Monthly Archives: March 2014

Mian-Sufi vs. Scott Sumner and John Taylor

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They write,

What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent.

Pointer from Mark Thoma. A couple of comments.

1. This seems like an argument against Scott Sumner’s view that monetary policy was too tight in 2008. That is, I take them as saying that there was nothing that the Fed could have done. Scott Sumner would insist that the Fed lacked the will, not the way.

2. Mian and Sufi offer a chart showing that core inflation was below the Fed’s 2 percent target almost the entire period starting in 2000. This seems like an argument against John Taylor’s view that monetary policy was too loose in 2004-2006.

3. I believe that in 2007 the Fed folks thought that inflation was rising, in part because they looked at oil prices, not just core inflation.

4. Mian and Sufi entitle their post “Monetary Policy and Secular Stagnation.” I still want to see an economist reconcile a belief in secular stagnation with a belief in Piketty’s claim that the return on capital is going to exceed the growth rate of the economy on a secular basis. For the record, I believe neither.

Virginia Postrel on Crowdfunding

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She writes,

“It’s a way to access capital, but what it’s also become is a market-testing and validation platform,” Ringelmann told the Dent the Future conference on Tuesday. “What we’re doing is creating pre-markets for ideas,” she said.

This makes sense to me. If I think of crowdfunding as angel investing, it holds no appeal to me at all. Angel investing by qualified investors is a dangerous game. Unless you are a whip-smart business lawyer, you can easily get hosed when the next investment round starts. I can’t imagine ordinary civilians making a profit at it.

But I am a very strong believer in test-marketing products. I like the idea of asking “Would you pay for this if I developed it?”

Pointer from Tyler Cowen.

What I’m Saying

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At this event, on Peter Schuck’s book on government failure. Peter Berkowitz liked the book more than I did. Berkowitz, a conservative, was not as troubled as I was by the elitist assumptions embedded in the author’s thinking.

Schuck talks about cultural impediments to better government in the United States. On p. 375, he writes

Of the particular cultural features identified in chapter 4, only four–decentralization, protection of individual rights, acceptance of social and economic inequality, and suspicion of technical expertise and official discretion–seem remotely tractable to policy-driven change.

What he describes as bugs, I would describe as features. In my remarks, I will suggest that the problem is not that the rest of America gives too little authority and autonomy to technical experts. The problem is that technical experts have too exalted a view of their own theories and capabilities.

I am in a bad mood about progressives these days, which is making it difficult for me to be charitable. Maybe it’s the long winter–I slipped and almost injured myself on another patch of global warming yesterday. But I am getting tired of the relentless support for grand social engineering notwithstanding its dismal track record, along with the bitter rhetoric against those of us who happen to disagree.

Technology or the Safety Net?

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The Financial Times reports,

Non-store retail, which includes online shops, recorded a boom in sales – up 31 per cent to $380bn. But the number of establishments rose only 12 per cent to 66,339 while employment in the sector was down slightly.

Pointer from Tyler Cowen. The gist of the article is that the U.S. economy is becoming more capital intensive.

Casey Mulligan, who gave a talk yesterday on his book The Redistribution Recession, says that 2/3 of the shortfall in employment can be explained by additions to the safety net. The big ones are extending unemployment compensation from 26 weeks to 99 weeks and taxpayers now supplying 65 percent of the cost of COBRA (health benefits) for people who lose jobs. Mulligan combines the various safety-net enhancements made since 2007 with standard estimates of how the “wedge” between the net gain to the worker from employment and the cost of compensation to employers affects hours worked, and that is how he arrives at his 2/3 figure.

In short, the economy has become more capital intensive since 2007 in large part due to the expansion of the safety net. Mulligan pointed out that this does not mean that the expansion was wrong, but he says you should not expect to return to the same rate of labor force participation that we had a few years ago as long as the new measures remain in place. And it will get worse once health care reform takes hold–including many Republican proposals as well as Obamacare. I do not have details on how health reform affects employment–that is the topic of Mulligan’s new book.

Mulligan would like suggestions for a title for the new book. I might suggest “Side Effect: Health Care Reform and the Job Market”

Redefining the Problem of Our Time

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Piketty has written a book that nobody interested in a defining issue of our era can afford to ignore.

That is from John Cassidy. Other reviewers often speak of inequality as the defining issue of our time. Brad DeLong has collected many reviews. Clearly, this book is serving as a rallying point for the cause of redistributing rather than creating wealth. Its appeal to academics is particularly strong.

If you had asked me, I would have said that the defining issue of our time is unsustainable government finance. Most major national governments have made promises that they are unlikely to keep. Our state and local governments are cutting back on services, and in a few cases going bankrupt, in order to pay pensions to former employees. The outlook for politics is grim.

And yet we are being told to focus on inequality as the defining problem of our time.

