Monthly Archives: April 2015

Relate this to Tobin’s q

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Justin Fox reported,

>Ocean Tomo calculates intangible assets simply “by subtracting the tangible book value from the market capitalization of a given company or index,” so the rise in intangibles since the 1970s is in part just a reflection of rising stock market valuations. But that’s not all it is: the cyclically adjusted price-earnings ratio on the Standard & Poor’s 500 Index has risen about 2 1/2 times since 1975, while the intangibles increase has been almost fivefold.

Tobin’s q is the ratio of the stock price to the replacement cost of capital. I am tempted to write:

q = P/K = (P/E)(E/K), where P is the stock price, E is earnings, and K is capital.

As Fox points out, a fair amount of the rise in q since the late 1970s comes from a higher P/E ratio. But I gather that if you think of K as tangible capital, then E/K also has soared.

Fox’s piece was mentioned in Scott Sumner’s discussion of what I called the fifth force. But Robin Hanson got me to take a look.

I would note that intangibles in the economy include not just firm-specific intangibles but also general intangibles that lead to better patterns of specialization and trade. Institutional improvements in India and China, as well as lower transportation and communication costs, come to mind.

Tyler Cowen has much more, including a hypothesis that accounting issues are involved.

Elizabeth Anderson Podcast

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I was uncharitable to her here. I was wrong and I apologize. I listened to some of a podcast that Aaron Powell and Trevor Burrus did with her. I was impressed by her command of the intellectual history of egalitarianism.

Nonetheless, I still think that she too readily equates working for a firm with being a slave. If you were a skilled craftsman and did not want to work for a big factory, you could still ply your craft. If you chose to work in the factory, it was because you could earn more in the factory than as an independent craftsman. Which in turn means that you are more valuable to society in the factory than on your own.

Today, nobody is forced to work at a low-wage employer. If you feel sorry for people who work for a low-wage employer and you want to donate money to them, you have my blessing. If you want to force the rest of us as taxpayers to donate money to them, then you are in good company, even among some of us who call ourselves libertarians (the bleeding-heart variety). But if your approach is to force the employer to become a high-wage employer, then I do not think much of your philosophy.

The Banking Crisis and the Real Economy

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How important was the financial crisis as a causal factor in the economic slump? Apparently, Brad DeLong and Dean Baker disagree. Baker wrote,

The $8 trillion in equity created by the housing bubble made homeowners feel wealthier. They consumed based on this wealth, believing that it would be there for them to draw on for their children’s education, their own retirement or for other needs.

When the bubble burst, homeowners cut back their consumption since this wealth no longer existed. However contrary to what you often read in the paper, consumption is not currently low, it is actually quite high when compared with any time except the years of the stock and housing bubbles.

DeLong replies,

in the absence of the financial crisis, the Federal Reserve’s lowering interest rates as consumption spending fell in response to the decline in home equity would have pushed down the value of the dollar and made further hikes in business investment a profitable proposition and so directed the additional household savings thus generated into even stronger booms in exports and business investment: in the absence of the financial crisis, what was in store for the U.S. was not a long, deep depression but, rather, a shallow recession plus a pronounced sectoral rotation.

Pointer from Mark Thoma. Conventional economics did not have a story of how stress in the financial sector could cause problems in the real economy. Even now, that view comes across as a just-so story. Baker argues that one does not need such a story, but DeLong says that we do need it.

I would note that if the financial crisis did not matter, then the bailouts, including interest payments on reserves, were simply transfers to bank shareholders. The more conventional view is that the bailouts prevented a horrible depression. So, the way I see it, the conventional view went from saying that the financial sector is nothing special to saying that you need to invoke specialness of the financial sector to explain how bad the recession was (Baker argues the opposite) and, moreover, the recession would have been even worse without the bailouts.

From a PSST perspective, I think that one must allow that it is possible that credit plays a big role in sustaining patterns of trade, and there may be something special about the financial sector. However, my own inclination is to see the financial sector as of 2007 as overgrown and to view the bailouts as making no contribution to the process of creating new patterns of specialization and trade.

Another Thiel Theme: Short Globalization

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In his conversation with Tyler Cowen, this theme was not as pervasive as contrarianism, but I found it more interesting and more provocative. Thiel’s view is that globalization has peaked. Therefore, companies and cities that are tied closely to globalization will decline relative to companies and cities that are less outward looking. So Texas will do better than Virginia, because Texas is focused on its own domestic production, while Virginia’s strength (I would say this only about Northern Virginia, by the way) is its military and diplomatic connections overseas.

Think about the notion “globalization has peaked” from a PSST perspective. Economic activity consists of patterns of sustainable specialization and trade. Globalization means that new patterns are being created across countries more rapidly than within countries. What would drive that differential, and what would slow it down?

Think of the benefit of a new pattern coming from comparative advantage and specialization. The cost is the fixed cost of setting up the pattern. Compared with setting up a local pattern, setting up an international pattern will tend to have higher fixed cost but with a larger subsequent benefit.

One possibility is that the cost of setting international patterns fell as China and India allowed their economic institutions to conform more readily to U.S. standards. However, over time, as China and India climb their way into the middle class, international comparative advantage is being reduced. There was an infamous paper by Samuelson that envisioned such a scenario. (It was perhaps his last academic publication, and it was not well received, because he seemed to disparage free trade.)

Another possibility is that the “low-hanging fruit” of reasonably low fixed cost international setups has been picked. Manufacturing and call centers can be moved offshore at moderate cost. With the New Commanding Heights industries of education and health care, it is much more difficult.

Another possibility is that globalization has not peaked.

