You are currently browsing Karl Smith’s articles.

Two quick things

One, is that – actually amazingly – the absolute change year-over-year in initial claims is following steady channel. You usually see the pace of decline, itself decline over time but that is not happening.

FRED Graph

This to me suggests that nothing special has happened in the labor market since the summer of 2011 and that its essentially steady as she goes.

As stated before, I have expected to see the economy “kick” by March or April of this year but as things look it will be late. The pressures do still seem to be building, as I’ll talk about in another post.

The other quick note, is that while Initial Claims tells us a whole lot about the labor market what they don’t actually tell us that much about are layoffs, which people sometimes mistake. You can file an initial claim if you are laid off but whether or not you do so, is dependent on the state of the job market. That’s why initial claims are actually a better indicator than layoffs themselves which are back down to the lows of the previous recovery.

FRED Graph

Obviously this idea sounds ridiculous to many economists as there is no particular reason to think it makes sense to go through such lengths to get natural resources. After all we live on a pretty darn big spacerock.

To the extent natural resources are expensive on earth it is because they are difficult to get at, not because we are running out. There is of course some possibility that they would be actually easier to get at in space. The problem is that doing so is a major project that only makes sense if you can bring back a lot of resouces.

However, the very reason that hard to get at resources on earth are expensive is because the limited quantities cause consumers to bid up the price. If there were many more, then the bidding would be less furious. So, you face the problem that as soon as you bring a huge chunk of gold or what have you back to earth you cause the price the crash and cannot recoup the mission costs.

That said, there are two things.

One, is that in theory the company could sell some type of speculative contracts on the minerals it hopes to get. Basically you need a contract that says, of the first X amount of mineral that we bring back you will buy it at Y price. Then these contracts would have to be sold in series with the understanding that the total draw down from the mining operation will be uncertain both in terms of beginning time, quantity and duration.

So they can try this, though I am guessing the price for such contract will not be that high.

Second, this actual strikes me as more like Craig Venter’s stent at Celera Genomics where a private company was used to do basic scientific research and the investors bought in, in part because they wanted to be a part of something great and in part because the scientists more or less conned them.

Though as wealth dispersion increases and people get richer I think this “Invest for Prestige/Get Conned” model will be big for science.

Paul Krugman thinks Bernanke has been assimilated

Ben Bernanke responds to my magazine piece; as I see it, in effect he declared that he has been assimilated by the Fed Borg:

But, I think it’s a bit different. He’s in a dream inside of dream, suffering from Monetary Inception.

I mean this only half-jokingly. The Fed’s policies will have effects on the real world. However, the Fed can never see the real world. It can’t see the past and it certainly can’t see the present. It only has a vague a haze about what reality might be.

In that situation, the constructed reality presented by the Fed staff is powerful. Its grounded. There is some sense that you know what you are doing. And, not only does this constructed reality shape what you think the situation is today, it shapes what you think the response to your actions has been. It shapes your interpretation of the causal nature of the world itself.

What Bernanke needs is a totem. An object to tell him that he is in a dream. That this isn’t real and on the outside there are real people. This is what screaming into the economic blogosphere and economic journalism world does.

Its an echo that they can faintly hear inside the Eccles Building. Tyler Cowen and perhaps Greg Ip think we are being too hard on the Chairman, but when he is in a dream inside of a dream you have to scream loudly in hopes that he’ll hear a whisper.

Like Will Wilkinson I found John Gray’s review of Jonathan Haidt’s, The Righteous Mind, entertaining if not particularly enlightening.

This is not my main point but I can’t help to note that Gray seems to think little of Haidt’s philosophical sophistication, yet in that same review pens paragraphs such as this

In his diary recording the persecution he suffered in Nazi Germany, Victor Klemperer reports on tradesmen and neighbors occasionally slipping him and his wife food and chocolate. Against the background of pervasive hatred and cruelty that Klemperer experienced, these fitful expressions of kindness must qualify as moral behavior. But they are in no sense “groupish.” Quite the contrary: they show people setting aside group identities for the sake of human sympathy. Those who helped Klemperer and his wife were violating the group-centered racist morality of Nazism—along with the morality that had in the past sanctioned persecution of Jews—in order to show concern for individuals. In effect, they were choosing between good and bad moralities.

Taken as a whole, these eloquent words don’t quite fall to the level of nonsense, but its certainly far from clear what meaningful statement Gray is making here and it does of course smack of appeal to emotion.

The larger point, however, is that I don’t see any fundamental tension between the work that Haidt is doing and moral philosophy. Gray writes

IT IS RATHER LATE in his argument that Haidt offers anything like a definition of morality, but when he does it is avowedly functionalist: “Moral systems are interlocking sets of values, virtues, norms, practices, identities, institutions, technologies, and evolved psychological mechanisms that work together to suppress or regulate self-interest and make cooperative societies possible.” Haidt recognizes that this is an entirely descriptive definition. He acknowledges that, if it were applied normatively, “it would give high marks to fascist and communist societies as well as to cults, so long as they achieved high levels of social cooperation by creating a shared social order.”

That is an implication of Haidt’s analysis about which he should be seriously concerned. But Haidt seems not to grasp the depth of the difficulties that he faces. There is a slippage from “is” to “ought” in nearly all evolutionary theorizing, with arguments about natural behavior sliding into claims about the human good. It may be true—though any account of how precisely this occurred can at present be little more than speculation—that much of what we see as morality evolved in a process of natural selection. That does not mean that the results must be benign. Freud tried to develop a view of human nature in terms of which morality could be better understood; but he accepted that much that comes naturally to humans—such as sexual predation and other types of violence—had to be repressed in the interests of a civilized life. Civilization sometimes requires the repression of natural human traits, including some that may be sanctioned by prevailing moral codes. The moralities that have emerged by natural selection have no overriding authority.

It is quite true that no description of the evolution of human morality tells us what we “ought” to do, but such descriptions in general and Haidt’s work in particular are incredibly useful to the moral philosopher.

For example, a significant chunk of moral philosophy could be understood as an attempt to divine what the following sentence is all about:

Sally said that eating meat is morally wrong, but I disagree.

Assuming that Sally did in fact utter the words “eating meat is morally wrong” what, if anything, am I disagreeing with?

Without diving too deep, let’s just say it is far from clear. However, Haidt is potentially offering us a clear first step.

According to Haidt I can understand that sentence as the following:

Sally said that eating meat violates either the principle of care, fairness, loyalty, respect, sanctity or liberty, but I disagree.

Importantly, if Haidt is right then my view of morality, projectivist anti-realism is seriously called into question. Indeed, taking Haidt seriously enough is grounds for accepting a full throated moral-realism.

So, I am deeply interested in the potential success of Haidt’s project.

Where I am confused by Haidt is his suggestion that of the six foundational values, conservatives see all six, libertarians see four and liberals only three.

Why should this be?

Are we suggesting that liberalism for example is a form of color-blindness; that liberals simply lack the cones to see three of the foundational moral values?

If this is the case are we to understand the growth of liberalism over time as the rapid spread of a genetic mutation? Is it the result of some sort of nutritional deficiency or environmental pollutant?

Moreover, it really seems like people are able to become more liberal or conservative as a result of primarily mental experiences. What is that all about?

Now I want to be clear that I am open to these possibilities. I am just not sure if that’s what Haidt means because he seems to suggest that through experience and intermingling liberals and conservatives can learn to put aside their differences.

However, doesn’t this suggest that liberals can in fact see all six foundational values?

Daniel Neman reviews Tyler Cowen’s An Economist Get’s Lunch

Don’t go into a restaurant with many beautiful women in it, says economist Tyler Cowen. Those places attract a lot of men, and although they may be popular for a few months the quality inevitably will soon diminish.

. . .

What these and other statements from the esteemed economist should teach us is that, in general, we shouldn’t listen to what economists have to say about restaurants. They don’t look at life the same way as you and I. And they certainly don’t consider situations that do not fit into their preconceived theories.

For instance, what if you are yourself a beautiful woman? What if you are a beautiful woman who wants to dine out with a number of your beautiful friends? According to Mr. Cowen, you shouldn’t go to whatever restaurant you happen to go to.

Perhaps what it teaches us is that we shouldn’t listen to esteemed Food Critics when it comes to deduction reasoning.

