Accrual Accounting for Government

Jeremy Liss writes,

By using an accounting method known as cash-basis accounting, legislators project future spending without having to consider billions of dollars of long-term financial commitments, leaving many budgets balanced in name only.

The Federal government also should have accrual accounting. In fact, back when I was drawing up my preferred list of priorities for the 2016 campaign, this was on the list. But I do not think that Donald Trump is planning on making it an issue.

Two Thoughts on Douglass North

1. Deirdre McCloskey treated him as an adversary.

2. I cannot think of any other Nobel Laureate who produced anything as significant after winning the Nobel Prize as Violence and Social Orders (My most recent essay about that book is here, and more links to my use of his framework can be Googled), or even come close.

Tyler Cowen has more.

On Refugees

Alex Tabarrok writes,

Even 4-year-old Syrian orphans are too dangerous to welcome to the United States, says New Jersey Gov. Chris Christie. What sort of man turns away desperate orphans out of fear?

Four-year-old orphans aside, it is not unreasonable to be concerned about the security challenges posed by Syrian refugees. It requires more than just screening out known radicals, a task which is difficult enough. Ideally, you would want to screen out those who may become disenchanted and radicalized over here, and that is impossible to predict. It does not take many Type I errors to have catastrophic results.

I think that there is rhetorical excess on both sides of the issue. A long time ago, I said that there is a lot of writing that is not designed so much to change anyone’s mind as it is to try to rally people on your own side not to change their minds. That is where I see the “debate” over refugees heading.

If someone can point me to an article on the subject that does not characterize the other point of view as “lunacy” or “irrational,” I would like to see it.

UPDATE: Apparently Megan McArdle and I have similar views.

Punishing Low-income Workers

Commenting on a new CBO report, Charles Hughes writes,

The median marginal tax rate for households just above the poverty level is almost 34 percent, the highest for any income level. Some households that receive larger benefits or higher state taxes have even higher effective rates: 10 percent of households just above the poverty line face a marginal rate higher than 65 percent. For each additional dollar earned in this range, these households would lose almost two-thirds to taxes or lost benefits. The comparable rate for the highest earners, households above 400 percent of the poverty level, is only 43.4 percent. If anything this analysis might understate how steep the effective marginal rates are for some households. CBO only considers the combined effect of income taxes, payroll taxes, SNAP and ACA exchange subsidies, so households that participate in other programs like TANF or housing assistance could face even higher rates.

I think that this ought to be a big issue. Sending a message to low-income households that says, in effect, “You might as well not work” is bound to have bad consequences. I wish that the Republicans were talking more about this and less about immigration.

Aspen Summit on Inequality and Opportunity

The video is here. Pointer from Mark Thoma.

I cannot comment on the video, since I have not watched it yet. I was just amused by the concept of a conference in Aspen on inequality. Heaven forbid that they should hold their discussion in Ferguson, Missouri, or rural Ohio.

I’ve been to Aspen only once, also for a conference. I came away thinking that the best economic opportunity there is for a gigolo. I have never seen such a concentration of wealth, attractive, unattached older women.

Panel on Inequality

With Thomas Piketty, Kevin Murphy, and Stephen Durlauf. View it at Mark Thoma’s blog.

Murphy offers the simplest explanation. Skilled workers become scarce, and less-skilled workers become abundant. The price of skilled labor rises, and those workers respond by working more. The price of less-skilled workers goes down, and they respond by working less. So income inequality shifts for both price and quantity reasons.

Why do skilled workers become scarce and less-skilled workers become abundant? I would say look at the four forces: bifurcated marriage patterns, New Commanding Heights (shift toward education and health care, aided by government subsidies), Moore’s Law, and globalization.

Is Larry Summers Getting Ready to Ditch Secular Stagnation?

He starts with the puzzle that employment and measured productivity growth have both been weak. If we are replacing less-skilled workers with machines and more-skilled workers, then why isn’t labor productivity going up?

This leads Summers to suggest that labor productivity is going up, but this is not being captured in the productivity statistics.

I am struck that there is likely what may well be an increase in unmeasured quality improvement. To take the first example that comes to mind and I’ll do an experiment with this group. I’ve done this experiment with other groups – which would you rather have for you and your family, 1980 healthcare at 1980 prices or 2015 healthcare at 2015 prices? How many people would prefer 1980 healthcare at 1980 prices? How many people would prefer 2015 healthcare at 2015 prices?

There are a fair number of abstainers but your answer was pretty clear. What does that mean? That means that healthcare inflation was negative from 1980. That is very different than the 6% or so that is reflected in the
national income accounts.

Again, thanks to Mark Thoma and Tyler Cowen for pointers.

