Monthly Archives: July 2015

Puzzling Statistics from the GDP Factory

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Scott Sumner writes,

This 4 and 1/2 years of sub-2% growth (on average) occurred during a period of rapidly falling unemployment, and above trend employment growth

The implications for productivity growth are terrible. Supposedly, firms got rid of their ZMP workers during the recession. Are we saying that subsequently they were hired back???

Again, I do not trust data that treats the entire economy as a GDP factory. If I had to bet, I would go with the Goldman Sachs view that inflation is over-stated, which means that real GDP growth has been under-stated.

Partially Vertebrate College President

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From a statement by the University of New Hampshire:

The associate vice president for community, equity and diversity removed the webpage this morning after a meeting with President Huddleston. The president fully supports efforts to encourage inclusivity and diversity on our campuses. He does not believe the guide was in any way helpful in achieving those goals. Speech guides or codes have no place at any American university.

Pointer from Alex Tabarrok, who commends President Huddleston.

An even more vertebrate college president would remove not just the web page but also administrators with titles like “associate vice president for community, equity and diversity.”

Occupational Licensing

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The Obama Administration reports a sort of meta-analysis. One excerpt:

Estimates suggest that over 1,100 occupations are regulated in at least one State, but fewer than 60 are regulated in all 50 States, showing substantial differences in which occupations States choose to regulate. For example, funeral attendants are licensed in nine States and florists are licensed in only one State.

Pointer from Tyler Cowen.

I have only skimmed the report, but I did not see a reform that was suggested at dinner the other night. That is, licensing should not be delegated to boards that consist solely of incumbent practitioners.

Against Identical Expectations

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Noah Smith writes,

rational expectations might really be wrong. People might make systematic errors, thinking that booms or busts will last forever. If that’s the case, then it will require the economics profession to abandon one of its strongest orthodoxies. But the payoff could be big if the profession devises models that successfully explain phenomena like bubbles and crashes.

Pointer from Mark Thoma.

Smith cites (preliminary?) research by Jesse Bricker, Jacob Krimmel and Claudia Sahm, who

looked at data from the Survey of Consumer Finances, from before and after the housing crash in 2008. They found that more optimistic ZIP codes — that is, places where people had unrealistically high expectations for their own incomes — were more likely to overpay for houses in the bubble run-up before 2008. These overoptimistic people also took on more debt, and they were more likely to increase borrowing in response to rising house prices.

I have not found a write-up of this work. UPDATE: slides here. But my thoughts:

1. “Rational expectations” is one of an entire class of expectations models that I reject. I call this class “identical expectations,” because it assumes that every individual has the same model of the market and the same information, thus arriving at the same set of expectations. I find this both unrealistic and, as Frydman and Goldberg have pointed out, un-Hayekian, because it assumes away any sort of local knowledge.

2. If we are going to attempt a simple model of expectations, then I would suggest one in which there are two types of traders–momentum traders and contrarian traders. Momentum traders live by the maxim “the trend is your friend.” When prices have risen recently, they expect them to continue to rise. Contrarian traders live by the maxim, “if something cannot go on forever, it will stop.” When prices have risen recently to the point where they are above historical norms relative to fundamental measures of value, contrarian traders expect them to fall.

Momentum traders never see bubbles. Contrarian traders see bubbles everywhere.

Economists tend to be contrarian traders. Robert Shiller is the leading exemplar of this. Not all economists share his views, of course, but hardly any economist would confess to being a momentum trader.

Still, I think that there are times and situations where momentum trading dominates. Both Shiller and John Cochrane see momentum trading as something that can persist for a while in housing markets, because of the high costs facing traders who would try to take advantage of even well-founded contrarian views.

Update: Smith recommends a paper by Hong and Stein.

Politics is a Hate Crime

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1. Bernie Sanders is asked by Ezra Klein about the case for immigration as a tool to reduce international poverty. His response?

Open borders? No, that’s a Koch brothers proposal.

Sanders manages to appeal to xenophobia on two levels. For people who hate outsiders of color, he is offering policy support. For people who pride themselves on not hating outsiders of color, he appeals to hatred of wealthy capitalists associated with the political right.

2. As a commenter suggested, hatred of lower-middle-class whites, particular of religious southerners, keeps many affluent hipsters in the Democratic fold.

3. At dinner last night, a political scientist said that studies indicate that increased polarization has not been driven by greater positive attachment to the party people support but to greater hostility toward the party that they oppose.

4. Donald Trump. Paul Krugman. Whatever their accomplishments in other fields might be, their political talent is expressing hatred for others in a way that many people find appealing.

I would hardly be the first person to suggest that there seems to be a deep human need for designated villain-groups. Look at tribalism, religious wars, mechanized warfare, Nazism, modern genocides.

Observing heated political conflict in the U.S. today, one does not know whether to shake one’s head in sadness or to be thankful that it provides a relatively non-violent outlet for group hatred.

Financial Advice for Bryan Caplan

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He says that he maintains as much housing debt as possible, in order to take advantage of the mortgage interest deduction.

My advice to him is to sell his stock portfolio, pay off his housing debt, and take long positions in stock index futures.*

*In practice, the prospect of incurring capital gains taxes might make this a bad move.

Here is my thinking.