Having accompanied many such diners facing this apparent dilemma, the solution is obvious. Travel in small groups. Find a place first. Don’t tell anyone about it. And, if they do find out move on to another place while relentlessly bad mouthing the first place, until it losses it social status. Rinse and Repeat.

Replying in part to me Daniel writes

It seems to me that secular ethics distinguishes itself by recognizing the fundamental pluralism of society, and that while these community-level constructions of the world are useful for getting along in the world, in a community – they don’t quite reach a standard of justification they claim for themselves. So we need a broader, more pluralist ethics and Douthat is right – that often consists of dismissing the justificationist, foundationalist project itself. Why? Because an ethics that you can get by writing a poetic book and waiting a couple centuries for it to gain mystical significance does not seem like a very laudable ethical code. You’ll get some gems from that approach, of course. We humans learn how to get along with each other, and that is going to be distilled in these various books. But it’s not a very strong justification. What much of the world has converged on is that since within-community justifications don’t work outside of the community, we need to come up with an ethical orientation that allows the coexistence of multiple potentially contradictory communities, justification and foundation be damned.

I don’t mean the following in any dismissive way but simply to articulate my understanding. Daniel seems to be making three statements to me

  1. Secular Ethics is Pluralistic Cultural Politics
  2. Hurrah for Pluralistic Cultural Politics!
  3. I am not interested in playing ethics-game

I understand the pull of this approach. I find this unsatisfying because, like Daniel I assume, I see limits to coexistence. As a contemporary practical matter for example, are we willing to accept, acceptance of human trafficking as a within-community ethical standard that should be tolerated, without even protest or disapprobation?

And, if you do think that we should attempt to morally press a community which accepts human trafficking, not to do so, are you not at minimum initiating a neutron-bomb moral assault. Where in this case you hope to leave the actual human participants unharmed, but to obliterate the underlying ethical standard.

And, if you do then what calculus do you use to decide when such an assault is warranted? This, I think, leads us back to playing ethics-game.

Ross Douthat writes

. . . much of today’s liberalism expects me to respect its moral fervor even as it denies the revelation that once justified that fervor in the first place. It insists that it is a purely secular and scientific enterprise even as it grounds its politics in metaphysical claims. (You will not find the principle of absolute human equality in evolutionary theory, or universal human rights anywhere in physics.) It complains that Christian teachings on homosexuality do violence to gay people’s equal dignity—but if the world is just matter in motion, whence comes this dignity? What justifies and sustains it? Why should I grant it such intense, almost supernatural respect?

This seems largely correct to me. A coherent secular morality is a tricky problem in and of itself. One that makes absolute claims even more so, and one that makes absolute claims absolutely seems well beyond our grasp. And, I say this as a secularist who is very much concerned with ethics or what, to make the point, I have often been forced to call the-ethics-game.

For example, the claim that slavery is fundamentally wrong in all cases is not controversial among secularists but it is far from clear how one justifies this except by asserting it. And, then of course what is one to say to people who deny it?

Intending no disrespect to the underlying issue, the argument seems to devolve into “na-na na-na boo-boo.” Which is to say, simply refusing to accept the denial as valid.

There are various claims which amount to saying the human faculty of reason endows us with certain inalienables. Not only does this strike me as blatant post hoc speciesism, but it seems to suggest that there is some mental threshold below which a person could fall in which not only enslaving them would be fine but also violating any of the other rights which are asserted to stem from self-ownership. In short treating the person as an animal.

Attempts to reconcile this problem back people into corners such as asserting that the well-being of an adult pig is as important as the well-being of a newborn baby.

At least some of the confusion over this comes from the assumption that lacking the same ethical grounding as Christians, secularists either will not behave morally or cannot make moral demands.

The first I think just misunderstands how people behave and gives too much credit to critical reasoning and justification. For the most part secularists behave morally for the same reason just about everyone else does, because they would feel bad if they did not.

The second I am increasingly tempted to say conflates cultural politics with the ethics-game. If you ask on what grounds do I accuse rapists of having done wrong, then the authentic answer is that a world with rape displeases me and this is a tool I can use to get society to impose sanctions against it.

That in my mind is quite different than the ethics-game. The ethics-game is an attempt to answer the question, what moral stance “should” I adopt. It is in the ethics-game that we pay careful attention to metaphysical coherence, consistency and an attempt to tease out what we really believe.

What Douthat appears to be saying is that the ethics-game is hard for secularists, and that is correct.

Kevin Drum thinks I have gone overboard

Just for the record, then: when I say “high healthcare costs,” what I mean is “lots of money flowing to heathcare entities.” I’m pretty sure that’s what everyone else means too. I know that Karl likes to be contrarian, but calling this a mere large-scale accounting issue is surely a little bit too Olympian even for him, isn’t it?

Let me see if I can make my point more clearly.

There are lots of ways more money could flow to health care entities:

  1. People could value health care services extremely highly and want to purchase more of them
  2. Moral Hazard could lead people to purchase health care through insurance that they do not value very much
  3. The regulatory system could cause people to purchase more health care than they would want
  4. The regulatory system could cause health care to be produced inefficiently
  5. Information asymmetries between patients and doctors could lead people to be misinformed about the value of health care and purchase more than they would want under perfect information
  6. The desire to signal that we care could cause us to purchase the most advanced forms of health care available, leading to an arms race in the production of advanced care
  7. Cartelization by health care providers could raises prices
  8. Health care entities may rent seek for higher payments from the government
  9. Health care entities may engage in outright fraud to increase payments from insurance carriers and consumers

While all of these things increase the amount of money flowing to health care entities they are very different issues, with different economic implications.

For example, I’m not sure if (1) is something anyone should be concerned about, nor would we even use the phrase high cost in other contexts. Lots more money is flowing to the makers of smartphones, but we don’t think usually think of high smartphone cost as something we are facing.

Indeed we commonly say that smartphone costs are falling. This is because the value proposition is increasing.

On the other hand (4) could just be a pure economic loss. If good treatments for example can’t pass FDA approval it might be the case that not a single person in America is better off and many people are worse off. As economists we might consider that pretty costly.

Lastly,  its not immediately clear that (9) involves any measurable economic loss at all. If it is extremely easy for some types of fraud to be committed and it doesn’t alter incentives then it could more or less a pure transfer from the victim to the perpetrator.

This may strike people are morally wrong but its not economically inefficient and indeed without saying more its not clear that a consequentialist would consider this a problem worth fixing.

That is what I mean by saying we should focus on what the actual problems are rather than getting wrapped up in the accounting issue of how much money is flowing to health care entities.

So both from private correspondent and comments on my last post I can tell that people read me as asking something different than what I mean to be asking. I am going to try to be more exact, at the price of being less readable.


So, financial commentators appear to be debating the merits of additional QE. Some are saying the effects would be good. Others are saying they would be bad.

I strongly suspect that they intend to be making assertions about the world. 

I do not believe that they intend to speak gibberish as one might do to an infant.  For example, saying “gaga-goo-goo.”

Nor, do I believe they intend to recite memorized lines from a script, like an actor.

Yet, if they are making assertions this suggests they have in their minds some relationship, presumably causal, between QE and the rest of the world.

I want to know what that relationship is, or if there are many different ones at least a few, perhaps more common, samples.

Even if some parts of that relationship are implicitly magical or nonsensical, that’s fine. I am not trying to evaluate it. I am trying to internalize it.

I have noticed that finance blogs, money managers and reports from Investment Banks place significant weight on QE. Some as being a way to save the stock market if not the economy. Some as a dangerous manipulation of markets.

What is not clear is what exactly they believe is happening here?

As economists we have thoughts and debates on this but I am not even clear on how to engage the financial community because I am not clear on what it is they are suggesting is happening.

So one reason to think that this recession is not structural, at least in the way that some people have argued is to look at state-by-state performance. That why you pick up not only the big industry effects but the multiplier effects from that industry.

Here is private sector employment in Michigan over the last 20 years or so

FRED Graph

The thing to note is that what happened to Michigan happened in the late 1990s and has been trending ever since. If anything this recovery is a reversal of that. This is important because Michigan is an obvious manufacturing and “old” economy state.

You could actually make an argument that some of the structural problem is that the economy was realigning so that people were moving from Michigan to Nevada and then whoops Michigan recovered and so now who wants to live in Nevada. Thus Nevada is stuck in rut monetary policy can’t fix. Though I think that is not the strongest of stories.