A Possible Project for Me

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I was thinking of doing a whole bunch of relatively short videos on PSST. The thought process that led me to this was:

1. The Weintraub volume on MIT economics showed how Samuelson shaped the direction of economics, in part with his textbook. I think of his textbook as “seeing like a state” in terms of economics. I think of PSST as the opposite view–very bottom-up.

2. I think one could write a decent textbook that focuses on PSST rather than on the production-and-distribution story that is the focus of neoclassical economics.

3. But nowadays, a textbook is not my medium of choice. The bigger closer library is the Internet, and YouTube in particular.

4. On YouTube, short, punchy pieces work better than long lectures. The challenge for me would be to break my ideas into bite-sized bits and still keep track of them–show the links among them, avoid duplication etc.

Anyway, I think of this as having about a 15 percent chance of going anywhere (it depends on whether I can remain convinced that it is a good idea). The next step would be to put together a draft outline.

Bernanke, the Savings Glut, and Stagnation

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You probably already read this.

Secular stagnation works through reduced domestic investment and consumption, the global savings glut through weaker exports and a larger trade deficit. However, there are important differences as well. As I’ve mentioned, the savings glut hypothesis takes a global perspective while the secular stagnation approach is usually applied to individual countries or regions. A second difference is that stagnationists tend to attribute weakness in capital investment to fundamental factors, like slow population growth, the low capital needs of many new industries, and the declining relative price of capital. In contrast, with a few exceptions, the savings glut hypothesis attributes the excess of desired saving over desired investment to government policy decisions, such as the concerted efforts of the Asian EMEs to reduce borrowing and build international reserves after the Asian financial crisis of the late 1990s.

I find Bernanke, both in this post and in preceding ones, more persuasive than Larry Summers.

One Peter Thiel Theme: Nonconformity

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Tyler Cowen links to his conversation with Peter Thiel. I listened to the YouTube version.

If there is one constant theme, it is Thiel’s support for nonconformity or contrarianism. If you start a business, try to make it so original that it is a monopoly. If you want to start a non-profit, make it for an unpopular cause. Try to value substance over status, meaning you worry about being true to yourself, not about obtaining broad approval and support. The independent truth-seeking scientist is the opposite of the popular truth-bending politician.

Still, he wants contrarians, not misanthropes. Contrarians who can work in teams. I would add, and I imagine he would agree, that contrarians need to be particularly selective about who they team up with.

Reflections on Paul Samuelson and MIT Economics

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I have finished my first path through the Weintraub volume. Here are my thoughts now:

1. There truly was a dramatic break between pre-war and postwar economics. Before the second World War, you could still see economics as a branch of social and political philosophy. And as philosophers, economists were worried about what they could and could not know. After the war, the discipline became dominated by modeling. Some of that was a long-term trend, and some of it came from the fact that modeling was applied to some aspects of the war effort itself.

2. Samuelson and Solow were part of a transitional generation. They were exponents of the newer modeling culture, but they still had plenty of doubts about the assumptions embedded in models.

3. The next generation of MIT economists, I would argue, was never trained to question assumptions. Once a particular equation had become customary, because a lot of papers used that equation, you just treated the equation as true. Think of the Cobb-Douglas production function, or the expectations-augmented Phillips Curve.

4. Samuelson’s self-image was that of an ideologically neutral technocrat. In the Weintraub volume, Harro Maas writes,

Technicality implied impartiality and detachment. Samuelson thus exemplifies for economics the general move of science in the postwar era to define itself as technical, a move that fit well with the teaching and research profile that MIT developed in the postwar era.

And later,

Samuelson did not consider it his task to be partisan for one particular line of economic policy, or to compromise between opposite policy positions, but to step back, or better “step aside,” and offer an analytical perspective from which to choose.

5. Of course, I would view Samuelson’s very framework as ideologically loaded. Samuelson took a “seeing like a state” approach to economics. Whether it was a social welfare function, a Keynesian multiplier, the doctrine of revealed preference, the Phillips Curve, or the production function, he focused on tools for helping policy makers control an economy. With such tools, the policy maker could know enough to direct economic activity. Samuelson was not troubled by Hayekian concerns about local knowledge.

Gary Solon on Gregory Clark

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Solon writes,

Evidently, the results reported by Clark do not reflect a universal law of social mobility. Quite to the contrary, other studies based on group-average data, even surnames data, frequently produce intergenerational coefficient estimates much smaller than Clark’s.

If you are interested in the issues raised by Clark, read the whole thing. Solon’s interpretation of Clark’s thesis as involving errors-in-variables is similar to mine.

Regulation as a Fifth Force

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Scott Sumner writes,

Building restrictions are increasing rental income as a share of national income. Intellectual property rights are barriers to entry that tend to create a winner-take-all situation (although other factors like network effects also play a role.) And other types of regulations (financial, human resources, etc.) are especially burdensome for small firms, and this favors the growth of inequality-intensive large firms.

Megan McArdle writes,

Homeowners in low-density neighborhoods will fight like tigers to preserve what they have. We’ve given them the legal tools to frequently win that fight — and if you try to take those tools away, they’ll fight that, too.

In the Four Forces story, gentrification is driven by the New Commanding Heights and bifurcated family patterns. Universities and hospitals replace manufacturing firms as the leading enterprises in cities. They hire marshmallow-test winners, some of whom want to live near where they work. Other marshmallow-test winners, looking to marshmallow-test-winner mates, also move into cities. These gentrifiers like restaurants and trendy shops, but otherwise they want to try to re-create suburban living, with low-density housing and easy biking.