Monthly Archives: February 2014

Inferring from an Identity

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Scott Sumner writes,

To my eyes it looks like “real wages” [(nominal average hourly earnings)/(NGDP/pop)] lead unemployment by about a month or two

Shock me, shock me. Let’s see:

NGDP = RGDP * P = N * (RGDP/N) * W*(P/W)

In words, nominal GDP = employment times output/worker times nominal wages times the price markup.

Solve this for the ratio of the nominal wage to nominal GDP:

W/NGDP = (W/P) * (RGDP/N)/N

In words, Sumner’s “real wage” (the nominal wage divided by nominal GDP) equals the inverse of the price markup times the inverse of productivity times 1/employment. If the price markup and productivity remain about unchanged, then by definition the “real wage” is inversely related to employment.

Scott is fond of saying, “Never reason from a price change.” I say, “Never draw a behavioral inference from an identity.”

Steve Oliner on Productivity

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Interesting interview. One excerpts:

the underlying pace of innovation has remained rapid but businesses have been slow to take on any kind of risky ventures, and financing for – until recently for, you know, early stage venture capital, for example, or for small businesses, has been pretty tight. So I think we are seeing a slowdown period in terms of the adoption of the innovation into the business world.

Another:

The PPI shows that the price declines for [semiconductors], which were extremely rapid throughout almost the entire history that they’ve been produced, have basically come to a halt — that in the last couple of years there have been no price declines to speak of at all, which is very strange and is in conflict with the fact that innovation in that part of the economy is still proceeding at a rapid rate. And it raises questions about whether the procedures that are being used to measure those prices are appropriate. And I personally think that they’re not, that prices are actually falling more rapidly than the official statistics would show.

The Qualifications for Fed Chair

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Justin Fox writes,

So has an economics PhD basically become a prerequisite for running the Fed? “I think the answer is ‘probably yes’ these days,” former Fed vice chairman Alan Blinder — a Princeton economics professor — emailed when I asked him. “Otherwise, the Fed’s staff will run technical rings around you.”

Not if you have enough confidence in your own judgment. Paul Volcker could not have cared less about the macroeconomic models of the Fed staff. In fact, nowhere in academic economics do they teach how the central bank really operates on a day-to-day basis. For that, you have to read Marcia Stigum’s Money Market.

Pointer from Mark Thoma.

It does seem to be true that Ph.D economists are now in the saddle at the Fed. In fact, there is a non-trivial chance that Janet Yellen will be the last Fed Chair not to have Stan Fischer as part of her intellectual ancestry (she is roughly the same age as Fischer and did her dissertation under James Tobin).

Richard Epstein vs. Hard-Core Libertarians

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He writes,

Society needs a coercive mechanism strong enough to keep defectors in line, but fair enough to command the allegiance of individuals, who must share the costs of creating that larger and mutually beneficial social order. The social contract that Locke said brought individuals out of the state of nature was one such device. The want of individual consent was displaced by a consciously designed substantive program to protect both liberty and property in ways that left all members of society better off than they were in the state of nature. Only constrained coercion can overcome the holdout problems needed to implement any principle of nonaggression.

Read the whole thing. He frames it as a disagreement with Rand Paul. However, most of the criticism seems addressed to Murray Rothbard, rather than at positions that Rand Paul has taken.

In my own thinking, I am increasingly leaning toward the view that government over a large territory and population is the problem. Government at a community level (think of a condo association) is tolerable because of the ease of exit. As you scale up government, the benefits tend to decline and the abuses tend to increase.

A Problem with Modern Macro

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David Glasner writes,

It is only after coordination failures have been excluded from the purview of macroeconomics that it became legitimate (for the sake of mathematical tractability) to deploy representative-agent models in macroeconomics, a coordination failure being tantamount, in the context of a representative agent model, to a form of irrationality on the part of the representative agent. Athreya characterizes choices about the level of aggregation as a trade-off between realism and tractability, but it seems to me that, rather than making a trade-off between realism and tractability, modern macroeconomics has simply made an a priori decision that coordination problems are not a relevant macroeconomic concern.

Pointer from Mark Thoma. In other words, the representative-agent approach in modern macro serves to eliminate what some of us think is the important reason that unemployment exists. In my book, I add

The first fundamental flaw is to to treat the production process as instantaneous. You have your capital and labor sitting there, and all you have to do is put them together to produce output. In my view, Fischer Black’s emphasis that production takes time is very important. It means that plans made months or years ago have to be reconciled with current conditions. As tastes and technologies evolve, some plans turn out to be brilliant, while others turn out to have been misguided…

The second flaw in mainstream macreoconomics is to ignore the time that it takes to discover successful production processes. There is a trial-and-error process at work as enterprises are launched. The fortunate few will expand, but most new firms will fail. Starting from a situation such as one that prevailed in 2009, with many previously-viable patterns of production no longer sustainable and consequently high unemployment, it takes a lot of time and effort to discover the new patterns of specialization and trade that will reveal everyone’s comparative advantage and restore full employment.