Ohio shows a similar pattern

FRED Graph

As does Indiana though less pronounced

FRED Graph

Contrast this to the Sun States


FRED Graph

or Nevada

FRED Graph

or Arizona

FRED Graph

Yet, can you really with a straight face tell me that millions of Baby Boomers are set to retire and so I should expect a structural drop in the demand for labor in Florida, Arizona and Nevada?

Now obviously these states had big housing booms and I have had people tell me there are too many homes in Nevada. Maybe, but here is non-wage personal income growth in Nevada

FRED Graph

That’s income from Social Security, dividends, rent, small business ownership etc.

The hump is likely from construction contractors who are often small businesses, but the underlying trend is straight up. Income is still pouring into Nevada from other states at roughly the same rate.

Tourism is down for sure and that hurts, but the retirees by this measure look like they are doing alright.

I don’t have time to go into too much detail but just wanted to make a point inspired by a few pieces I have read lately.

That is the foreclosure process is deleveraging and a wealth transfer from the financial sector to homeowners. This may seem obvious or silly to various folks but let me give one quick thought experiment to see if I can hit on the importance of this.

Suppose there was a massive housing bubble and all the homes in America roughly doubled in price. Also suppose that many people either traded up homes or cashed out home equity so that in the aggregate homeowners had very little equity. Now suppose the bubble burst and home prices headed back down towards normal, further reducing total equity.

Perhaps this is a plausible scenario.

Now, suppose that while trying to set-up his ITunes playlist Chris Dodd accidently presses the Financial Armageddon Button. That button triggers immediate universal non-judicial non-recourse foreclosures for everyone with a mortgage, whether they are current on their payments or not.

What happens?

Well all of the mortgage debt goes away and the banking sector is left with a bunch of houses which it must sell. For the sake of argument lets assume that virtually no one can get credit.

So the prices of all of these will collapse until the inventory can be cleared even in a no credit world.

What does this mean for homeowners.

It means that they now have houses, but no mortgages.

They lost little because they had no equity. They gained a lot because they now have houses, but no debt. So they are much wealthier, at least in this part of the analysis

Where did the “wealth” come from? It was a transfer from the financial sector to homeowners.

Now of course there are a lot of other questions people will immediately ask about knock-on effects, financial collapse and who in the end owns the financial obligations, but this core dynamic is I think underappreciated.

Steve Randy Waldman has a characteristically excellent post where he argues that the monetary policy we observe in Japan, the Eurozone and to a lesser extent America, is simply the result of the preferences of the political influential class of savers.

I love this post for a lot of reasons but one is that it gives me a chance to say: I just don’t buy it.

Lots of time in intellectual discourse we don’t buy the arguments from others and feel compelled to give reasons. This results in a lot of – for lack of a better term – intellectual bullshit.

I don’t have a clear well defined reason for rejecting Steve’s contention. I am just not yet convinced. So rather than committing myself to a half hearted argument and muddying the conversation with junk talking points its better just to announce that I am not sold.

This has the tendency to lower my status as any good intellectual should be able to defend his position, but luckily with Steve this is not a concern.

I can feel comfortable simply saying, I like it but still no. At least not yet.

Among other things this makes it much easier to change my mind if he does convince me as my defensive arguments are likely to trick my subconscious into being more committed to the notion that he is wrong.

Hopefully a short post. This idea doesn’t seem radical to me but given the conversation I suppose its different than what most people have in mind.

Its not immediately clear to me that we should care at all about inequality per se. Some folks have argued that income inequality leads to political inequality. Of course, that is not something I am likely to care about either.

What I am concerned with is the conditions that poor people face.

An argument that does have currency with me is that if we can successfully take access to resources from richer people and given them to poorer people then this is a good idea. Not because it reduces inequality, but because it simply increases the opportunity sets of poorer folks which I think is generally better than increasing the opportunity sets of richer folks.

However, ideally I would want this to have as little destruction of total opportunity sets as possible which might mean tolerating very high or increasing levels of inequality in general.

More concretely it could mean creating an economy where the rich got even richer but we could redistribute some of that wealth to poorer folks.

Some might argue that if the rich become super rich they will resist this. Maybe, but its not clear to me that this happens in practice.

Even if you think of the Reagan Revolution as have reduced the amount of redistribution that actually gets to the poor that happened at a time of lower inequality.

It is true that Welfare Reform happened during relatively prosperous times but I think that is a more complex issue. In the 90s, however, the earned income tax credit seemed to be very popular and of course as societies has become richer they tend to increase Social Security for the disabled and elderly.

I don’t mean this to attach to any particularly policy proposal (besides radically lowering immigration restrictions) but just as a general way of thinking about the issue. The question is what can we do to improve the lives of the least advantaged.

Whatever inequality winds up being under this strategy is fine by me.

Matt Yglesias, among others points out that batteries are a stumbling block to full scale electric vehicles

This is bad news for the world. If you look at the mobile computing space, precisely the area in which you don’t see breathtaking innovation is this battery stuff. We’re just not getting better at the basic physics of storing electricity in a reasonably compact way. Battery life for things like smartphones and laptops has improved, but that’s all coming as improved efficiency of the chipsets. But here, too, the basic physics of translating engine power into forward automobile motion are not amenable to enormous improvements.

I actually think there is a lot more room to radically improve the economic here.

The way cars work now is that

  1. People generally own the car that they use for transportation
  2. Most cars are idle most of the time


These two things are massively inefficient and contribute to an enormous capital expense for driving. The reason we do this is two fold. One the operating expenses for cars are really high – both in terms of fuel and the drivers mental capacity -  so the capital expense is not as big of deal. Two, convince is a big deal.

Luckily we have the confluence of several techs that are potentially game changers here.

First, are driverless cars or autonomous vehicles (AVs) as I prefer to call them.  This radically cuts down on the amount of attention that someone has to devote to driving and so the operating expense goes down.

Second, is cheap electricity. Currently electricity is already pretty cheap compared to oil. It will probably get cheaper in America in the near term as a a result of the natural gas boom and a reduction in the cost of combined cycle generators. In theory you can make one small enough to fit your house, which means gains from mass production.

Over the long run Photovoltaics are the likely source of very cheap power. Lets leave the discussion of how the energy will be stored/distributed for later.

So, that’s a reduction in the fuel costs.

Third, smartphones would allow us to order a AV to our exact location, pay for it and have it drop us off. Further we can order exactly the AV we want. Many seats or few. Lots of storage or little. Fancy or basic. Consumer comfort or a rolling business office, etc.

Lots more convenience.

All of these factors together mean that there is now enormous pressure to get more out of the capital and luckily there is an easy way – battery swapping.

I imagine that most AVs might have a small internal battery for cruising around the home station, but in general the AV will pickup the battery it needs for the job that it has been tasked to do. This means that batteries will always either be charging or in use.

Even at night, when most humans are asleep the batteries can be swapped in to delivery vehicles. This means the battery is in constant use which means that its use is amortized over a much shorter period of time and the cost of capital is much less.

Getting from where we are today to this world is a challenge but it is one of the advantages of lots of rich countries. Someone – probably the South Koreans – will go for this system first. Then folks will look in awe and want it for themselves.

Kevin Drum writes

Today, Aaron Carroll tells us the story of TriCor, aka fenofibrate, a cholesterol drug licensed by Abbott Labs in 1998. Unfortunately, TriCor’s patent was due to run out in 2000 and a maker of generic drugs was all set to produce a generic version. So Abbott sued, which delayed the generic version by 30 months:

. . .

The cost to American consumers of not having access to a generic version of TriCor is on the order of $700 million per year, money that (presumably) accrues to Abbott Labs instead.

This is a part of a longer point but its important to note that its not clear that health care costs were raised as a part of this.

There may have been deadweight loss, though given widespread health insurance and government payment plans its not clear the deadweight loss is that great.

Mostly it seems that at worst money was transferred from consumers and taxpayers to TriCor. This is not an economic cost. It is simply redistribution.

So, one concrete problem that you might have with the US health care system is that it serves to redistribute income in ways that you do not like.

That’s a real thing. You could say, I would rather have the money than Abbot Labs and I understand what problem you face and we can talk about solutions.

However, as generally used the phrase “high health care costs” doesn’t refer to anything that makes any economic sense and so its not clear what the appropriate remedy is.

