Monthly Archives: September 2013

Exit, Voice, and Knowledge

Posted on by

Samuel DeCanio writes,

democratic politics creates difficult knowledge problems for modern societies. By granting political parties exclusive authority over the production of goods and services, by preventing voters from comparing the effects of parties’ policies, and by requiring voters to evaluate the consequences of policies without a common metric for comparing disparate goods, democratic politics exacerbates the effects of ignorance on human affairs.

Pointer from Peter Boettke. This is an issue on which progressives and libertarians talk past one another. I think that for progressives what is important is that the political process has the potential to work well, while we know that markets fail to realize the potential of perfect competition under perfect information. For example, I read Steven Teles as saying that the problem with democracy is not that it inherently faces knowledge problems but that certain institutional characteristics, such as the Senate cloture rule, are at fault.

When the issue is government vs. the market, frankly, I have a hard time giving a good account of the progressive point of view. I keep hearing it as “markets fail, therefore government works,” and I know that is an uncharitable interpretation.

Over-interpreting Elections

Posted on by

John Hinderaker looks at some poll results and writes,

Democrats lead Republicans in the generic Congressional preference poll by 40%-37%. It’s a paradox: voters prefer Republicans on the issues, but still lean toward voting for Democrats. One could speculate about why that is true; I think it is obvious that the press’s ceaseless attacks on Republicans are part of the explanation.

The Gamble, a new book by John Sides and Lynn Vavreck, warns against any attempt to over-interpret polls or elections. (if you search for “The Gamble Vavreck” the book has many different subtitles, which strikes me as weird. Is PUpress micro-targeting?) They argue that the press is an opinion follower rather than an opinion leader.

Their view is that many voters are partisan and unpersuadable. Swing voters tend to move with the state of the economy.

I am a bit skeptical of the economic variable. They say that economic conditions in 2012 were good enough to re-elect Obama. They look at GDP growth in the first half of the year, which looks fair. But other measures, such as the employment to population ratio, look pretty terrible. Why should voters focus on the one but not the other? My hypothesis is that, given that we have only about a dozen observations (Presidential elections) to go by, with sufficient specification searching and information from prior research, you can get a good fit mostly on luck. The fact that the fit held in 2012 does relatively little to lead me to dismiss the luck factor.

Nonetheless, one of my take-aways from the book is that issues matter much less than pundits believe. The idea that voters are sending clear messages on issues is tempting to claim and rather difficult to defend.

Ashok Rao’s Platform

Posted on by

I like much of it, but not this:

Get rid of the Department of Education and allocate every child into school by a random lottery. Public education is a bit (but not really) like the individual mandate. It works well if everyone uses it without segregation. There are big externalities in moving a rich kid from his bubble of a rich school to a poorer school…

Maybe Albert Hirschman would like this. I agree that we schools tend to segregate by income class. However, I disagree that public education “works well” as long as you get rid of income segregation.

Overall, he says that his list of points is “clearly progressive,” but “a bit of stuff…should appeal to a libertarian.” More than a bit, actually. I recommend reading his whole post.

Pointer from Tyler Cowen.

Underbussed by Stanley Fischer

Posted on by

The WSJ blog reports,

“You can’t expect the Fed to spell out what it’s going to do,” Mr. Fischer said. “Why? Because it doesn’t know.”

He added: “We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise.”

It seems to me that this throws both Scott Sumner and John Taylor under the bus. Instead, Fischer seems to be implying that the Fed needs to engage in fine tuning, using indicators that are too arcane to describe to the public.

By the way, Sylvester Eijffinger and Edin Mugajic think that the “new tools” of monetary policy will be used as far as the eye can see.

Given that other central banks will also proceed cautiously, “textbook” monetary policy will probably not be the norm again until at least 2020. Even then, central bankers would continue to view expansionary monetary policy as a viable strategy to cope with deteriorating economic conditions in the future. Against this background, the term “unconventional” does not apply to ZIRP and QE.

The Labor Share of Income

Posted on by

Has fallen and it can’t get up, according to Michael Elsby, Bart Hobijn, and Aysegul Sahin.

the decline of the labor share, which has been driven by a decline in the share of payroll compensation in national income over the last 25 years, is likely due to the offshoring of the labor-intensive component of the U.S. supply chain.

Pointer from Tyler Cowen. I have called this the Great Factor-price Equalization.

If your model of a recession is that it is caused by sticky wages, then as far as I can tell labor’s share of income should rise during a recession. Or, to put it another way, if labor’s share falls (as it has during this recession), then makes the sticky-wage story less attractive. Labor’s share of income can be written as WL/PY, where w is the wage, L is employment, P is the price level, and Y is real GDP. We can re-write this as (W/P)(L/Y), or the real wage times the average productivity of labor. I labor’s share falls, then either real wages have fallen or productivity has risen. If real wages have fallen, then this directly contradicts the sticky-wage story. If real wages have risen, then productivity has risen faster, and I still have doubts about the sticky-wage story.

