Monthly Archives: October 2013

The Age-Earnings Profile

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It’s changing, as Timothy Taylor reports.

In 2012, the typical workers [did not] reach the median level of earnings until age 30–four years later than their counterparts in 1980. And in 2012, while wages still drop off when people reach their early 60s, the decline is not as rapid or as far.

He cites a study by Anthony P. Carnevale, Andrew R. Hanson, and Artem Gulish.

From a PSST perspective, it makes sense that as the economy grows more complex it takes more time for young people to arrive at their comparative advantage. But there are no doubt other things going on as well.

Three Axes Meets Average is Over

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William Galston sees things along the oppressor-oppressed axis.

There’s nothing we can do, says Mr. Cowen, to avert a future in which 10% to 15% of Americans enjoy fantastically wealthy and interesting lives while the rest slog along without hope of a better life, tranquilized by free Internet and canned beans…He seems not to have considered the possibility that his depiction of our future might fill [us] with justified revulsion.

Patrick J. Deneen chimes in along the civilization-barbarism axis.

Thus, a philosophy that places in the forefront a theory of human liberty arrives at the conclusion that certain historical, technological, and economic forces are inevitable, and it is futile to resist them. One might bother to ask the Amish if this is true, but they didn’t go to Harvard. Clearly, they don’t value human freedom, since they are not on the historical merry-go-round to inevitable human liberty—and degradation.

Pointer from Tyler Cowen.

Contemporary Money and Banking

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In a comment on this post, the DeLong who is still attached to his hinges left me with quite a reading list.

1. Barkley Rosser writes,

Prior to 1984, there was a clear correlation between reserves, loans, and M2. After then, while loans and M2 continued to go along in a pretty close lockstep, reserves simply have flopped around all over the place.

Rosser cites Seth Carpenter and Selva Demilrap, who write

For better or worse, most economists think of M2 as the measure of money. M2 is defined as the sum of currency, checking deposits, savings deposits, retail money market mutual funds, and small time deposits. Since 1992, the only deposits on depository institutions’ balance sheets that had reserve requirements have been transaction deposits, which are essentially checking deposits. As noted above, the majority of M2 is not reservable and money market mutual funds are not liabilities of depository institutions. Nevertheless, it is the link between money and reserves that drives the theoretical money multiplier relationship. As a result, the standard multiplier cannot be an important part of the transmission mechanism because reserves are not linked to most of M2.

After reading these and other papers on his list, Mr. DeLong writes,

All this leaves me befuddled as to what the FRB and the econ profession are using as a model of the money machine.

I think that the popular saying among monetary economists these days is that attention has shifted from the Fed’s liabilities to the Fed’s assets. The old story was that the Fed’s liabilities were currency and bank reserves, and the banks lent out a predictable multiple of their reserves. The new story is that banks hold a ton of excess reserves. Also, if you include retail money market mutual funds in M2 (when did that happen? I’m so out of it, I thought that M2 was still, you know M2), then Carpenter and Demilrap are right that the money multiplier was never so reliable, anyway.

Anyway, back to the Fed’s assets. When the Fed buys long-term Treasuries, this takes them out of the hands of private investors, who then have to find something else to buy. They bid up the prices of other bonds and drive down interest rates, or so the theory goes.

My own view is that in an enormous world capital market, the Fed is not driving long-term interest rates. I am willing to be wrong. But my null hypothesis is that the Fed is always in an asset substitutability trap. Financial markets work to create substitutability. As a result, you have Goodhart’s Law: if the Fed can control the supply of an asset class (or definition of money), then that asset class will not have much effect on the economy; if an asset class correlates strongly with economic activity, the Fed will not be able to control it.

Another way to put this is that monetary and financial arrangements are endogenous with respect to Fed procedures. The financial markets will evolve ways to insulate the economy from what the Fed does.

PSST, Youth Unemployment, and Internships

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From the book-in-progress, a draft of a dialogue in which a character representing my views is speaking.

In the Schumpeterian story, jobs are always being created and destroyed. Sometimes, though, new opportunities appear before old firms realize that they are in trouble. Lots of people try to come up with new ways to deliver news on the Internet, but old-fashioned newspapers are slow to close down. That is Schumpeter’s model of a boom.