My thoughts:

1. Since people do not face health care costs directly (with their own money), perhaps this is not a fair question.

2. What about Hansonian medicine?

3. And yet, I agree with Summers on this. I certainly would prefer today’s health care at today’s prices. One of the first points I made in Crisis of Abundance is that we could afford to give everyone in the U.S. the health care of 1970. The main reason we are spending more on health care today is that it is more capital intensive and more specialist intensive. (Incidentally, I predicted when Crisis of Abundance was published in 2006 that its relevance would last a decade. I am now confident that it will be relevant even longer.)

4. Ask Summers’ question about higher education. Would you prefer a 1980 college education at 1980 tuition or 2015 college education at 2015 tuition? Personally, I see no reason to choose the latter.

In some sense, it does not matter whether Summers’ point is valid. Productivity has been been going up quite well in manufacturing and in some other sectors (e.g., Walmart). However, labor is shifting to the New Commanding Heights sectors. Maybe productivity is rising in those sectors and inflation is over-stated, or maybe they suffer from Baumol’s cost disease and there is no overstatement of inflation. Either way, once we ditch the GDP factory and disaggregate the economy, the productivity puzzle goes away.

Summers points out that if you take the view that inflation is lower than what is measured, then real interest rates are higher than typically measured. This is not good for his previous views on secular stagnation, as he points out:

to be fair [it]has an implication for views that I and others have expressed about secular stagnation, at one level you can say, well real interest rates really aren’t that low once you subtract inflation. Once you subtract properly measured inflation, there has been less of a decline in real interest rates than we thought.

And what if we think about a disaggregated economy, with deflation in some sectors and inflation in others? Does it even make sense to talk about “the” real interest rate? Obviously for a business, it is the rate of price change in your sector that matters. For a household, you care about some average rate of price change, but which average? My girls are done with schooling, so do I care about college tuition changes? Does it matter to me whether health care inflation is overstated or not, given that my only option is to purchase health insurance at current prices?

“Secular stagnation” is anachronistic, AS-AD, GDP-factory thinking. We are in a specialized economy. Eventually, otehr economists are going to come around to PSST.

Is Larry Summers Getting Ready to Ditch AS-AD?

Both Tyler Cowen and Mark Thoma point to a discussion by Larry Summers.

I want to argue that the traditional oppositional pairing of supply side secular stagnation and demand side secular stagnation is more of a confusion, than a truth.

His current approach involves thinking about interactions between aggregate supply and aggregate demand. I hope the next stage in his thinking, and that of other macroeconomists, is to ditch AS-AD altogether. Don’t think of the economy as a GDP factory!

Instead, think in terms of a specialized economy. It is affected by secular trends, such as labor force participation increasing for women and decreasing for men from 1970-2000. It is affected by adjustment problems, such as the oil shock of the 1970s or the house-price and mortgage debt crash of 2008.

Can Crowdfunding Work?

Robert Shiller is worried about crowdfunding.

But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions.” It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments.

Pointer from Mark Thoma.

My thoughts:

Amateur investing in start-ups is per se a really bad idea. I did it a few times as an “angel investor” and got screwed. Founders made promises to me about how they would handle finances, and they quickly broke those promises. And once, when the start-up managed to do well, the founder obtained follow-up funding that amounted to legal blackmail against those of us who were early investors, so we got nothing. I came out of that experience convinced that unless you have top-notch lawyers working with you, investing in start-ups is a no-win game. As a small investor, you would need to score a home run just to cover your legal bills.

I see two possibilities for crowdfunding.

1. Suppose that people are only asked to invest in companies where they want to buy the company’s offering. Then, it seems like an interesting way for start-ups to do early market testing.

2. Suppose that the crowdfunding platforms provide some of the legal protection that venture capitalists and other high rollers are able to give themselves against subsequent misbehavior by founders or follow-on financiers.

If one of these, or preferably both, are in place, then I think that crowdfunding could last. Otherwise, I expect it to produce very negative average long-term returns and die a natural death.

Scott Sumner on the Great Depression

His book will be out soon, and no doubt it will break into my earlier list. Meanwhile, he has posted a really useful flowchart summary.

My own views.

All recession are adjustment problems. The Great Depression’s adjustment problems included:

1. Massive reconfiguration of agriculture because of tractors, trucking, and refrigeration. This displaced farm laborers.

2. Massive reconfiguration of manufacturing, as the small electric motor changed many production processes. As Amy Sue Bix points out, as of 1920 there were still men rolling cigars and making light bulbs by blowing glass. Machines could to those jobs better.

3. Sudden changes in asset prices, as a land bubble burst in the late 1920s and a stock market bubble burst in 1929.

4. The rise of fascism/socialism in Europe and a fear of something similar here–regime uncertainty, to use Robert Higgs’ term.

5. Counterproductive New Deal initiatives, such as destroying pigs and organizing industry into cartels (the NRA).

6. Loss of trust in financial intermediaries.

7. Increase in international protectionism.