Monthly Archives: September 2013

The Phillips Curve: DYTVSC?

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Marco Bassetto, Todd Messer, and Christine Ostrowski write,

the recovery of inflation in 2009–10 occurred precisely at the only time (since 1985) in which the statistical models considered here would predict sharp disinflation, that is, inflation went up at the time at which the models would most strongly predict that it should go down

Later,

the degree by which the statistical relationship between economic activity and output has become flatter—as well as the fact that models would often predict not only the wrong magnitude of the response of inflation, but also the wrong direction—may offer support to the idea of a vertical Phillips curve, where the determinants of (forecastable) inflation changes are unrelated to economic activity, such as in the model of Lucas (1972). This model would have diametrically opposed implications for policy, suggesting that (the
systematic component of) monetary policy can be most effective at controlling inflation, while having little or no direct impact on measures of economic activity

They did not visit the same country as Robert Gordon or Scott Sumner.

1930s Bank Failures and Output: DYTVSC?

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Jeffrey Miron and Natalia Rigol write,

assume it takes at least a month for bank failures to disrupt credit intermediation and thereby lower output. Under this assumption, any contemporaneous relation between output and failures is assumed to represent the impact of output on failures. We can then determine the effects of failures on output by excluding contemporaneous failures from the regressions. At a minimum, it seems reasonable to consider this specification.

Table 3 presents the results. In these regressions, bank failures have no predictive power for
output; indeed, the coefficients on bank failures imply that failures predict increases in output. Thus, if the
identifying assumption implicit in Table 3 is correct, these data and this specification provide no evidence
(indeed, contradict) the view that bank failures cause output declines.

DYTVSC means “Did you two visit the same country?” The person with the opposite point of view is Ben Bernanke.

Scott Sumner has more.

Two Views of the Non-Taper Rally

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1. Scott Sumner:

Note that the instant reaction of stocks is a more reliable indicator of monetary policy that long term bond yields. Long term rates rose on the announcement of QE3, and rose again on taper talk. Why is the long term bond market so schizophrenic? I have no idea.

2. A press release about a new behavioral economics study:

Dr Benedetto De Martino, a researcher at Royal Holloway University of London who led the study while at the California Institute of Technology, said: “We find that in a bubble situation, people start to see the market as a strategic opponent and shift the brain processes they’re using to make financial decisions. They start trying to imagine how the other traders will behave and this leads them to modify their judgment of how valuable the asset is. They become less driven by explicit information, like actual prices, and more focused on how they imagine the market will change.

“These brain processes have evolved to help us get along better in social situations and are usually advantageous. But we’ve shown that when we use them within a complex modern system, like financial markets, they can result in unproductive behaviours that drive a cycle of boom and bust.”

The team found that when participants noticed disparity between how much they perceived an asset to be worth and the rate of transactions for that asset, they began making poor business decisions and bubbles started to form in the market.

Professor Peter Bossaerts from the University of Utah, a co-author of the study, explains: “It’s group illusion. When participants see inconsistency in the rate of transactions, they think that there are people who know better operating in the marketplace and they make a game out of it. In reality, however, there is nothing to be gained because nobody knows better.”

Colin Camerer, Robert Kirby Professor of Behavioral Economics at the California Institute of Technology, said: “There’s a mathematical measure of when the flow of traders’ orders to buy or sell changes from steady to choppy. A choppy flow is a clue that trades are bunching up around new information or pausing to see what happens next. This way of measuring has been sitting on the shelf for years. This is the first study to show that it seems to correspond to what the brain is computing.”

My own view is that the stock market is efficient in the sense that returns are nearly impossible to forecast, but it is not rational. In 1979, stocks may have been undervalued by a factor of two or more. By 2000, they may have been overvalued by that much. Given that I think that the market can be off base by 50 percent, I am reluctant to draw inferences about moves of 2 or 3 percent.

Another Edition of “Did You Two Visit the Same Country?”

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1. Meg Jacobs writes,

Austerity has shaped American politics and policy for almost four decades. Over that period, the pressure for deficit reduction and spending cuts has been ongoing and intense. Even when liberals have found a modicum of political space to push through new social initiatives, such as President Obama’s Affordable Care Act, the agenda has quickly returned to constraining and limiting the growth of government. Democrats have generally joined Republicans in embracing this cause. The debate has centered on how far to go with austerity, rather than whether austerity is even the right objective.

That is the point of a recent spate of books from the unrepentant Keynesian left, which offers a potent, if largely unheeded, critique of contemporary public policy. These books argue that we’re in the mess we are in today—an anemic recovery, chronic underinvestment in the public sphere, and the specter of EU collapse—because of the austerity policies that the United States and Europe have chosen.

2. Ian Talley writes,

The U.S., Japan and Europe risk drowning in debt, with public obligations in rich countries hitting levels close to the historical peak reached in World War II.

How did the most advanced countries in the world get it so wrong?

Overly optimistic budget projections, poor data on government liabilities and a flawed understanding about how shocks can hurt public finances, the International Monetary Fund says in a new policy paper published Tuesday.

Median Household Income: Did You Two Visit the Same Country?

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Neil Irwin writes,

In 1989, the median American household made $51,681 in current dollars (the 2012 number, again, was $51,017). That means that 24 years ago, a middle class American family was making more than the a middle class family was making one year ago.

Pointer from Tyler Cowen.
James Pethokoukis writes,

real median household income indeed rose over the Long Boom of 1983 through 2007.

Welcome to the world of endpoint choice. Wapo’s wonkblog, the official regurgitator of White House talking points, wants you to start in 1989, end in 2012, and say it’s one long miserable period for the middle class. Ergo, not Obama’s fault.

