Monthly Archives: July 2013

A Provocative Claim

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From “Dalrock.”

Child support crowds out marriage, and even in cases where weddings still technically occur the option for the wife to unilaterally convert the family from a marriage based family to a child support based family always exists. This is part of the threatpoint designed to empower wives and dis-empower husbands. Men simply don’t have the option to choose the marriage based model over the child support model.

Incidentally, I have downloaded Robert George’s Conscience and its Enemies. He takes the conservative point of view on family issues, and I admit that I am not yet persuaded. However, it may be worth writing a longer review. Robby and I happened to overlap a bit at Swarthmore. He now teaches at Princeton. These days, he would get my vote for number one on the list of Professors Who Are Unlikely to Receive a Standing Ovation–at either place. Let’s just say that Swarthmoreans are all about the oppressor-oppressed axis, not so much about civilization-barbarism. I’m guessing Princetonians are similar.

Basically, I am just another liberal Painglossian when to comes to trends in family law. That is, I have never thought that child support laws were anything but good. I never thought that loosening divorce laws was a mistake. I am on the pro-choice side on the abortion issue. etc.

While one blog post is not going to change my mind, “Dalrock” leads one to consider the question that economists ask about well-intended policy: but then what? what happens in the long run?

Suppose you make it easier for a woman to divorce a man and to obtain child support. Then what?

Then men will prefer not to get married. Staying unmarried makes it harder for the woman to break up the relationship and still receive child support.

I am not sure that these are top-of-mind issues among young people. Of course, my contacts with young people are pretty much limited to the affluent children of Vickies. What these young people say is top-of-mind is that they really, really, don’t want to go through divorce. Compared to my generation, they seem to regard marriage as belonging to a later stage in life. My line is that for our generation, getting married was like starting a new business–a moment of promise and hope. Today, it’s like going IPO–a moment of affirmation and triumph.

Nominal GDP and Employment

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The chart comes from Dan Diamond. Pointer from Tyler Cowen.

Let’s pretend that health care is the whole economy. The top line is the growth rate of nominal GDP. The lower line is the growth rate of employment. Growth in nominal GDP is growth in real GDP plus inflation. Growth in real GDP is growth in number of workers plus growth in output per worker. Inflation is growth in compensation per worker plus growth in the price markup over compensation. Putting this all together, we have

growth of nominal GDP = (growth of number of workers + growth of output per worker) + (growth of compensation per worker + growth of the price markup over compensation)

Scott Sumner would say that the two most reliable numbers here are the ones shown in the chart–growth in nominal GDP and growth in the number of workers. The division between nominal GDP and real GDP depends on making the correct quality adjustment for prices, which Sumner would argue is much less reliable than the other two measures. (I think everyone would agree that quality-adjustment is less reliable, but some of us prefer to believe that it is not much less reliable.)

The difference between the two lines on the chart consists of productivity growth, wage growth, and growth in the price markup. Diamond says that wage growth does not account for the slowdown in nominal GDP (although wage growth did decline–I think by about a percentage point, based on the data in Diamond’s link). He alludes to a mix shift. If people shift away from prescription drugs and toward other services, those other services could have lower productivity and/or a lower price markup.

In any case, it looks as if either productivity growth has declined or the growth in the price markup has declined. This should show up as a decline in corporate profits in the health care industry. Can anyone find data? I have trouble navigating the Commerce Department’s web site.

I did stumble across this paper, which tries to decompose the rise in health care spending from 2003 to 2007.

Our decomposition also sheds light on productivity in the treatment of cancer. Over the four-year sample period, expenditure per capita rose twice as fast for malignant neoplasms (48 percent growth in expenditure per capita) than non-malignant neoplasms (24 percent growth in expenditure per capita). A large reason for the discrepancy is the difference between growth in the cost of treatment (that is, expenditure per episode of care). Service prices for malignant neoplasms grew over twice as fast as service prices for non-malignant neoplasms. This may indicate that more expensive and innovative services are playing a role in cancer spending growth.

This is interesting, but for present purposes it is of little use. The chart above shows a slowdown in the rate of growth in overall health spending between 2003 and 2007.

But my main point is that we expect nominal GDP growth and employment growth to line up. If they do not, something must be going on with either productivity, compensation, or price markups. This is a matter of accounting.

No One is Asking Me

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But here are my thoughts on the infamous Zimmerman trial.

1. Suppose Zimmerman’s gun never goes off, he is the only one injured, and Martin is put on trial for assault. Martin would be acquitted. When two men get in a scuffle, and no one is there who witnessed it clearly from the beginning, no jury is going to convict anyone. Unless there is some very unusual forensic evidence, self-defense is going to be hard to rule out.