The importance of this laborious discovery process is what I think is missing from Fischer Black’s account of macroeconomics. He insists on using the term “general equilibrium,” while I believe that it is important to recognize that the economy is never in an equilibrium state. Moreover, the adjustment to changes in tastes, technology, and shocks (such as a surge in oil prices) can be long and painful.

The CBO’s Economic Outlook

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The Congressional Budget Office, a Koch-funded organization known to be affiliated with the Tea Party, writes,

CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

They also write,

Federal revenues are expected to grow by about 9 percent this year, to $3.0 trillion, or 17.5 percent of GDP—just above their average percentage of the past 40 years…

Federal outlays are expected to increase by 2.6 percent this year, to $3.5 trillion, or 20.5 percent of GDP—their average percentage over the past 40 years. CBO projects that under current law, outlays will grow faster than the economy during the next decade and will equal 22.4 percent of GDP in 2024.

These right-wing nut cases do not acknowledge that the real problem that we face is austerity.

Statistics vs. Calculus in High School

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From a podcast with Russ Roberts and Erik Brynjolfsson (the guest):

Guest: My pet little thing, I just wanted to mention, is I’m not as much of a fan of calculus as I once was, and I’m on a little push in my high school to replace calculus with statistics. In terms of what I think is practical for most people, with the possible exception of Ph.D. economists: calculus is just widely needed. But that’s sort of a tangent. Russ: Well, it’s interesting. My wife is a math teacher, and she is teaching a class of seniors this year, split between calculus and statistics, for one of the levels of the school. And statistics is–I agree with you. Statistics is in many ways much more useful for most students than calculus. The problem is, to teach it well is extraordinarily difficult. It’s very easy to teach a horrible statistics class where you spin back the definitions of mean and median. But you become dangerous because you think you know something about data when in fact it’s kind of subtle. Guest: Yeah. But you read newspapers saying–I just grimace because the journalists don’t understand basic statistics, and I don’t think the readers do either. And that’s something that appears almost daily in our lives. I’d love it if we upped our education in that area. As data and data science becomes more important, it’s going to be more important to do that.

Most of the discussion concerns the new book The Second Machine Age, or what I call “average is over and over.”

Paranoia Along Three Axes

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Cass Sunstein writes,

The first is a wildly exaggerated sense of risks — a belief that if government is engaging in certain action (such as surveillance or gun control), it will inevitably use its authority so as to jeopardize civil liberties and perhaps democracy itself. In practice, of course, the risk might be real. But paranoid libertarians are convinced of its reality whether or not they have good reason for their conviction.

He lists five signs of libertarian paranoia. I expected to hate the article, but I agree with it more than I disagree. In the three-axis model, paranoia means seeing others as representing the “bad” end of your preferred axis. So when a libertarian thinks that conservatives and progressives are merely out to crush liberty and expand coercion, that is a paranoid libertarian.

Similarly, when a conservative thinks that progressives and libertarians are merely out to tear down civilization and replace it with barbarism, then that is a paranoid conservative. Finally, when a progressive thinks that conservatives and libertarians are merely out to help the oppressors keep down the oppressed, then that is a paranoid progressive.

Over-rated in Economics

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Tyler Cowen writes,

at any point in time, the most overrated economists are the most highly rated young empirical economists at the top schools.

He says this is because empirical results do not hold up terribly well, and because what matters in empirical work is the overall body of work done by the profession, not so much the contributions of particular individuals.

I think that economists in policy-hot fields tend to be over-rated. Macro is one example. Health care is another. When I think of Jonathan Gruber or David Cutler, what comes to mind are their policy opinions, rather than any research discoveries. They are rated highly by economists who think that Gruber and Cutler know how to fix the health care system. Given that I do not believe this to be the case, I have to view them as dangerously over-rated.

I think that the fields of economic history and financial institutions are under-rated. Doug Diamond is known for his paper with Dybvig, but he has done other stuff that I like that has not received as much attention. Consequently, I think of him as under-rated. Gregory Clark may be under-rated. In my macro memoir, I end up saying that if I had it to do over again, I would pursue economic history and financial institutions as fields, rather than macro.

Many years ago Dick Startz wrote advice to economists on the job market. He said that the quality of professors at lower-institutions tends to be higher than you probably expect. Given that observation, it would be easier to find under-rated economists at lower-tier institutions and easier to find over-rated economists at top-tier institutions.

Treating Conservatism as a Personality Defect

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My latest book review.

In Our Political Nature: The Evolutionary Origins of What Divides Us, author Avi Tuschman interprets political attitudes in terms of human evolutionary strategies. Conservatives have personalities that align with one set of strategies, and liberals have personalities that align with another. It is an intriguing analysis, but one to which I have a number of objections.

Tuschman’s thesis is that conservatism is fundamentally about marrying within the tribe (endogamy). Liberalism is fundamentally about exogamy.

In my own Three Languages book, I try not to demand and oversimplify ideological views. I talk about the three axes as languages that are used to achieve closure on issues and demonize those who disagree. However, I assume that people arrive at their views via reason.

Tuschman does not credit people with reason. However you rationalize your beliefs on immigration or gay marriage, if you are antagonistic it is because you are inclined toward endogamy and if you are favorable it is because you are inclined toward exogamy.