Eventually, the obsolete firms get the memo. Perhaps they get it during a financial crisis, when it becomes clear that they are no longer viable. As a result, a lot of workers are let go at the same time.

Now the entrepreneurs have to figure out what to do with these unemployed workers. The challenge is that these are likely to be the workers whose skills have the least value in the contemporary workplace. They are not likely to be computer programmers, or effective project managers, or persuasive salespeople.

Moderator: But in today’s economy, the people that seem to be having the hardest time finding a job are younger workers. You would think that if technological obsolescence is the problem, it should be the older workers having problems, and young people should be doing okay.

Schumpeterian Adjustment: That is a bit of a puzzle. One factor at work is that a lot of older people work in occupations that are protected in one way or another. In government, they are not going to fire a 50-year-old in order to hire a 25-year-old, even if the younger worker has better computer skills and requires lower compensation.

Something like one-third of the labor force is working in occupations that require licenses, and one thing that people in those fields can do is make it harder to get a license. They require a new entrant to obtain a doctorate (this happened several years ago in Maryland in physical therapy), but existing practitioners are grandfathered in.

However, I think that the biggest reason that young people tend to have lower rates of employment than older workers is that young people have not been able to settle on their comparative advantage. Young people today do not go to trade school. Most of them get general degrees, and they have very little experience in actual work environments, so they do not know the best way to use their talents. Neither do employers.

We are seeing an economy with fewer well-defined jobs. If it’s well-defined, it can be automated. Instead, businesses have projects to try to create new capabilities or solve problems. It is harder to fit inexperienced workers into that framework. You cannot just give them a couple days of training and have them be productive. Overall, the up-front cost of bringing on a new worker has been going up, particularly for young people with no work experience.

Moderator: Shouldn’t the wage rate take care of that? Young workers will have to accept lower wages.

Schumpeterian Adjustment: In fact, what we are seeing is a different path for young workers into the workplace. Consider the phenomenon of internships, many of which are unpaid. I think that internships are a response to the high fixed cost associated with hiring a new worker. You have to put so much effort into training and acclimating a new hire before the person becomes productive that it does not work just to pay a low wage or to hire people that you will have to fire later. Instead, the internship works as a sort of trial period. By creating an internship path into the business, the firm cuts down on its up-front hiring costs. The intern bears more of those costs.

The Fiscal Brouhaha

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First, some reality:

At the close of business on Jan. 20, 2009, the day Obama was inaugurated, the U.S. government debt held by the public was $6,307,311,000,000, according to the Daily Treasury Statement for that day.

At the close of business on Sept. 30, 2013—the last day of fiscal 2013—the Daily Treasury Statement said the U.S. government debt held by the public was $11,976,279,000,000.

I think that it is fair to attribute a lot of this debt increase to policies and economic conditions created under President Bush. Still, I find it ironic that President Obama would tell Wall Street that investors should be concerned about a potential default.

My views of the current situation:

1. Our politicians are like a family with a huge credit card debt. The Republicans are threatening not to make the minimum payment, and that is clearly a case of brinkmanship. However, the Democrats have no plan to keep the debt from growing out of control, and that in its own way is brinkmanship.

2. It is almost as if our political system and the news media are designed to conjure up short-term symbolic conflicts to distract attention from long-term problems.

3. A good rule of thumb in politics is that fiscal conservatives make noise, but spenders win in the end.

The Cochrane Tax

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John Cochrane proposes,

I think a simple tax is the answer – though since “tax” is a dirty word, let’s call it a “systemic externality fee” – on debt, and especially on short-term debt or any other contract where the investor has the right to demand payment, and fail the firm if not received. Every dollar of such funding will cost, say, a 10 cent fee. Payments due later generate smaller fees.

The idea is that all short-term debt contracts end up being implicitly insured by taxpayers. So from the standpoint of incentives and fairness, those contracts ought to be taxed.

