to fully tease out but that I ask, especially my non-Keynesian, readers to think about.

Oil shocks seem to have a negative impact on growth.

The question is: why?

There are at least two possible answers.

  1. Oil is necessary input in productive activity and oil shocks generate a negative productivity shock by causing us to switch to less productive modes of production.
  2. Oil shocks sap consumer spending pulling down retail sales and especially motor vehicle sales.

My guess is that most of us will think the second effect is the stronger of the two and responsible for the immediate contraction we see in the wake of oil spikes.

However, the money has to go somewhere. In practice in fact when oil prices rise the money goes to oil producing countries and the balance sheets of major oil producers who then overwhelmingly buy Treasuries with it.

In other words it works exactly the opposite of fiscal stimulus. Instead of selling Treasuries and using that to put money in the pockets of consumers, you are taking money out of the pockets of consumers and using that to buy Treasuries.

The difference is that it is conducted by private companies or foreign government in the pursuit of profits. However, that really shouldn’t matter to any of the economics.

If we accept that oil shocks can slow the economy. Shouldn’t this open us up to the possibility that fiscal stimulus could speed it up?

As I expected the Retail Sales report came in quite strong.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for July, adjusted for seasonal
variation and holiday and trading-day differences, but not for price changes, were $390.4 billion, an increase of 0.5 percent (±0.5%)*
from the previous month, and 8.5 percent (±0.7%) above July 2010.  Total sales for the May through July 2011 period were up 8.2
percent (±0.3%) from the same period a year ago.  The May to June 2011 percent change was revised from +0.1 percent (±0.5%)* to
+0.3 percent (±0.3%)

Unexpectedly there was an upward revision to the June numbers. Sans concerns about Europe I actually see this report trending even a bit stronger over the rest of the year.

The ol’ CAFE standards debate is floating around the blogosphere again thanks to new higher rates on the way. Instead of writing anything substantive about it I want to point to an excellent post from Ed Dolan that says pretty much everything that needs to be said on the issue.

For example, he reports on a newer study that shows price elasticities once proclaimed to have fallen are now on their way back up, and in the range -0.4 to -0.8.

His post also nicely presents some externality based arguments against  CAFE standards:

The tendency of more fuel-efficient vehicles to induce additional driving is known as the “rebound effect.”… [T]he rebound effect causes an absolute increase in those externalities that are proportional to miles driven, including road congestion and traffic accidents. It also increases the cost of road maintenance, because the wear and tear from more miles driven is only partly offset by the lower average weight of high-mileage vehicles.

Note that these externalities are ones that in other contexts are frequently (and rightly) appealed to by the same people who argue for CAFE standards.

In addition, Dolan draws our attention to this graph showing how fuel cost is related to consumption across OECD countries:

As he says, there is a convincingly tight relationship between price and quantity… go figure!

For some good analysis of the new fuel economy standards for big rigs I recommend Megan McArdle’s take.

Somehow I missed this early but the FRED now has 96 disaggregated construction series. Let me show you how deep the rabbit hole goes.

Here is Total Construction Spending: Religious. That’s right people, I’ve got spending on churches.

FRED Graph

Or how about this Total Public Construction Spending, Sewage and Waste Disposal

FRED Graph

And here is Total Construction Spending, Conservation and Development. I am not even sure exactly what that is!. That’s how good this data set is.

FRED Graph

And I still don’t even have that Excel thingy installed yet.

The money markets are still a mess and the situation in Europe posing the threat of future contagion for US markets.. Suppose Europe goes all to hell, we should expect at least three shocks to the US

  1. A fall in US exports which will shut down growth in US manufacturing and cut one of the bright spots in the early 2011 economy.
  2. A collapse in profits at US multinationals corporations, which will send down stock prices and impact consumer spending as households feel poorer.
  3. Possible instability in the US banking sector due to their exposure to European debt.

Its hard for me to speak a lot to the third possibility because unlike the structured debt/subprime market I was not really following US banking exposure very carefully. It could be big, it could be small. I really have no idea.

On the other hand the fundamentals for the US economy continue to look towards growth

  1. Jobless claims are falling fairly steadily again, suggesting that the rough patch was indeed a patch.
  2. Chain store sales went very well. We’ll get the full retail report tomorrow I believe and I am expecting a nice report.
  3. US auto sales are markedly improved.
  4. Gas prices are likely on their way down.
  5. Apartment vacancies are getting tighter every month suggesting that my fabled construction boom may not be far away
  6. State and local government budget deficits are beginning to ease significantly.

Again I feel awkward saying it but despite clear flashing red signs in the money markets and I am tilted towards growth.

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