I would like to encourage people to be more explicit about the real problems that they perceive rather than extensive references to large scale accounting issues.

I haven’t written about obesity in a while but this from Tyler Cowen prompts me

Dr. Sturm found no relationship between what type of food students said they ate, what they weighed, and the type of food within a mile and a half of their homes.

At the same time Scott Sumner provides with a rhetorical tool that might help me convey what is otherwise extremely difficult to convey. That is:

Never reason from a food choice

Just like price and markets, food choice seems like the most obvious aspect influencing nutritional outcomes. Its right there in front of us. However, once you realize you are dealing with an equilibrium system the most obvious candidate frequently becomes the least powerful one.

To start with the choice of what to eat and when is obviously extremely basic. All animals do it for sure. Maybe we can get into some debate over whether bacteria and protozoa do it, but we know for sure that all animals make choices about what to eat.

However, we don’t think that most animals actually make the same type of deliberate choices that we think of humans making. Some of them have such rudimentary brains that it seem strange to talk about the choosing at all or indeed being “aware” of what they have eaten. They live in the moment and operate on nearly pure instinct.

Yet, these animals balance their caloric intact. Together with reproduction that is the main thing that many animals do.

So, we know that there must be some mechanism that matches caloric intake and output. Where these two forces intersect the drive to eat is the result.

Now you observe an oddity. The body mass of human beings – and seemingly other animals but that is another story – is rising. Why?

Apparently a lot of people run to food choice and say, well people must be choosing the “wrong” foods. However, this is bad question. We are dealing with an equilibrium system. What exogenous force has caused food choice to settle at a different level.

We know food choice hasn’t simply gone off the rails because people do not increase body mass without bound. This is technically possible but almost never happens. Instead people increase a given amount of body mass and reach a new equilibrium.

This suggests something has happened to the feedback mechanism. But, what?

Maybe we say advertising or something else. But, then you study the mechanism closely and it is darn robust. For example, just to show extremes you can forcibly run a human being up to expending 8000 calories a day without worrying that the human will even slowly starve to death.

That means that it can take an at least 4 fold shock to its system and not miss its equilibrium values hardly at all. The misalignment associated with obesity is quite small compared to that.

This should make us think that its not a simple shock. Something more subtle has happened to the feedback mechanism itself.

In the modern world no one is going to let us cut open human beings willy-nilly and screw around with their endocrine and nervous system. If we could then we could solve this mystery in no time flat.

Given ethical limitations we are forced to make inferences on data that is far removed from the systems of interest. Nonetheless, we still know such systems exist and we should suspect that they have something to do with hormones and other peptides.

We know that when we go screwing around with people’s hormones their basic desires change. Food is a basic desire. We also know that body composition and food intake change hormones.

Thus our baseline should be that something weird is happening to the hormones.

And, that is really my message. Hormones ought to be the baseline here. Its of course possible that some other theory is correct but this should undoubtedly be the one we run to first.

As it turns out there is increasing evidence for the hormone theory and we think we may even know some of the ones that are involved ghrelin, peptide YY, etc. That’s great. But, its not the empirical evidence that should be swaying us here. Its is extremely preliminary.

What should be swaying us is basic reasoning about how dynamical systems operate.

Another sense I am gathering from the blogosphere is that understanding the macroecnomy in practice is about understanding savings.

That seems astoundingly obvious on one level as Keynesianism is all about savings; Moneterism is largerly about money and its dual role as a store of value; and Wicksellianism is all about the interest rate.

That’s all fine as a technical matter. However, what I think folks are missing are deep conceptual issues around savings.

At its heart I think it is because people have deep emotional issues attached to savings, so let me tell some personal stories that will help illustrate why I see the difference.

When I was a small kid, maybe five  or six – I can’t remember exactly – I was fascinated with savings. In particular, I was fascinated with compound interest because like many math oriented kids I loved the non-intuitive nature of geometric series.

I would sit I the bath calculating how long it would take to reach various levels of wealth given certain rates of savings. This was before common place calculators – at least for someone at my income level – and so I would develop lots of tricks that are now obvious to anyone with basic financial math, like doubling time and reverse amortization to go from a final wealth to a payment.

What ever quirk this is stayed with me the rest of my life so that as I have written before, I spent part of my youth providing financial services to folks who don’t have access to mainstream means.

My infamous – truly ask many of my old friends – miserliness was not limited to just accumulating compound interest. In the 90s when interest rates were low by my standards I did in fact keep thousands of dollars in cash in my sock drawer. No reason. I just did.

For most of my life I have hated material consumption, especially nondurables. I have personally owned one car in my life and that was a hand me down once I started working away from home in a town where I need transportation. Every other vehicle I have driven was someone else’s.

Besides computers, which I was bought once I left the free access of the university computer lab, I have rarely owned major devices. I have never bought a television or home appliance for myself. I once accepted a hand me down toaster oven. I have never bought a piece of furniture for myself.

In college I lived on a mattress on the floor a got from someone who was moving out and a couch a got in return for power washing a ladies basement. I never owned more than one plate, one pot, a pan and a few forks for myself.

The primary meat that I ate one my own was canned tuna and that was back before the health craze made it so damn expensive. At the time you could get them on sale for 25 cents a can.

As I mentioned before I have never had bought health insurance for myself with my own money and until I became much older I never paid for physician or hospital services with my own money. Though I did buy pharmaceuticals.

I say all of this to make it clear that the moral issue of trying to conserve was never a problem. My view has been that material things were a burden and in general even taking care of them took up more time and energy that they were worth.

As such I have never felt the guilt waiting to consume beyond my means and I think that gives me a different perspective on the world.

That is because the guilt seem to cloud the thinking of most people and lead them to conclude that forestalling consumption and worse reducing expenditure is an unmitigated good. To be clear I like to forestall consumption but out of pure selfishness. Not concern for anyone else or “doing the right thing.”

This I believe helps me think more clearly about savings and to understand the inherent difficulties associated with it. Far from being a utopian ideal to which we should all strive, savings is actually logistically difficult. Things rot. The wear out. The become obsolete.

You have to pay to save, and I know because it is a payment I have had to endure. You can loan your money to someone though outside of official channels getting it back is a non-trivial exercise.

People can and do loose your money.

This is actually more common than people stealing your money. Most people will lose your money out of stupidity. Its another story all together but people consistently think that their plans and ideas are good when almost all plans and ideas are shit.

In any case transporting resources into the future is a fundamentally hard proposition when you try to do it yourself. Then you might ask, why is it so easy for society to do it.

Well this was a puzzle for me, but if your interest is peaked by this then you will investigate and notice that it comes down to couple of things:

One, the court and credit system help you to enforce claims against other people: When you loan people money they will probably use it for some stupid idea for the sheer fact that most ideas are stupid. This will result in a loss. However, what you can do is get either the court or the credit system to entice them to give you some of their other stuff instead.

This is why going into debt seem like a bad idea for most people. There is nothing wrong with the debt per se. Its just that the debt empowers them to act on their ideas, which once again are fundamentally stupid.

Without debt they just sit around imagining all the goods things that could happen if they had access to resources but of course none of these good things will actually ever happen  no matter how many resources they have access to, so they are better off just living in fantasy land.

Two, buildings, buildings, buildings: Building are like magic for so many reasons. For one thing they deteriorate very slowly. That’s usually your problem with most savings. Things rot. Buildings of course “rot” but they do so very slowly especially if they are made out of concrete or set on a concrete foundation which is a huge freaking deal. Like really a game changer.

Second, is buildings allow for increasing productivity. Its not just that you build a building and then the folks in are more productive. You build a building and then the next building you build right next to it is more productive. Its like freaking magic.

This of course is the origin of urbanization, and it’s a huge deal. It allows your savings to work wonders.


The thing is these golden gooses do not work all the time. For one thing the loaning people money doesn’t work in the aggregate. Not everyone can save by loaning people money. Boom, right there half the ease of savings is gone. What is easy for a person is now hard for a nation or the world.

The second is that buildings run into problems. For one people want to move but moving buildings is hard. For two, people put up all sorts of zoning restrictions. For three congestion ultimately decreases the usefulness of buildings. For four, stupidity rears its head and sometime people build buildings in really unfortunate locations. For five, buildings work best when you can fill them with people and at least in the developed world we are running out of people.

All of this comes to the point that in an aging industrialized country that already really dense savings because really difficult. Nonetheless people are still programed that its an unmitigated good.