Better Measures of Poverty

Posted on by

Timothy Taylor writes,

Meyer and Sullivan used consumption data, and again they set up the calculation so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980…By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.

He is referring to a paper by Bruce D. Meyer and James X. Sullivan. Since it comes from a Brookings conference, you can read comments by others at the end of the paper. The commenters did not shoot it down.

The main reason for using a consumption-based measure is that poor people tend to under-report much of their income, such as the value of government-provided benefits. In other words, even if you think that income is the right variable to use for measuring poverty, consumption might be the best available proxy for income.

If the substance of the paper is correct, and poverty is at low levels in the United States, then there is a case for reducing benefits in order to reduce the high marginal tax rate that deters low-income people from working.

However, my own opinion, driven by anecdotal observation rather than data, is that poverty in the U.S. is nowhere near zero. Perhaps if people with low incomes made really good decisions about how to spend their money, then poverty would be near zero. However, over the course of their lifetimes, many people make many bad decisions, and as a result they will spend a lot of time dealing with financial adversity. The moral and practical implications of this view of poverty are not as clearcut as either a progressive or a conservative would like.

Fischer Black on PSST

Posted on by

Comments on this post reminded me that I need to re-read Fischer Black’s famous address, Noise. He writes,

The costs of shifting real resources are clearly large, so it is plausible that these costs might play a role in business cycles. The costs of putting inflation adjustments in contracts or of publicizing changes in the money stock or the price level seem low, so it is not plausible that these costs play a significant role in business cycles.

Tyler Cowen and I both credit Fischer Black with influencing our views on macro. More from Black:

I cannot think of any conventional econometric tests that would shed light on the question of whether my business cycle theory is correct or not. One of its predictions, though, is that real wages will fluctuate with other measures of economic activity. When there is a match between tastes and technology in many sectors, income will be high, wags will be high, output will be high, and unemployment will be low. Thus real wages will be procyclical.

I am pretty sure that the ratio of wages to nominal GDP has been falling as the labor market has weakened over the past dozen years. So procyclical real wages are still with us.

And then:

I believe that monetary policy is almost completely passive in a country like the U.S. Money goes up when prices go up or when incomes goes up because demand for money goes up at those times. I have been unable to construct an equilibrium model in which changes in money cause changes in prices or income, but I have not trouble constructing an equilibrium model in which changes in prices or income cause changes in money.

Similarly, I also think that it is at least as plausible that causality runs from the long-term bond market to the Fed funds market as the reverse.

Finally:

I think that the price level and the rate of inflation are literally indeterminate. They are whatever people think they will be. They are determined by expectations, but expectations follow no rational rules.

Keep in mind that he is talking about a country without an insane fiscal/monetary nexus. I am sure he would grant that you can have hyperinflation by running ridiculously large deficits and printing money to fund them.

Narrative Wars on the State of the Economy.

Posted on by

John B. Taylor and Lee Ohanian write,

why is the current recovery so weak? It is not because of the aftermath of the 2007-08 financial crisis. U.S. Financial markets began to recover in late 2008, more than four and a half years ago.

I am just starting to write in my book about the aftermath of the financial crisis (which means I am on the home stretch, although I am not sure that I might not try one more major re-write of the whole book). Like Ohanian and Taylor, I find it striking that he employment/population ratio today is actually lower than it was during the official “recession.” (See also Stephen Bronars on a careful calculation that adjusts the employment/population ratio for demographic trend factors. Bottom line: it still looks awful.)

My take on that is that the NBER dating of the end of the recession is a distortion of reality. Yes, GDP started to rise in the middle of 2009, but otherwise, things do not look very good.

Why is the economy not doing well? I would suggest the the latest Economic Freedom indexes might have part of the answer. Since the year 2000, we have fallen on a 10-point scale from 8.65 to 7.74.

The left’s counter-narrative is that the financial crisis blew a deep hole in the economy, and we needed bailouts and Keynesian stimulus do dig us out. We had about the right amount of bailouts, but not enough stimulus. And anyone who believes anything different is anti-science and defiant of the facts.

Narrative Wars on Housing

Posted on by

Peter Wallison writes,

At the time of Lehman’s failure, half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky and low-quality. Of these, 74% were on the books of government agencies, principally the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

I think that the left’s counter-narrative is that Fannie and Freddie bought the better mortgages of those available. What happened is that the really bad mortgages that they didn’t buy ended up defaulting, causing house price declines, which caused the better (or not-as-bad) mortgages that Freddie and Fannie bought to default, also.

In addition, the counter-narrative is that Freddie and Fannie were driven by their shareholders, not by their regulators, to buy risky loans. I would just note here, as I have before, that it is a bit perverse that we had the Fed tasked with consumer protection in the mortgage industry while HUD was tasked with safety and soundness regulation of the two key lenders. And we are surprised that this did not work out well?