Pethokoukis, who has a somewhat different narrative agenda, shall we say, suggests you start your 1980s comparison at a low point rather than a high point. More important, he says to end it in 2007. Using this new endpoint, it seems that the “30-year stagnation” in real median income is actually a 5-year decline, most of which took place on Obama’s watch.

I am inclined to fall somewhere in between. The peak for this statistic appears to be in 1999, at about $56,000. I would focus on the decline since that date, and I would not blame any President as much as I would blame structural change.

One thing I would like to see is a narrower statistic: the median household income for a household of a given size (say, 4) headed by someone of a given age range (say, 35 to 45). That would control for demographic changes. I am not saying it would tell a different story, but I would like to see things like changes in household size not mixed in with the numbers.

In a later post, Tyler Cowen downplays demographics. However, he links to Kevin Erdmann, who puts demographics front and center–in particular, the decline in the number of earners per household. Erdmann shows that income per earner has gone up, but earners per household has gone down. Reasons he gives for the latter:

1. As the population has aged, the number of zero-earner households as risen sharply. Remember that the income data does not include Social Security or other government transfer payments. [correction, the SS payments would be income. see Erdmanns comment below]

2. The importance of non-wage benefits may be holding down the number of two-earner households. Once one person can provide job-related health insurance to the household, there is not so much point in sending another person into the labor market to obtain a job whose compensation consists largely of health insurance.

The Next Policy Frontier: Improving Parenting?

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Richard V. Reeves, Isabel Sawhill, & Kimberly Howard write,

interventions in parenting are politically unpalatable. Conservatives are comfortable with the notion that parents and families matter, but too often simply blame the parents for whatever goes wrong. They resist the notion that government has a role in promoting good parenting. Judging is fine. Acting is not. Liberals have exactly the opposite problem. They have no qualms about deploying expensive public policies, but are wary of any suggestion that parents—especially poor and/or black parents—are in some way responsible for the constrained life chances of their children.

Later, they write,

Forty-five percent of mothers with less than a high-school degree, and 44 percent of single mothers, are ranked as being among the “weakest” quarter of parents. At the other end of the scale, higher levels of income, education, and family stability all predict stronger parenting. There are also sizable racial gaps in parenting scores. Our analysis suggests that the biggest gaps are not between the helicopter parents at the top and ordinary families in the middle, but between the middle and the bottom. Forty-eight percent of parents in the bottom income quintile rank among the weakest, compared to 16 percent of those in the middle, and 5 percent of the most affluent.

Still later,

In our new paper, we estimate the effects of HIPPY on longer-term outcomes of participants. The goal of the program, offered when children are age three to five, is to effectively train parents to be their child’s first teacher. Families receive biweekly home visits from a paraprofessional for 30 weeks out of the year, along with biweekly group meetings. Parents are also given books and toys. A high-quality evaluation of the program found significant improvements in reading and school readiness in first grade. Using a microsimulation model—the Social Genome Model—we predict that HIPPY participants are 3 percent more likely to graduate high school, and 6 percent less likely to become teen parents. These are modest effects, but positive ones, given the importance of the outcomes.

Of course, if the improvements in readiness in first grade fade out, or prove impossible to replicate in subsequent studies….

Overall, this is an essay that is modest in its claims, and I give the authors kudos for that.

Pointer from Timothy Taylor.

Popular Delusions

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The Harvard School of Public Health reports,

Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

Pointer from Phil Izzo. Somehow, I don’t think Tyler Cowen would be surprised by these results.

Average is Over, Boys and Girls

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Christina Hoff Sommers writes,

Women still predominate—some­times overwhelmingly—in empathy-centered fields such as early-childhood education, social work, veterinary medicine, and psychology, while men prevail in the mechanical vocations such as car repair, oil drilling, and electrical engineering.

If she would read Tyler Cowen’s new book, she would understand that “empathy-centered fields” have been trending up in demand, because that is where humans have a comparative advantage in a world where computers and robots keep getting better. In addition, Cowen argues that complex businesses require teamwork, not the sort of oppositional, maverick attitude that comes more naturally to males. I read Average is Over as implying that we should not blame the deteriorating outcomes for average males on feminist prejudice in education.

McKinsey Hubris

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Tom Latkovic writes,

Because episodes have, by definition, a finite duration, it is now relatively easy to mine data sets to identify which providers can solve specific medical problems more effectively and at a lower cost than other providers. Whether the category being considered is surgeons who perform hip replacements, oncologists who treat prostate cancer, or hospitals that take care of stroke patients, the goal of this approach is to reward providers for delivering a patient’s desired outcome (say, walking, remission, or hospital discharge without readmission) with as few complications as possible and for providing the best experience at the lowest possible cost. Focusing on episodes of care makes it easier to compare performance across providers and encourages productive competition among them. We believe that more than $2 trillion of US annual spending on health care, which currently totals about $2.7 trillion, could be paid through an episode-focused approach.

McKinsey folks think very highly of themselves. I have always resented that.

In this case, Latkovic appears to be comparing the existing compensation system with a system that would not be gamed. That is unrealistic. Instead, ask yourself how doctors would game an outcomes-based compensation system.

1. Over-diagnose. That is, report that the patient has a condition that is worse than it is.

2. Under-treat. Suppose that 10 percent of the variation in outcomes is due to doctor actions, and 90 percent is due to other random variables. Then the profit-maximizing strategy is to pocket the payment for the “episode,” do nothing, and hope for the best. In fact, you should avoid patients where the routine action produces cure with certainty, because the profit margin is likely to be low.

3. Select only patients with high conscientiousness, because they will have much better outcomes than patients with similar ailments and low conscientiousness.

etc.