Retirement and Wealth

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Timothy Taylor points to some sobering news.

those in the 1980s were more likely to be ready for retirement than those in the 1990s; those in the 1990s were more likely to be ready for retirement than those in the 2000s; and those in 2010 were least likely of all to be ready for retirement.

I know many people in close to 60 years old, currently living upper-middle class lives, with less than $200,000 in non-housing savings. I do not think they have thought ahead very far. Some questions:

1. What does this mean for their lifestyles during retirement? Less expensive meals? Less expensive vacations? Less choice about where to live?

2. What does this mean for their level of dependence on government benefits?

3. What does this mean for the prospects of reducing Social Security or Medicare benefits?

The DC Car Chase

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I don’t usually blog about the latest news, particularly when there is no economic content. But I happened to be driving in suburban Maryland and listening to the car radio as the story broke on Thursday afternoon. Friday morning’s Wapo reports,

A woman with a 1-year-old girl in her car was fatally shot by police near the U.S. Capitol on Thursday, after a chase through the heart of Washington that brought a new jolt of fear to a city already rattled by the recent Navy Yard shooting and the federal shutdown.

I think this is a good way to write the lead sentence. It gets to the fact that a woman was killed, which is sad. And it gets to the fact that security issues in DC are really top of mind.

From the first report I heard, about half an hour after the shooting, my instincts were that the woman was mentally ill and that she was black. This was before it was reported that there was a child in the car, and long before the woman had been identified. Why were my instincts what they were? Perhaps because mental illness has been on my mind, just because I’ve encountered some sad cases recently. Or perhaps the actions of the driver just sounded like someone mentally ill.

And I guess my instinct that she was black was based on a presumption that the police would not have been in shoot-to-kill mode with a white woman. I am not saying that I consciously thought “the police would shoot a black woman, but not a white woman.” All I know is that the image that popped into my head was that of a black woman, and I think the reason that it did is that I had a harder time picturing the police killing a white woman.

Given these instincts, I felt uncomfortable listening to the reporters on the radio heaping praise on the police and expressing gratitude for how quickly and effectively they had secured the situation. The reporters were proud of the police and happy with the outcome. My instinct was that it was a misunderstanding and a tragedy. I am not saying that the police were necessarily unjustified in what they did. One can argue that they acted appropriately under the circumstances as they understood them (what if the woman was a threat to detonate a bomb in the car?).

My final thought: had this woman taken her mental illness anywhere but near the President and Congress, my guess is that she would be alive and getting treatment.

Risk Premiums and Short-term Rates

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Jeremy Stein sees a connection.

over a sample period from 1999 to 2012, a 100 basis point increase in the 2-year nominal yield on FOMC announcement day–which we take as a proxy for a change in the expected path of the federal funds rate over the following several quarters–is associated with a 42 basis point increase in the 10-year forward overnight real rate, extracted from the yield curve for Treasury inflation-protected securities (TIPS).

…These changes in term premiums then appear to reverse themselves over the following 6 to 12 months.

…Banks fit with our conception of yield-oriented
investors to the extent that they care about their reported earnings–which, given bank accounting rules for available-for-sale securities, are based on current income from securities holdings and not mark-to-market changes in value. And, indeed, we find that when the yield curve steepens, banks increase the maturity of their securities holdings.

Thanks to Tyler Cowen for the pointer.

If this is correct, then monetary policy affects long-term real rates, although having the effect reverse itself within 6 to 12 months makes me wonder. In fact, this whole thing makes me wonder….

The Fiscal Multiplier

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An IMF paper writes,

there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump.

Reading further, it turns out that some of the “evidence” consists of simulations of macroeconometric models, which I personally do not find convincing. Also, I would have liked to see more discussion of the the “monetary offset” issue.

The main point of the paper is that although the pre-crisis conventional wisdom was that discretionary countercyclical fiscal policy was not necessary, the post-crisis conventional wisdom is that it is a good idea. What I suggest in the book that I am writing is that this is normal in macroeconomics. That is, the conventional wisdom at time t always seems to be that the conventional wisdom at time t-1 is wrong. Yet if you think about what this model implies for the conventional wisdom at time t as viewed in time t+1, it is quite subversive.

Thanks to Timothy Taylor for the pointer.