Monthly Archives: January 2014

Future Job Growth

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From the WSJ;

Personal-care aide will be the fastest growing job from 2012 to 2022, among categories with more than 25,000 positions, the Labor Department said in a new report. The field will grow by nearly 50% to 1.8 million jobs.

I could envision a scenario in which personal services of all sorts become more important. For example, here is an idea from IBM.

by next year, Watson will be your personal shopping assistant. Store associates will also have similar intelligent tech providing them instant product information, customer loyalty data, sales histories, user reviews, blogs and magazines, so that when you do need to talk with another human, they know exactly how to help.

IBM thinks in terms of technology it can sell to large enterprises. I tend to think in terms of disintermediation, in which large enterprises are no longer needed.

So IBM thinks about adding personalization to an existing classroom. I think about getting away from classrooms and going back to tutors. Imagine a world with tutors instead of schools.

Schools keep you kids around all day, and thereby waste most of the day. For parents, that is as much a feature as a bug, because they need schools to supervise their kids. But if you were to re-organize schooling into a day-care component and a tutoring component, you might find benefits in getting rid of the enterprise that we call a school.

So we might find that in the future there are fewer school administrators and fewer classroom teachers, but there are a lot more day-care supervisors and tutors.

Russ Roberts Asks an Easy Question

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He writes,

There are lots of claims about inequality and what is really going on. But this chart makes whatever explanation you believe in harder to explain. Chew on it.

Nick Schulz and I wrote about what we called the Sergey Brin Effect. We pointed out that the “game” of income distribution has been re-shaped by immigration, assortative mating, and technology.

The chart the Roberts refers to shows major differences in trends by education category. It also shows that, controlling for level of education, women have done better than men. My guess is that this is due to technology. We have seen an increase in the comparative advantage of people who can get into well-protected credentials cartels or who can help companies formulate and execute complex business strategies. I think that explains the education-income trend. We have seen a decline in the comparative advantage of workers who are good at lifting, shaping, and applying finishing to metal but who are not so good at interacting with customers and co-workers. That also explains the education-income trend, but I think it also helps explain the male-female trend.

The chart also shows more earnings growth at the top of the education ladder. That, along with assortative mating by education, should really drive household inequality.

Defining a Bubble

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Justin Fox writes,

So maybe we should tweak the second sentence of Brunnermaier’s definition, to something like: Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price. A little clunky, and of course “plausible” is a judgment call. But it does get at the idea that we shouldn’t be calling every last rise in P/E ratios a bubble.

Pointer from Mark Thoma.

I would tweak this definition back in Shiller’s direction. I think you have to know why people are buying the asset in order to know whether it is a bubble. If investors who are buying the asset have estimates of the discounted present value of the income from that asset that imply a negative real return, then it is a bubble.

To simplify, assume no aggregate inflation. That gets out of the way any difference between real income and nominal income or between real returns and nominal returns.

Suppose that I buy an asset that yields an income stream–rents, dividends, or what have you. Suppose that we discount this income stream at the risk-free rate, and the resulting real return is negative. Why, then, am I buying the asset?

1. Perhaps it has a “negative beta,” so it has tremendous diversification value. Let’s rule that one out.

2. I get utility out of owning the asset. This might apply to jewelry or paintings. Or I could get “extra utility” out of owning my house that is over and above what I save by not having to pay rent. Let’s ignore those cases, also.

3. I expect to be able to sell the asset at a higher price to someone else.

When (3) is the only way to get a positive return from holding the asset, then we have a bubble.

The difference between my definition and Fox’s is that his definition requires that we have an objective definition of “plausible.” Mine requires learning from investors what their estimates are for future income from the asset.

So with something like stocks, you have to know whether the people buying are projecting higher future earnings than what you think are plausible (in which case, no bubble) or whether they are projecting earnings that imply negative rates of return (in which case, bubble).

What 5 Policies Would Help Millenials?

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Dylan Mathews makes an attempt at answering. The question is probably stupid, because the answers do not seem so smart. I think that the biggest problems for millenials are the high fixed cost of hiring workers and the big generational imbalance embedded in government budgets. However, millenials are likely to benefit at some point from very rapid technological progress.

Some policies that might help:

1. Decouple health insurance from employment.

2. Legalize catastrophic health insurance coverage, as opposed to mandating comprehensive coverage. In other words, undo Obamacare.

3. Eliminate the corporate income tax, taxes on saving and employer payroll taxes. Millenials are going to need all the saving and all the work they can get. What that leaves you with is a consumption tax.

4. We also have to cut spending. Carefully means-test Social Security, Medicare, and get rid of the millionaires on Medicaid. Get rid of all Federal grant programs except for those from the NIH and NSF. No export-import bank, no energy subsidies, no education grants, etc.

5. No agriculture subsidies, no housing subsidies of any kind.

Hey, I didn’t say that any of this was going to be feasible politically.

DSGE and the Market Test

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Noah Smith writes,

In other words, DSGE models (not just “Freshwater” models, I mean the whole kit & caboodle) have failed a key test of usefulness. Their main selling point – satisfying the Lucas critique – should make them very valuable to industry. But industry shuns them.

Pointer from Mark Thoma.

A few years ago, I happened to run into Olivier Blanchard. I offered my complaint that folks like Stan Fischer and himself had made macroeconomics narrow and stilted. “We’ve passed the market test,” he replied. But the “market test” to which he referred is limited to academic macro. It is a supplier-controlled cartel, not a consumer market.

