Monthly Archives: August 2013

What Did Keynes Really Mean?

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Roger Farmer writes,

As I have argued now for more than six years, Keynesian economics is not about sticky wages and prices. It is about the inability of a market economy to coordinate on a Pareto efficient steady-state equilibrium.

Thanks to Mark Thoma for the pointer.

This is an old controversy–a “well-squeezed orange,” as Charles Kindleberger described the question of what caused the industrial revolution. In the 1960s, Clower and Leijonhufvud were the spokesmen for Farmer’s view.

The coordination problem also can be given a classical reading, as I do with PSST. However, I totally reject the notion of a “steady-state equilibrium.” The economy is constantly creating new opportunities and destroying old business models. It is in the midst of these dynamic changes that workers become unemployed.

A Theme from My Next Book

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Jag Bhalla writes a post entitled Is Economics More Like History Than Physics? If we are talking about macroeconomics, then I would say yes. That is a major theme of the book I am working on. Bhalla writes,

Steven Pinker says, “No sane thinker would try to explain World War I in the language of physics.” Yet some economists aim close to such craziness.

Pinker says the ”mindset of science” eliminates errors by “open debate, peer review, and double-blind methods,” and especially, experimentation. But experiments require repetition and control over all relevant variables. We can experiment on individual behavior, but not with history or macroeconomics.

Pointer from Mark Thoma.

Here is Pinker’s essay.

Mind the Gap?

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Larry Kotlikoff writes,

The fiscal gap is a comprehensive measure of our government’s indebtedness. It is defined as the present value of all projected future expenditures, including servicing outstanding official federal debt, less the present value of all projected future tax and other receipts, including income accruing from the government’s current ownership of financial assets.

He wants to see CBO, OMB, and GAO all report on this measure.

I think I would prefer to see accrual accounting. That is, report the increase in government obligations each year. But the fiscal gap idea might be helpful.

The Mortgage Interest Deduction

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(1) If I buy a property and rent it out, then my income is equal to the rent that I get, minus expenses, including interest payments on a mortgage. Thus, I get to deduct mortgage interest.

(2) If homeowners could not deduct mortgage interest, then landlords would have an advantage. That is, the landlord could deduct mortgage interest, but the homeowner could not.

(3) As a homeowner, I do not count as income the “rent” that I earn on the house. This gives me an advantage over a landlord.

(4) Also, I do not count as income a capital gain from selling the house. This is another advantage over a landlord.

One can argue that the main distortions in the tax code are (3) and (4), rather than the mortgage interest deduction. If you took away (3) and (4), then I think one could argue that you want to keep the mortgage interest deduction.

Of course, the main reason we have the mortgage interest deduction is that the mortgage industry loves it. Yes, it is popular with people who currently use the deduction. But even if you “grandfathered” the deduction for everyone currently using it, you could never get a repeal past the housing lobby.

Taking on the Housing Lobby

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Congressman Jeb Hensarling did not get the memo. He said,

Will our generation perpetuate a system that demands “more house” today only to ensure that our children are confined to “less house” tomorrow? Today’s system of boom, bust, and bailout is retarding economic growth and helping fuel what all acknowledge as unsustainable levels of national debt.

The wind is blowing the other way. Nick Timiraos reports,

An earlier proposal, issued in April 2011, said the skin-in-the-game rules wouldn’t apply to mortgage securities containing loans where borrowers made at least a 20% down payment.

Now, regulators want to scrap that requirement, meaning that banks would have to retain 5% only of mortgages that allow borrowers to make “interest-only” payments or that don’t fully document a borrower’s ability to repay a mortgage—a much smaller portion of the market that includes the riskiest loan products that caused much of the crisis-time losses.

Hensarling wants to get the government out of the business of deciding what makes mortgages eligible for government insurance subsidies, by eliminating those subsidies.

Right now, because of the Dodd-Frank Act, Washington has more control over who can buy a home than your local bank. The PATH Act addresses these devastating rules head on, getting Washington out of the way to allow banks to lend, builders to build, Realtors to sell, and home buyers to buy.

The Great Demographic Stagnation

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Rob Arnott and Denis Chaves write,

the developed world is entering a new phase in which the low fertility rates of past decades lead to slow growth (in many countries, no growth) in the young adult population; young adults are the dominant engine for GDP growth. Mature adults, many of whom are at or near their peak productivity, are poised to retire, creating an impressive surge in the rolls of senior citizens. These newlyminted senior citizens, transitioning from near-peak productivity to retirement in a single step, will be drawing on the economy while no longer producing goods and services. The unequivocal good news of a steady rise in life expectancy means that these retirees will create a very substantial drag on GDP growth, as these seniors move from peak productivity to negligible productivity in just a few years.

I think that with old people healthier, productivity does not have to drop off so much at age 60. And we do have the ability to change the age of government dependency. But read the whole thing. The point that we have a major slowdown in economic growth baked into demographics seems straightforward and powerful.

UPDATE: Kevin Erdmann shows how demographics have affected labor force participation in the U.S. the past decade.

Youth Unemployment

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Diana G. Carew writes,

Of the 17 million Americans age 16-24 not enrolled in school or working full-time in July 2013, 5.6 million were working part-time, 3.2 million were unemployed – a 17.1 percent unemployment rate – and another 8.4 million were not in the labor force altogether.

Together, these charts suggest the problem facing young Americans is structural. If worsening labor market conditions were a temporary effect of the recession, we would have expected to see improvement with the recovery. Instead, young Americans appear stuck in their post-recessionary state.

Pointer from Tyler Cowen.

Why is the gap between the reservation wage and marginal revenue product so much higher among young people than among others?

Some possibilities:

1. The trend in the Thete lifestyle is to work only sporadically, counting on support from relatives and the government.

2. The minimum wage is much more binding than we thought.

3. Downward wage stickiness is much more prevalent among people who are new to the labor market than among middle-aged workers. (I admit I am being sarcastic here)

The Housing Lobby Wins Again

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Matt Yglesias writes,

the administration isn’t pushing for any major rethink of housing policy in the wake of the crisis. The idea that the government should encourage people to make leveraged investments in owner-occupied housing and that these investments should be the cornerstone of middle-class savings is alive and well with us.

There are real estate agents and mortgage brokers in every Congressional district. That tells you everything you need to know about how housing policy is going to be made.

Megan McArdle on Thetes

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She writes,

to people at the bottom of the income distribution, telling them to wait to have children until they’ve found a stable partner and a steady job seems about as reasonable as telling them to wait until after they’ve won the Heisman Trophy. There aren’t a lot of jobs that a high-school graduate can count on to deliver long-term, full-time employment.

It is possible that there are emerging two classes with very different tastes. The Vickies want long-term, full-time employment, health insurance, stable marriages to partners with “consumption complementarity,” and upper-middle class schools for their children (if any). The thetes do not value those goods as highly. They prefer to be more impulsive and less compulsive.