I have not yet read the Piketty book. Perhaps I will find it persuasive. But I do not understand how Larry Summers, who believes that we are in a period of secular stagnation, with an excess of capital and an equilibrium real interest rate that is negative, can give a positive review of a book that says that we have such a capital scarcity that we will see a real interest rate greater than the economic growth rate for the indefinite future.

It seems to me that the development of India and China, along with ongoing technological change, is making the gap in incomes between those countries and ours smaller, while the gap within the United States widens. I am not convinced that this represents a net increase in inequality, much less that it is the defining problem of our time. Twenty years from now, my guess is that the people who are worried about this problem, and not the problem of unsustainable government finance, will not seem particularly astute.

Shiller-Bashing

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Scott Sumner writes,

I distinctly recall that Robert Shiller did not recommend that people buy stocks in 2009. That made me wonder when Robert Shiller did say it was a good time to buy stocks.

Barry Ritholtz writes,

By one metric — Yale professor Robert Shiller’s cyclically adjusted price-to-earnings ratio, or CAPE ratio — stocks are especially pricey. This has become the bears’ favorite valuation measure. But beware of cherry-picking any particular metric that rationalizes your position. Indeed, over the past 20 years, the CAPE measure has pegged U.S. equities as “overvalued” 85 percent of the time.

But for me, the most interesting Shiller-bashing is in the book I am reading by Duncan Watts, Everything is Obvious. He reproduces a chart created by David Pennock and Dan Reeves, using option prices to derive the probability distribution of future stock prices. The chart shows clearly that the uncertainty about future stock prices is much higher than the variation of past stock prices. That is exactly the criticism that I made of Shiller’s famous “variance bounds” estimates when he first published his work on that topic, and which he told the journal editor to reject. I still think that I was right. I should note that Watts does not make the Shiller connection in his book. However, I think that Watts gives us plenty of reason to be cautious about making statements like “Shiller called the housing bubble.”

I wish that more economists were aware of Watts.

Policy Proposals for Fishtown

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Ron Haskins writes

The program of this type that has had the most success so far is called career academies, in which students organize into small learning communities to participate in academic and technical education for three or four years during high school. Perhaps the most important aspect of the program is the opportunity students have to gain several years of experience with local employers who provide career-specific learning experiences. An eight-year follow-up of young adults who had participated in career academies showed limited effects on young women but major effects on young men. Young men who had been in the program were about 33% more likely to be married, were about 30% more likely to live with their partners and their children, and earned about $30,000 more over the eight years than the men in the randomized control groups. Expanding the reach of career academies, especially in high-poverty areas, would be a wise investment.

He lists other ideas, including extending the Earned Income Tax Credit to single parents.

Replicating Successful Government Interventions

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According to Stuart M. Butler and David B. Mulhausen, it is not easy.

the task of mimicking and scaling up programs that work is not so straightforward. Success is never a simple matter of easily traceable cause and effect, and even the people who have achieved a breakthrough often cannot pinpoint exactly what worked and why. Social outcomes have an impossibly complex array of causes, and the circumstances that characterize one place are rarely identical — and are often not even very similar — to those found elsewhere. A seemingly successful preschool program in Chicago may fail in Atlanta, even if it is reproduced virtually identically, because of differences, both large and small, between the two cities.

I think that a big problem is that success can be mis-measured in the first place. For example, the authors write,

Early-childhood education offers a good example of such pitfalls. Head Start, a federal program that funds preschool initiatives for the poor, was based on a modest number of small-scale, randomized experiments showing positive cognitive outcomes associated with preschool intervention. These limited evaluations helped trigger expenditures of over $200 billion since 1965. Yet the scaled-up national program never underwent a thorough, scientifically rigorous evaluation of its effectiveness until Congress mandated a study in 1998. Even then, the publication of the study’s results (documenting the program’s effects as measured in children in kindergarten, first grade, and third grade) was delayed for four years after data collection was completed. When finally released, the results were disappointing, with almost all of the few, modest benefits associated with Head Start evaporating by kindergarten. It seems the program had been running for decades without achieving all that much. Worse yet, the scant evidence of success has not stopped Head Start’s budget from continuing to swell: The program cost $8 billion last year.

In the private sector, if a firm gets off to a promising start but then founders, it sinks. Government programs keep right on going. This is one of the issues that I will be raising when I discuss a new book at Cato on Thursday. I will offer an even more pessimistic take than the authors of the article or the author of the book.

Climate Models vs. Macroeconomic Models

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In a podcast with Russ Roberts, Kerry Emanuel says,

there is a huge difference between climate modeling and economic modeling. We know the equations. You guys don’t. Okay? And we actually know the equations we are trying to solve. And the problems come with actually trying to solve them. And arguably our computers aren’t nearly powerful enough to really solve them exactly; and they won’t be for generations, unless there is some unbelievable breakthrough in computation.

I am surprised that he received no pushback on this point. I confess that I paused there and searched the transcript for “water vapor” or “clouds.” Not finding either, I just skimmed the rest of the transcript without reading it closely.