This makes it hard for them to accept  it when folks like me say, look you need to chill out on the savings. People think I am crazy. Then when their savings yield no return they get all upset like they have been screwed, when in fact this is just life.

This phenomenon is so pervasive that whole economies go into recession in part because people cannot wrap their minds around the concept that savings is logistically difficult and that if you do too much of it you will run into to trouble.

Those with money insist that the government hold steady or in some cases even reduce the quantity of money in circulation so that money becomes more scarce and it appears that they are becoming wealthier when in fact they are just taking an ever increasing portion of a shrinking pie.

The problem is just that savings is logistically difficult yet people cannot seem to accept this.

While I am completely sympathetic to all of the points Scott Sumner raises I have been reluctant to fully embrace the Market Monetarist School for a couple of reasons.

First, being a neo-Wicksellian/Woofordian I do in fact believe that interest rates and expectations of future interest rates, not money itself stear the nominal economy. I think monetary policy in a world without money works just fine.

While this is an interesting academic dispute its not clear that it matters much for real policy. Market Monetarists believe that long run expectations of monetary policy matter and as long as we agree on that there is no practical difference.

Second, I am becoming more sold on the need for a new policy regime. For one thing I am increasingly skeptical of the dual mandate. As my previous post suggests my concern is that the weighting of the elements of the mandate are regime dependent and that this introduces monetary uncertainty and policy error.

Third, in a deeply practical sense I think selling a higher and steady Nominal Spending target is easier than selling a high inflation target. Especially as we enter a world with unfortunately falling population growth this will be key.

I actually don’t think we will experience much in the way of a fall in TFP growth but I think population growth is actually more important because the particulars of capital accumulation with respect to TFP growth are more variable.

Put another way, given equal GDP growth there is more variance associated with the marginal return on various capital projects under high (frontier) TFP growth than under high population growth or catch up TFP growth.

I believe this means that the associated natural rate of interest is lower.

Scott Sumner writes

What interests me most is that [Pianalto] talks as if the Fed is still steering the nominal economy, despite near zero interest rates.  Other people may not see it that way, but swing voters at the FOMC certainly talk like they are still “doing monetary policy.”   In one sense that’s reassuring—we’d hate to see those at the controls claiming that the steering mechanism for the economy was stuck.  On the other hand it’s also a bit dismaying, as the marginal crew member of USS Nominal GDP seems happy with the ship’s course; even as Obama, Romney, Bernanke, 14 million unemployed, and the US stock market think it’s obvious that aggregate demand is too low.

I’d like to encourage a shifting of the conversation. I think virtually all nominalists agree that there is monetary policy at the zero lower bound.

What we disagree about is whether the Fed’s reaction function changes significantly in the presence of the zero lower bound. Indeed, that might be an interesting paper.

This could take on several forms. One, as I suggest is that the reaction function could become asymmetric, so that the Fed attaches a very high loss weight what we might call “non-Keynesian easing” but “attaches a low loss weight to “Keynesian easing.”

In this case normalizing interest rates though expansionary fiscal policy in effect serves to soften the stance of monetary policy.

There are at least two other hypothesis worth exploring:

One is that the Fed’s inflation weighting simply rises as it hits the zero lower bound. I don’t have an immediate explanation for this apart from the hypothesis above, but we should consider that something odd simply happens in the minds of central bankers as they bump up against the zero lower bound. The evidence suggests this.

The second is what I am loosely calling hysteresis in policy making. This is essentially the hypothesis that policy makers become inured to their past mistakes. So in a regime that has had persistently high inflation, the loss weighting of inflation begins to drop.

In a regime that has persistently high unemployment the loss weighting on unemployment begins to drop. Policy makers themselves begin to accept the new normal.

All of these cases, have important policy implications.

One of course is a strongly growing level target that assures that the Fed never bumps up against “non-Keynesian easing” the other is that fiscal policy or more importantly automatic stabilizers could have an important role to play early in a recession.

This is very out of the box, but imagine a standing Civilian Corp that works like this. At any time anyone can sign up for 6 months of work at the Civilian Corp. You will be paid 70% of your previous average salary and will not loose unemployment eligibility. Though you can only do one round in the Corp every five years or so.

The Corp then outsources you out to non-profits to do charitable work.

The point of the Corp is this: When a large unexpected aggregate demand shock hits  many people will choose the Corp over running out their unemployment benefits.

The huge rise in Corp employment will serve as an obvious sign to policy makers that they have failed. Yet, the sting of true jobless will not have hit yet. This gives a buffer zone where it is undeniable that monetary policy is falling but the worst of joblessness has not yet come about.

The hope would be that policy makers would move to shift monetary expectations quickly so as to prevent the emergence of true joblessness.

Now, I am fully aware that in the ideal monetary regime we never even get to this point because the Central Bank is always targeting levels. However, in practice the regime is likely to make some sort of unforeseen error and need to change expectations quickly.

This at least give us a buffer.

I am of course not hanging my hat on this idea, just throwing it out.

My real concern is measuring policy makers loss functions under different regimes.

I am not even sure what to make of this, but in a note relating to the Keynes-Hayek debate Edmund Phelps writes

What now do we do? With some luck, the economy will
“recover” through a return of investment activity to sustainable
levels once some capital stocks, like houses, have been worked
down. But it will not recover to a strong level of business activity
unless something happens to boost innovation. The great question
is how best to get innovators humming again through the breadth
of the land. Hayek himself said little on innovation. But at least he
had an applicable theory of how a healthy economy works.

The Keynesians, sad to say, show no understanding of how
the economy works. They think they can lever employment up or
down by pushing buttons – as if the economy were hydraulic. They
show no grasp of the concepts that would be necessary to restore us
to prosperity and flourishing. In an old image that applies well to
the posturing of today’s self-styled Keynesians, “the Emperor has
no clothes.”

So obviously there is the general mincing of welfare and macroeconomic notions. Does anyone seriously doubt that the government can lever up down employment by pushing buttons? Suppose  that anyone found having a job was shot on sight. Show of hand for how many think this would lower employment.

Suppose I drafted all citizens between the ages of 16 and 65, do you think this would raise employment?

But, lets leave that aside since a lot of folks get confused over the difference between welfare and economic aggregates.

What is anyone to make of the statement that a

a strong level of business activity unless something happens to boost innovation

How can that possibly be anything other than a monetary statement, which Phelps rejects as a cause for the slump. Accept for concerns over monetary policy what at all would innovation have to do with business activity?

It is clear why you could not get economic growth without innovation but the vast majority of business activity over the course of human history have been in economies that were not growing.

Indeed, the vast majority of business activity that occurs from now until the end time will almost certainly be in economies that are not growing. Sustained per capita growth is an odd thing that just started recently and will likely end in fairly short span of time.

I hate to put it this way but I cannot read this without wondering, if this is what Edmund Phelps thinks, then what do most people think?

Tyler Cowen has some comments on the ObamaCare chatter

. . . the “war” is the joint view — extremely common in America — that a) tax revenues are on an acceptable track, and b) we should spend more and more on health care each year at high rates, including in per capita terms.

If you think that dual project is sustainable, you may be relatively interested in estimates relative to baseline.  If, like me, you think that project is like a failed and failing war, a success “relative to baseline” won’t much impress you.  In fact it may scare you all the more to hear about success relative to baseline, as that can be taken as a signal that there is no really good plan behind the scenes.  Here are a few factors which could radically upset current mainstream baselines:

Its not immediately clear to me what these two paragraphs mean exactly, but off the cuff I don’t know who the folks are who think that current tax revenues combined increasing health care spending is sustainable.

There are certainly people who don’t think about it much, that probably constitutes the bulk of society. Then there are people like me who think that sustainability is not an important consideration. Well, that’s probably just me, but I think I am slowly winning converts.

However, the mass of the chattering class is constantly talking about the need to reign in health care costs and/or reform the tax code, often with an eye towards more revenue.

Perhaps more interesting to me is this point by Tyler

Imagine people sitting around in Spain, in 2006, debating various scenarios relative to the “baseline budget.”  Maybe that’s America today, though we do not face the same particular problems or timing that Spain did.