Social Reasoning, Continued

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I’ve been stalking Mathew Lieberman on line, looking at videos and interviews and such. Also, a commenter found this journal article. I suppose I ought to just read his book, but I find his style somewhat annoying, so I hesitate. Anyway, here is an NPR interview.

if I’m being rejected from a group, how do I need to change my behavior or what I say or think in order to not be excluded or rejected from that group? It teaches me lessons about how to behave differently in the future. And because we can imagine the future, we can also use that preemptively. We can feel social pain at the threat of being excluded from a relationship or a group.

I do think that this is a very powerful motivator. Go back to Adam Smith. People want to feel high self-regard. But your self-regard depends on how you are regarded by others. Ideally, your tribe wants to nurture and protect you, because they love you and admire you. Worst case, your tribe wants to shun and expel you.

Some thoughts on what I might call the “tribal membership motivator.”

1. It is amazingly powerful. How else to explain fans of college sports or professional sports?

2. Do we need it for social glue? If we lacked this instinct, would we be unable to follow rules? If you only followed social norms when you made a rational calculation about the costs of getting caught cheating vs. the benefits of getting away with it, we probably end up in a world of Prisoners’ Dilemma games in which everyone constantly defects.

3. But the social brain also makes us vulnerable to exploitation. Examples would include men recruited to fight for warlords, individuals pledging loyalty to crime bosses, citizens manipulated by politicians, workers manipulated by bosses, and customers manipulates by salespeople.

4. Lieberman argues that the social brain is important in primates because of the long period in which infants are helpless. We need to be able to form strong connections with parents, or else we would not survive. Note how this circles back to the way in which many institutions try to tap into this primal attraction to parents by stepping into the role of substitute parent: religious organizations, schools, governments, and business hierarchies all exploit this to some degree.

5. Even if markets are effective in some objective sense, they do not provide people with a sense of familial protection and tribal belonging. Perhaps what libertarians need to do is build up the non-governmental substitutes for familial protection and tribal belonging in order to take some of the oxygen away from government. Of course, the other tribe, those evil bastids, is doing the opposite.

State and Local Health Obligations

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From a new working paper by Bryan Lutz and Louise Sheiner.

A major factor weighing down the long-term finances of state and local governments is the obligation to fund retiree benefits. While state and local government pension obligations have been analyzed in great detail, much less attention has been paid to the costs of the other major retiree benefit provided by these governments: retiree health insurance. The first portion of the paper uses the information contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash flows underlying the liabilities given in the report. Obtaining the cash flows allows us to construct liability estimates which are consistent across governments in terms of the discount rate, actuarial method and assumptions concerning medical cost inflation and mortality…Relative to pension obligations discounted at the same rate, we find that unfunded retiree health care liabilities are 1/2 the size of unfunded pension obligations.

Perhaps the most interesting aspect of the paper is the amount of effort it took on their part to find the data to do the calculations. Similarly, one of the biggest challenges for Reinhart and Rogoff is to find data on government debt outstanding. There are strong incentives for politicians to avoid transparent accounting, and not much in the way of countervailing power.

Why I Quit Macroeconomics

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We construct a microfounded, dynamic version of the IS-LM-Phillips curve model by adding two elements to the money-in-the-utility-function model of Sidrauski (1967). First, real wealth enters the utility function. The resulting Euler equation describes consumption as a decreasing function of the interest rate in steady state–the IS curve. The demand for real money balances describes consumption as an increasing function of the interest rate in steady state–the LM curve. The intersection of the IS and LM curves defines the aggregate demand (AD) curve. Second, matching frictions in the labor market create unemployment. The aggregate supply (AS) curve describes output sold for a given market tightness. Tightness adjusts to equalize AD and AS curve for any price process. With a rigid price process, this steady-state equilibrium captures Keynesian intuitions. Demand and supply shocks affect tightness, unemployment, consumption, and output. Monetary policy affects aggregate demand and can be used for stabilization. Monetary policy is ineffective in a liquidity trap with zero nominal interest rate. In contrast, with a flexible price process, aggregate demand and monetary policy are irrelevant when the nominal interest rate is positive. In a liquidity trap, monetary policy is useful if it can increase inflation. We discuss equilibrium dynamics under a Phillips curve describing the slow adjustment of prices to their flexible level in the long run.

That is the abstract of a new paper by Pascal Michaillat and Emmanuel Saez. It was while I was in graduate school that this sort of mathematical self-abuse took over the field.

Wesley Mouch’s Assistant

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CBS reports,

Lesley Stahl: Let me interrupt you. You were the government. How many of the loans were you involved in?

Steven Koonin: Difficult to know the exact number. But I would say in the order of 30.

Lesley Stahl: Did you make mistakes?

Steven Koonin: I think I didn’t do as good a job as I could’ve. In retrospect, I would’ve done things a bit differently.

Lesley Stahl: Part of this was supposed to be creating new jobs. Everything I’ve read there were not many jobs created.

Steven Koonin: That’s correct.

Lesley Stahl: So what went wrong there?

Steven Koonin: I didn’t say it would create jobs. Other people did.

Honestly, I did not know what to excerpt. Read the whole thing. Wesley Mouch was, of course, Steven Chu, the Energy Secretary in President Obams’s first term.