2. A question hanging over the incident is this: if Martin had been white skinned, would he be alive today? The verdict in the trial does not settle that question. I don’t know the answer to that question. I would advise conservatives not to accuse anyone of exploiting the incident, unless you think that you can show that the answer to the question is “no” or that the question does not matter.

3. Although this is not the question on most people’s minds, the question I have is why we can’t teach young men to avoid getting into scuffles. I think everyone would have to agree that Zimmerman could have avoided getting into a scuffle. Personally, I am just as convinced that Martin could have avoided getting into a scuffle. He could have turned his back and walked quickly. Or he could have politely said, “Excuse me? You’re making me nervous the way you seem to be following me.”

4. Another non-central question I have is whether there is a causal relationship between the use of profanity/derogatory language and violence. I take the view that unrestrained use of four-letter words undermines our respect for the dignity of other people. Refraining from the use of profanity is a way of saying, “I respect you. I put limits on my behavior in your presence.” Of course, that does not mean that stamping out profanity would address the cause of disrespect.

Relative Wages

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Felix Salmon finds some interesting charts, from something called the National Employment Law Project.

They looked at the annual Occupational and Employment Statistics for three years — 2007, 2009 and 2012 — and created a list of wages for 785 different occupations. They then split those occupations into five quintiles, according to income; the lowest quintile made $9.49/hr, on average, last year, while the highest quintile averaged $40.23/hr.

As you go down the charts, you can see that until you get to the fourth and fifth quintiles, most jobs fall below the green lines — which means that they’re seeing their real wages fall. You can also see the commodification of low-wage jobs in the the number of occupations in the bottom two quintiles: there are just 47 occupations in the bottom quintile, while there are 186 occupations in the top quintile. (Each quintile, of course, includes the same number of total workers.)

Some remarks:

1. I would have preferred that they split the quintiles in 2007, rather than 2012. That way, you reduce the likelihood of accidental correlation between levels and growth rates. But leave that aside.

2. I would like to see employment data for the various occupations. If employment also fell in the occupations where real wages fell the most, that would suggest that what we are seeing is structural change. In fact, it would suggest that real wages did not fall enough.

3. James Tobin, in a Presidential Address to the American Economic Association over forty years ago, suggested that the Phillips Curve might be explained by downward stickiness of nominal wages when relative wages are in need of adjustment. Raising aggregate demand raises prices, and that in turn helps bring down the real wages in sectors where they otherwise would be too high.

ZMP and Gender

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Nicholas Eberstadt writes,

In the early 1950s, practically all men in this age group [25 to 54] were either working or looking for work-fewer than 3 men out of every 100 were out of the labor force. By contrast, over 11 out of every 100 men of prime working age are completely out of the labor force today-one in nine, fully four times the fraction back in the early postwar era. This flight from work at prime working ages accounts for the vast majority of the 13 percentage point drop in employment ratios reported for this key demographic group over the past sixty years (i.e., 1953-2013)

Some comments

1. If you look closely at Eberstadt’s charts, you can see that the decline in adult male employment was at least as large between 1999 and the present as it was from 1950 to 1999. In terms of the rate of change, the decline was gradual until recently, and then it accelerated. In addition, I believe it is the case that the growth in female employment slowed just as the decline in male employment accelerated.

2. If you want to tell a conventional macro story, you could attribute most of what has happened since 1999 to aggregate demand. On the other hand, I think pretty much everyone would agree that the from 1950-1999 we were seeing secular, structural changes that raise female employment and reduced male employment. It would be absurd to tell an aggregate demand story for this. Still, it is interesting that the drop in male employment is not steady, but instead consists of downward ratchets that occur during recessions, while during recoveries male employment levels off and even rises.

3. Continuing with the theme of conventional macro, you might say that what we have seen recently is another downward ratchet in male employment due to severe drops in aggregate demand. This is overlaid on a continuation of the secular decline.

4. The secular explanation would be that low-skilled men have faced increasing competition from capital and from foreign labor.

5. It is not clear what the possibilities are for raising the skills of males displaced by these phenomena.

6. Going forward, one plausible scenario is continued divergence between Vickies and thetes. We should perhaps be thinking more in terms of how to adapt to such an outcome, as opposed to making futile attempts to ward it off.

Quackroeconomics New Title, New Outline

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The title might be:

Macroeconomics Ain’t So

It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.

–Will Rogers (?)

The outline might be:

1. Introduction

2. Macroeconomics as I experienced it (how macroeconomic thinking evolved in the 1970s and 1980s, with an autobiographical perspective)

3. Why classical macroeconomics ain’t so

4. Why folk Keynesian macroeconomics ain’t so

5. Why the liquidity trap ain’t so

6. Why the Hicksian IS-LM model ain’t so

7. Why the textbook AS-AD model ain’t so

8. Why Dark Age Macroeconomics ain’t so

9. Why PSST ain’t so, but still might be about the best we can do

Cowen vs. Caplan

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Tyler Cowen writes,

I postulate the wage return to signalling as going away within five years, in say a career of forty years

Some remarks:

1. Why does Bryan have to ask anyone’s opinion about the relative weight of signalling? Perhaps because this question may never be settled empirically. If it could be settled easily, then that $20 bill would have been picked up by now. If it cannot be settled easily, then perhaps the reason is that the signalling model is in many respects “observationally equivalent” to the human capital model.