This sounds like a point I would make. Doesn’t this reveal not only the asininity of this entire exercise but the deep foolishness in thinking that responsible and prudent action will save you from being royally screwed. After all, Spain had not only a low budget deficit but was running a strong surplus. They were a prime example of a good little European citizen. And, now here they are on the verge of destruction and being pressed into ever worse policies by the European elite.

My growing sense is that in their heart of hearts most people just can’t accept that the world is fundamentally unfair. They think there must have been something that could have been done to prevent this badness. If only . . .

If only nothing in many cases. You were just screwed. That is life.

If you want to get out with your head intact then the question is not how to be responsible but how to survive a crisis. When you are engulfed in flames – and you will be – what do you do?

This is why if there is any lesson from all of this it is to point out how fantastically awful the ECB’s management of the crisis has been. Will this stop policy makers from screwing up similarly in the future, of course not.

The hope is that we will know who to hang, and that we can proceed with the hangings in short order. That is the way out.

Part of my general thesis behind a robustly recovering US economy was that we would see a marked increase in the construction of multi-family housing units.

The press continues to note the general strength of this segment but relative to my view of the economy it has continued to disappoint.

Here are Multi-Family starts over the last two years.

FRED Graph

That might look impressive until you compare it to what a real boom looks like

FRED Graph

The “hopeful” argument is that while the absolute increase is much smaller this time around the pace is actually a bit faster, a four-fold increase rather than a 3-fold increase.

However, given the current conditions in housing I was looking for an even stronger snap back. This alone will not be enough to push the economy into a boom. We need a series step-up in the rate of growth.

What’s worse from a long run perspective is that the failure of multifamily to bounce back potentially sets up single family for a new bubble. With rents tight and likely to get tighter, buying becomes a better and better deal.

This has the potential to bring out both investors and first time buyers in droves. That in turn will lead to an extremely rapid draw down in inventory, which leads to a stabilization in prices, which leads to looser lending standards which leads to a boom in buying.

That kind of instability is difficult to manage. Economic stabilization going forward would be better if there was a larger stock of multifamily rental housing, yet that is looking increasingly unlikely.

Felix Salmon writes

In this kind of a recession, monetary policy — reducing rates to zero — doesn’t work. And tax cuts don’t work either: they just increase household savings. You need government spending, at least until the economy has warmed up to the point at which companies and individuals start borrowing again. And the good news is that in a balance sheet recession, government spending is pretty much cost-free, since interest rates are at zero.

Except that rapid increases in household savings will cure the balance sheet recession. With all due respect to Felix I think this is part of the ideological blinders than lead to bad policy on all sides.

One can make an easy case that direct government spending would generate more immediate stimulus in general and especially during a balance sheet recession.

However, folks are weary of direct government spending. Rather than wasting a lot of time and energy arguing over that its better to simply choose policies that everyone can agree on and then go really huge on those polices.

My original suggestion from early 2008 was a complete suspension of the payroll tax combined with open ended loans to State and Local Governments. I still think that would have given us a much quicker repair than we saw.

Note we would be transferring at least $450 Billion a year into households pockets and potentially savings. Though likely the net effects would have been much larger as no payroll tax would have increased labor demand.

As it was households only reduced their total debt by about $700B over the course of the last few years. Meaning that they could either have accomplished this entire adjustment by sometime in 2009 or if they had continued to save the entire portion then by now they could have made an adjustment at least two and half times larger.

FRED Graph

Further, even if you don’t buy the idea that the marginal effect of taxation would have mattered much in the recession the relaxation of cash flow constraints on businesses would have. That is, some businesses slowed down radically on hiring in part because they were unsure if they would be able to meet payroll. Lowering the cost of payroll would have lowered that.

However, we can take it even further. One of the goals of the Administration and Democratic Congress was clearly an expansion in health care.

Suppose at the apex of the crisis you have offered to Federalize Medicaid. That is to move the entire program to being funded by the Federal government. The logic being that this would remove a huge burden from the states at a time of crisis and give the states vastly increased flexibility.

In both cases what you are doing is moving liabilities off of state and private balance sheets and on to public balance sheets. This is exactly what you would want to do in a balance sheet recession and it could be done without authorizing any new spending.

Again my point here is not argue whether this would have been the best conceivable policy but whether or not it would have been a better policy than we got and less hamstrung by partisan differences.

There is approximately zero percent chance of the Federal Reserve staking out an official position like this, but would push for an interim statement like the following:

The Federal Reserve regards the deterioration in sovereign balance sheets within the Eurozone and the associated stresses within national banking systems as posing not only a risk to sustained growth in the United States, but as contributing to significant deflationary pressure around the world.

A large and unexpected fall in the dollar price of internationally traded goods and services raises the risk of deflationary expectations with United States and the committee will take all necessary action to prevent this dynamic from taking hold.

The clear message being that unless the ECB and the Bundesbank reverse course immediately they can expect the current Eurozone recession to be compounded by a rising Euro.

I’ve been playing with the JOLTS data and I don’t have anything too too solid to report but I did want to reinforce some of my earlier points about how different the US economy as a whole is from the economy we have in our minds.

We usually think of a worker as a breadwinning head household in a career job. He or she has a steady life that may be rocked by recession. However, one of our most job heavy sectors is Leisure and Hospitality. Look at its basic dynamics

FRED Graph

Its quite large at nearly 10% of all jobs. Its fast growing generally. Was one of the few sectors to show increased employment from when the recession ended and it recent months may be growing faster than at any time during the last recover.

In addition look how dominate it is in terms of overall job growth. Here are the12 month moving averages.

FRED Graph

Currently the 12 month moving average of all job growth is around 150K, suggesting that nearly 1/5 net new jobs is Leisure and Hospitality.

Generally speaking this is a trend I would expect to continue as the End of Retail is combined with increasing income inequality. We should expect low skilled workers to become increasingly concentrated in direct service jobs like hot food and drinks.

Any one one of the points I wanted to make is that despite the huge job losses associated with the recession, there were not actually many layoffs or discharges in this sector. Here are the JOLTS data

FRED Graph

If anything layoffs and discharges seemed to ease during the last downturn. I think what we are looking at is simply an incredibly dynamic sector of the economy in terms of workforce.

Rather than seeing a recession happen in terms of layoffs and sending people home. We simply see that job openings shut down.

FRED Graph

This has potentially interesting consequences. If what we are seeing is that for some reason – maybe hardship, maybe life cycle – folks are passing through this sector, then when this sector shuts down on hiring its going to have some strange outside-insider implications.

We are not going to see lots of workers loosing their jobs, simply that the opportunity for new workers to gain jobs will collapse. This is somewhat different from how we commonly talk about job markets.

And, in general I think its important to point out that much of the US workforce is in areas that don’t have the office like dynamics that are common to folks who read and right blogs.

For example another sector where layoffs were not the norm but hiring collapsed was health care and education. That’s even larger in terms of employment.

This is a point I have been meaning to make for a while and Mark Thoma’s post this morning spurs me on. He writes

My view is that the costs of doing too much — the inflation cost — is much lower than the costs of doing too little, i.e. the costs of higher than necessary unemployment (though see David Altig). I’m aware that we differ on this point, those in favor of relatively immediate interest rate increases see the costs of inflation as very high and it’s this point that I hope will generate further discussion. In reality, how high are the costs of a temporary bout of inflation — I have faith that the Fed won’t allow an increase in inflation to become a permanent problem — and are they so high that they justify erring on the side of doing too little rather than too much? I don’t think they are, but am willing to listen to other views.

My understanding is that the principle fear regarding inflation is that if a sustained period of high inflation were allowed expectations would become unmoored and the Fed would lose it hard won credibility.

The problem with this view is that it flies in the face of the notion that inflation expectations are rational.

A rational agent incorporates knowledge not only of Fed behavior but of the informational and operational constraints facing the Fed. If it is in fact the case that the Fed is only risking higher inflation because it is

  1. Uncertain about potential output
  2. Concerned about hysteresis
  3. Has difficulty adjusting policy at the zero lower bound
  4. Is operating in the wake of a major international financial crisis

Then a rational agent should not conclude that long run inflation targets have meaningfully changed.

And, we must remember that rational agents are not “cynical agents.”

An agent who was irrationally cynical about the Fed’s attempt to tame inflation from the 1980s onward would have lost enormous amounts of money shorting the bond market.

Agents today face a similar gamble and it simply would not be smart to assume that a Fed that was aggressive now is giving up on its long run inflation targets.