2. Tyler is suggesting that the signalling proportion of the wage premium for a college degree ought to decay as employers learn from experience about workers, reducing the premium they are willing to pay for an old signal. On the other hand, human capital obtained in school might not decay to the same extent. However, I am confident that someone can come up with a signalling story that is consistent with persistence of a premium or come up with a human capital story that is consistent with decay.

Julio Rotemberg’s Theory of Fed Behavior

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Simple, but brilliant.

This paper focuses on a particular force that may help account for the qualitative changes in monetary policy across these periods. This force is the tendency of the Fed to act as if it were penitent when critics successfully argue that “bad outcomes” are a product of Fed “mistakes.” The description of past policy as having involved mistakes is a staple in the literature discussing Federal Reserve actions.1 Critics who seek to blame the Fed for bad outcomes typically go beyond saying that a particular policy move was unwise. Rather, they tend to argue that a particular pattern of Fed behavior is responsible for a series of unwise policy moves, and it is this pattern that they paint as being mistaken. The Fed then tends to become averse to this, now successfully vilified, pattern of behavior.

I think that all organizations act this way. When something bad happens, the organization goes overboard to make sure that it does not happen again. This may or not be constructive, given all of the potential bad things that might happen. Fits in with “fighting the last war” syndrome.

From a conference on the Fed’s 100th anniversary. Other papers here, and also a speech from Ben Bernanke.

Sentences to Ponder

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Charles Hill wrote,

To understand the current Islamist assault on world order, it is necessary to recognize that every major war of the modern age has been an ideologically driven attempt — no two alike — to overthrow and replace the Westphalian international state system.

The quote is from page 49 of Trial of 1000 Years: World Order and Islamism, cited by Roger Kimball.

I have not read the book, but I would be curious how Hill fits World War I into this framework. Instead, this might be an example of over-reaching along the conservative civilization-vs.-barbarism axis.

Pratap Bhanu Mehta writes,

Let us take at face value the claim that the protections of US citizens against surveillance were violated only incidentally. Let us also accept that states will privilege their own citizens over others. Implicit in the debate is a premise few seem to have questioned: that it is justified for the US to violate the privacy rights of citizens of other countries without just cause. It has rendered meaningless whatever domestic protections citizens of other nations may enjoy against their own democratic governments. Why should an Indian citizen fight unregulated surveillance at home when the US can carry it out anyway?

Pointer from Tyler Cowen.

I wish more people took David Brin’s approach to thinking about surveillance. We do not necessarily have to see surveillance as a tool of coercion or as oppression. But once people put it one of those axes, it is hard to get them to reconsider.

Sumner vs. Williams

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John Williams writes,

The intuition for policy attenuation is that uncertainty about the effects of policy creates ex post policy errors that cause economic outcomes to differ from the policymaker’s intentions. The magnitude of the policy error is multiplicative in the policy action; that is, the larger the action, the greater the expected squared error. Therefore, the expected size of the policy error is affected by the size of the policy action, creating a bias toward muted policy actions.

Think of the shower-tuning analogy. Suppose the water is too cold. If you know exactly how the water temperature will change as you move the knob, you turn it quickly. If you are not sure how much the water temperature will change for a given amount of turning, you turn the knob more slowly, to avoid getting scalded.

Scott Sumner comments,

Williams misses the bigger picture, those “demand shocks” were contractionary Fed policy. More specifically they were caused by the failure of the Fed to do NGDP level targeting. The Fed set the wrong target in each year, and this caused the vast majority of the “demand shocks”. With a policy of NGDPLT along a five percent trend line, the recession would have been far milder, with unemployment probably peaking at 6 to 7 percent.

A digression for people of the concrete steppes. No, it wasn’t just “errors of omission”. After growing at 5 percent per year during the Great Moderation, the Fed brought growth in the base to a sudden halt from July 2007 to April 2008. Yet the Fed saw itself as a valiant knight fighting off recession by cutting the Fed funds rate, as if interest rates were a reliable measure of the stance of monetary policy. They aren’t. But even if they were, the Fed drove real interest rates sharply higher in the second half of 2008, a time when they weren’t at the zero bound. So there were plenty of affirmative actions taken by the Fed to drive us into a deep slump. BTW, the base isn’t a reliable indicator either, only NGDP expectations count.

Sumner thinks that the Fed ignored the temperature of the water and just stared at the knob.