Thus there is little reason to think that if the Fed is not in fact giving up on inflation targets that the market will believe that it is.

I think the following is true more generally, though I understand it would require a proof:

The Central Bank cannot advantage itself by attempting to send false signals to rational agents who possess the same information.

For example, making a bigger deal about inflation than what would accurately reflect the Fed’s loss function cannot serve to lower long term losses. The market will not be “fooled” by such signals into up-weighting the inflation component of the loss function in future periods, but the Fed will suffer losses in the present period.

Cardiff Garcia has a great post about safe assets and the quest for collateral. In the end he asks

Does the shadow banking system’s relationship to monetary policy have any implication for the Smithian/neo-Wicksellian view, which awaits the natural rate of interest imminently rising to and exceeding the federal funds rate?

The short-short-short answer is that from the looks of it right now the real economy driving the natural rate up will outrun the collateral contraction.

The short-short answer is that I will admit I am growingly concerned about what happens when we cross over to the other side. I have not looked into the details but from a 30K foot view I imagine that we will soon hit a point where the issuance of private safe collateral reverses, which could push some part of the economy into an uncontrollable boom.

My baseline expectation is that there is a non-trivial chance it could be housing all over again. Though again, I don’t know the details of the market.

In any case it’s a pickle because the fundamental asset problem remains and there is no clear way to stop the boom-bust cycle when private collateral is so strongly pro-cyclical.

As I hinted at, at Kauffman the ideal strategy would be for the US government to run massive deficit – most efficiently by dramatically reducing taxation at all levels and transferring the burden for Medicaid and Higher Ed to the Federal government and the massively opening up to immigration.

Thus allows us to support the issuance of massively more public collateral and have it backed by a larger population. Absent something like this I think there is no obvious way to avoid this.

PCE moved forward rapidly in Feb, no doubt raising tracking forecasts for Q1GDP. Importantly, it seems that while the decline in energy consumption has slowed, it has not reversed.

Regardless of what happens with the weather we should expect the official measures of energy consumption to turn north hard as the winter passes. In short, low heating during the winter  cut deeply into consumer spending measures.

However, as we pass into the Spring the seasonal adjustment will except heating expenses to fall away anyway, so it will no longer count against consumer spending estimates. This will be reflected as boom.

Rough and ready from a text file I managed to find. The new series smoothes out the jump we saw last year and confirms the year-over-year storyline that there has basically been a smooth trend downward with a bit of flattening out last summer.


There seems to be some disconnect or bit of talking past one another on the issue of a housing recovery.

There are people in the Recovery Winter camp, like myself, who argue that the upturn in housing will contribute to sustained growth in the United States, baring major unforeseen shocks. That is, unless something identifiably contractionary happens we should expect growth to become more solid, with fewer disappointments and a steady path back towards our long run trajectory. In short, a recovery.

However, I am receiving a steady stream of comments noting the continued downward movement in home prices along with evidence that the uptick in new home sales and starts at the beginning of this year was a fluke.

So, to be clear, I don’t think there is any reason why we should expect strongly rising single family home prices in the near future. Nor, is my baseline assumption that we will see a strong increase in single family construction. The upturn at the beginning of this year was surprising to me as well.

In contrast, my thesis is first that single family construction will not fall any further. Currently new single family homes built-for-sale are running slightly behind new single family home sales. Inventory is at record lows and declining. Thus even with continued weakness in the existing home market we are not likely to see significant declines in new single family home construction.

This is in large part because new single family home construction is close to or outright dominated now by custom home construction. That is homes built by owner or built by contractor for a specific owner. There is no substitute for a custom built single family home and there is no reason to expect that people in this market are going to be doing worse economically. So, we think those builds are safe.

In contrast the baseline scenario involves a pick-up in multifamily construction as rents rise. At core the reasoning is that a breakdown in the mortgage market and/or folks desire to invest in single family homes does not change the need for housing. Currently America’s population growth is well outstripping its housing stock so that we have an abnormally large number of people per household and an abnormally small number of households.

Barring a large cultural change – which is possible – this will mean a steady increase in the demand for rental housing. We have seen this as rents are currently rising quite rapidly and reports from apartment owners show what are approaching record low vacancies.

This makes constructing apartments a great value proposition.

Now, lots of people point out that multifamily is a small part of the overall housing market. This is true but two things:

First, the small size of multifamily is a result of a 20+ year expansion of single family homes. Go back to the 70s and 80s and multifamily construction was on par with single family.

Second, for growth what matters is not the level but the absolute change. If multifamily went from its current pace of roughly 200K units a year to a pace of 800K units a year that would constitute massive growth, even though it would be well shy of the record pace that single family construction hit during the boom.

A residential industry that was pumping out 800Kmultifamily units along with roughly 400K single family units a year would also be in a robust recovery, with rapidly declining unemployment among construction workers.

This scenario, in which new home construction comes to be dominated by multifamily built-to-rent units does not require the single family housing market to normalize anytime soon. Indeed, it predicated on the assumption that the single family home market will not normalize soon.

If the single family home market does normalize it will put a dent in the multifamily market. I suspect that part of the reason multifamily isn’t accelerating any faster is concern that the single family market will repair itself ahead of schedule and knee-cap rising rents.

You just can’t beat this closing, in my mind’s eye it was complete with a mic drop and Scott walking off stage right.

Monetary policy should always be set in such a way as to produce on-target expected NGDP growth.  That’s the Lars Svensson principle.  If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed.  With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world.  Spending has opportunity costs.  Unemployment compensation discourages work.  Saving boosts investment.  Protectionism is destructive.  And so on.  That’s the policy we should be teaching our grad students.  The optimal monetary policy.  Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress.  As far as I can tell, those countries don’t exist.

A cursory look at personal income statistics shows that the biggest drag on personal income right now is the decline in transfer payment from the government. At first this seems natural as the economy is recovering and automatic stabilizers like unemployment insurance work in both directions. They slow the descent into recession but as they roll off they also slow the recovery.

Yet, the recent numbers were to big to explained by unemployment insurance alone. It turns out government health care spending is dropping by unprecedented amounts.

Below are year over year declines in transfer payments

FRED Graph

The blue line is Medicaid which is now outpacing Unemployment insurance in terms of absolute year-over-year spending reduction. The red line is Medicare, which is whose year-over-year spending is not quite in decline but appear poised to make declines in the coming months.

This may be why the fundamentals in health care look surprisingly weak. Job gains have slowed as well as capital expenditure.

Just a quick shot. One growing point of tension that I that has both semantic and substantive difficulties is whether or not we regard the situation in the mortgage markets as “structural.”

Clearly the health of the mortgage market is strongly influenced both the business cycle and likely by monetary accommodation directly. It also is dynamic in that we don’t expect things to last.

At the same time its also clear that it changes how monetary policy affects the economy. To illustrate, the problems in the mortgage market are well known but look at commercial banking outside of the mortgage market.

FRED Graph

A rapid return not just to normalization but to conditions that are almost as good as it gets.

This seems to be the theme building in Federal Reserve speeches and communication. Ben Bernanke today.

To sum up: A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed.  Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force.  Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.  Notably, an examination of recent deviations from Okun’s law suggests that the recent decline in the unemployment rate may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009.  To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.

Rate are improving, but “conditions remain far from normal” in the level.

This links well with “economic conditions are likely to warrant an exceptionally low level for the Federal Funds rate”

We are beginning to see a strong implicit recognition that the relevant economic conditions are not the growth rates of real variables but the level of those variables, particularly employment.

Fed officials appear unwilling at this point to make similar statements about the price level, though we have seem some significant table-setting by Charles Evans in that regard.

Though I would generally regard this as a slow and steady move to shift expectations, it could also be regarded as “Odyssean” guidance, in that as the Fed takes more and more implicit responsibility for the level of employment it is providing ammunition to its dovish critics.

This in turn changes the Fed’s loss function so that an attempt to raise rates early is more difficult.

I should note the dynamics of a body that has some but limited tools to alter its own loss function are fascinating in-and-of-themselves.

Tyler Cowen discusses the general implications of runs on the new (shadow) banking system. Though this point leads directly into something that I have been thinking about

Another feature of this new order is that more and more financial transactions will be collateralized with the safest securities possible: United States Treasuries. Demand for them will remain high, and low borrowing costs will ease our fiscal problems. Still, the resulting low rates of return serve as a tax on safe savings, encourage a risky quest for yield and redistribute resources to government borrowing and spending. It isn’t healthy for the private sector when investors are so obsessed with holding wealth in the form of safe governmental guarantees.

Its actually not clear to me that demand will remain high, in the sense that the term spread will not reassert itself. To explain a bit more:

The interest rate on T-Bills is simply whatever the Fed wants it to be. T-Bills and excess bank reserves are essentially interchangeable. In normal times the value of excess reserves is the Fed Funds rate. Today it is the Interest on Reserves rate. However, both of those are essentially controlled by the Federal Reserve.

If we lived in a world with zero risk then one would expect the interest rate on 10 year Treasury bonds to simply be the weighted average of the interest rate on T-Bills for the next ten years.

However, there is risk so, investors (a) have to guess what that interest rate will be and (b) demand a premium for the risk that they are wrong.  This is the term premium and its why interest rates on long term government bonds are persistently higher than short term government treasury bills.

To the extent that expectations or risk appetite in the bond market exert direct influence on US Treasury interest rates, it is through the term premium.

Right now the term premium is extremely low, indeed one would guess that it is negative. The interest rate on a 30 year government bond is only 3.3%.

While its possible that the interest rate on T-Bills averages only 3.3% over the next 30 years this is – hopefully – extremely unlikely. It implies that nominal GDP growth will average 3.3% over the next 30 years, as the Fed must ultimately align interest rates with nominal growth rates or the economy will persistently overheat or stagnate.

The more likely explanation is that the demand for safe liquid assets is so high that investors are willing to accept a negative term premium.

Will this continue?

The answer is almost assuredly, no.

This implies that long term interest rates on government debt is likely to rise and that conversely the value of long term government debt will fall.

US Government debt is in a bubble.

I am coming to believe that bubbles are a persistent feature of  the modern global economy and extend from the fact that the world is aging.  As this continues the bubbles will likely only get larger and larger.

The simple reason is that as individuals pass into middle age they attempt to increase their savings. One way to do this by loaning or renting resources to the next generation. However, as the population ages opportunities to do this are more and more rare.

This implies that savings can only take place through capital deepening. In essence this means more investment per worker. This expansion in investment per worker causes some types of capital to liquefy. That is, existing pieces of capital can readily find a buyer at fundamental values.

Yet, once capital liquifies it begins to earn a liquidity premium – like the one earned by US government debt now.  This, in turn, drives the market price on the capital even higher and we enter a bubble.

In practice, the capital object itself doesn’t get moved around but a financial instrument entitling someone to the rents from the use of the capital or a debt secured by the capital. However, the effect is the same. The financial instrument becomes liquid, starts to earn a liquidity premium and then goes into a bubble.

My growing sense is that this process has been repeated over and over again since the late 1980s. First, in Japan. Then in Korea and South East Asia. Then in the US tech industry. Then in the developed world’s housing markets. Now in US and UK government debt.

Moreover, there is no obvious way to stop this from happening. On first thought it would seem that deflation could prevent this by causing cash to earn a positive rate of return. This basically just ratchets up the money bubble.

However, without negative nominal interest rates this worsens the ultimate problem of expanding the capital stock because it essentially subsidizes money as a store of value against capital.

So, I don’t know that there is a clear way to stop this from happening.

One thing I have noticed is that just based on my wading through economic cycle data over the years I have tended do discount the notion of economic confidence as irrelevant and concepts like multiple-equilbria-in-macroeconomic-aggregates as completely unlike anything we observe in the real world.

Yet, my fellow economists, particularly older ones take the notions quite seriously.

Michael Forli suggests that times may have changed

A final, somewhat technical, implication is that the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist. The idea that there could exist virtuous/vicious circles between real economic outcomes and confidence (or asset prices, effectively the same thing) was first formally advanced by David Cass and Carl Shell. They referred to these virtuous/vicious circles as “sunspot equilibria;” George Soros dubbed the property “reflexivity.” Subsequent applied macroeconomists appealed to the procyclicality of productivity as evidence of the type of increasing returns to production sufficient to generate confidence feedback loops. If labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies. While it is hard to say much definitively, it is interesting to observe that over the last two years the economy has been subject to large swings in investor sentiment and asset prices, and yet actual growth outcomes have been remarkably stable.

Dave Altig offers the following

If you try, it isn’t too hard to see in this chart a picture of a labor market that is very close to “normalized,” excepting a few sectors that are experiencing longer-term structural issues. First, most sectors—that is, most of the bubbles in the chart—lie above the horizontal zero axis, meaning that they are now in positive growth territory for this recovery. Second, most sector bubbles are aligning along the 45-degree line, meaning jobs in these areas are expanding (or in the case of the information sector, contracting) at about the same pace as they were before the “Great Recession.” Third, the exceptions are exactly what we would expect—employment in the construction, financial activities, and government sectors continues to fall, and the manufacturing sector (a job-shedder for quite some time) is growing slightly


First, a clarification. Its not immediately clear from Altig’s post but the chart indicates that  employment in non-motor vehicle manufacturing is expanding far, far faster  than would be expected given the last recovery.

This is important for thinking about any kind of structural story you might be inclined to tell. Manufacturing employment had been falling rapidly for roughly 15 years and then suddenly stopped falling in the wake of this recession and started growing very slowly.

This may be the structural shift that folks are looking for but its important to note that this is basically a “reshoring” shift. Although, its not so much reshoring as a rapid slowdown in offshoring combined with growing underlying demand.

In addition, the dynamics of the dot-com recession were very different. Though it felt mild to most folks and the employment rate only barely peaked above 6% it was actually slightly more harsh for non-financial corporate profit growth.

Here are non-financial corporate profits on a log scale. You can see the divot from Dot-Com was proportionately the largest on record.

FRED Graph

That recession behaved in many ways like what you would expect if you were experiencing a demographic slowdown. Capital took a huge beating. Employment growth was slow and unsteady, but unemployment was mild.

Lets look at private sector employment in the two recoveries

FRED Graph

The bottom of Dot-Com was long and drawn-out while the Great Recession was sharp, returning almost immediately to growth rate during the last recovery.

If we look at compounded annual rates of growth, private sector payroll growth during the Great Recession return to above long-run trend (2%)  sooner than either of the last two recessions, despite being deeper.

FRED Graph

So private sector employment growth has been quite strong. GDP, less so.

There has been a divergence in Okun’s law, even when looking at long run patterns

FRED Graph

Though notice the deviation is even more pronounced using a nominal version of the law, suggesting that nominal spending growth exceeding maximum production growth is not yet the issue

FRED Graph

Based on both the growth in payrolls and the decline in unemployment  historical patterns would lead us to expect real GDP growth of around 4% and nominal GDP growth of around 6.5 – 7%.

I think the strongest clue in explaining this discrepancy comes from looking at non-durable goods output.

The big unexpected surge in employment is in manufacturing ex-motor vehicles. Though again its not so much job gains as the absence of job losses. Motor vehicles make up a large part of the durable goods sector, so we can get a proxy for non-vehicle manufacturing by looking a non-durable goods.

FRED Graph

Despite the above average employment growth – which is to say the absence of employment shrinkage – production in non-durable goods is way down and indeed declining.

So the GDP discrepancy looks like it may be due to a sectoral shift and possibly the closing of opportunities to offshore portions of the non-durable supply chain.

In general I think looking to GDP introduces unnecessary opaqueness in the modern age. We have easy access to much finer data. In this case GDP would provide a potentially confusing measure of the state of the economy as compared to payroll growth or unemployment.

If it is the case that GDP growth is slowing because non-durable production is slowing despite rapidly increasing employment then it is likely that we will soon see increased investment in the sector boosting productivity and creating a following period where GDP rises faster than employment.

A counter-structural as well

FRED Graph

How tight? Lets invert

FRED Graph

Via Real Time Economics, a decidedly well crafted message

I am at the moment in a position that I’ve called essentially patient vigilance–meaning that I want to see how the economy evolves before drawing conclusions that more stimulus is needed and could actually have the effect where the benefits would outweigh the costs. I don’t rule it out.

By laying out the choice in this way Lockhart both loosens Fed policy and strengthens long term credibility. Essentially we see a re-weighting of the Fed’s loss function rather than an adjustment to its optimal rule or distribution in economic estimates.

Follow Modeled Behavior on Twitter