1. If you maintain housing debt that you could pay off, you have to put the money to work somehow. The question is whether you can earn more on your money than the after-tax interest rate. If you invest in risk-free securities, the answer is obviously “no.” Borrowing at 3 percent to invest in a money-market fund is a losing proposition, tax deduction or no tax deduction.

2. There might be some bond that you can buy that earns more than the after-tax mortgage interest rate, but that bond is going to have some risk attached to it. And you will have to pay taxes on the interest from that bond.

3. That leaves stocks. If you maintain housing debt in order to own stocks, then you are saying that you are happy to have a leveraged position in stocks, because you think that the expected return on stocks is higher than your borrowing rate. In Pikettyian terms, you believe that g is greater than r.

Fine. But if that is true, then I am pretty sure that the most efficient way to take your position would be by holding a position in stock index futures, rather than by taking out a mortgage loan to invest in stocks.

If you don’t like paying taxes, I understand that. As much as I disparage non-profits, I give large amounts to non-profits because I prefer that to paying taxes. But from a purely financial perspective, I think that maintaining mortgage debt that you could afford to pay off strikes me as a losing proposition. You unnecessarily enrich the mortgage lender at your expense.

Academia: Was it Always Thus?

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In response to me, Devin Helton writes,

what these complaints ignore is that intellectual narrowness in academia has been a major problem for many decades. The devastating real world consequences have already happened.

His long post includes many citations, although he leaves out Allan Bloom, regarded by many as the ur-complainer on these matters. One of his links goes to a post put up almost exactly four years ago by Timothy Burke, a Swarthmore history professor, who wrote

the conversation about diversity usually boils down to fixed identarian formulas, to improving the percentage of recognized groups, not to diversifying the kinds of experience (and passions) that professionals can bring to intellectual work. I feel intuitively that the generation of faculty just ahead of me, people from their late 50s to 70s, are more diverse in this sense if not racially so. I know considerably more first-generation scholars whose passionate connection to intellectual work got them into academia in that generation than in any younger cohort.

That fits with my diagnosis. I think that as the pre-1960s-era professors (meaning professors who got their Ph.D’s before 1970) have aged out of academia, there has been an acceleration in the trend toward doctrinaire belief and away from rational thought.

The story as I am suggesting it is that starting around 1970, graduate programs in the humanities and social sciences started to filter out independent thinkers. By 1990, your chances of having a thesis adviser who was a Thinker rather than a Doctrinairian were somewhat low. They dwindled rapidly thereafter. So the cohort that is now entering into teaching positions is almost devoid of Thinkers, and they are replacing the few Thinkers from before 1970.

Of course, there remains the possibility that what has changed over the past 15-25 years is that I have become a right-wing nut job. Or that the biases in academia have remained approximately constant, and the increase has been in the amount of complaining and anecdote-recitation among conservatives and in conservative media.

Claiming Higher Productivity Growth: Some Implications

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James Pethokoukis cites, without providing a link, a recent claim by Goldman Sachs economists.

If our ballpark estimate of a 0.7pp understatement of annual GDP growth is close to the mark, the measured growth pace over the past five years of 2.2% might correspond to a true growth pace of almost 3%. This would be closer to the pace one would expect given the pace of improvement in most labor market indicators over the past five years.

They think that inflation is overstated, and therefore real output and productivity are understated. The official estimates face several well-known problems, including:

1. For some products and services, quality change is difficult to measure. The statisticians’ estimates of quality improvement tend to be biased in the direction of zero. I’ll bet, for example, that if you were to look into medical care data in the GDP accounts in detail, you would find a lot instances in which quality improvements are mis-classified as cost increases, and almost no cases of the opposite.

2. The process of aggregation is problematic, because people shift their consumption in response to price changes. If college tuition goes up and people switch to using YouTube, it is not clear how to measure the change in real consumption of education services.

3. The nature of inputs changes. To any business, the differences in skills and characteristics of workers matter. In the aggregate productivity statistics, an hour of labor is an hour of labor. There are similar problems with aggregating capital and aggregating output.

You know I don’t like anything that smacks of treating the economy as a homogeneous GDP factory. But if you do think in those terms, then I am inclined to agree with the Goldman folks. The aggregate measures show the GDP factory becoming more and more profitable, even with rather slow growth in revenue (nominal GDP). To get that, you need productivity growth to be better than wage growth. And, yes, that means that an implication of the Goldman view (and mine) is that the people who complain that labor is not getting its fair share would have more fuel to feed their complaints.

It means that real interest rates have been higher than they appeared to be. So does that mean that the zero bound was more binding than we thought? But we got higher growth than we thought??? I think that, on balance, this is bad for people who harp on the zero bound, but my biases have always been against that viewpoint.

Meanwhile, righties, it also means that people who think that there must be inflation going on somewhere, because the Fed is such a wicked institution, are not correct. I expect to get a lot of push-back on that. For those of you who want to use asset prices as your measure of Fed profligacy, you may have a point, but that is a different story as far as I am concerned. For those of you who are new to this blog, I subscribe to a “consensual hallucination” theory of low to moderate inflation. That is, people just operate as if prices are going to keep doing what they have been doing. On the other hand, I subscribe to the fiscal theory of hyperinflation. You get big hyperinflation when, and only when, the government is deficit-spending so much that it can no longer finance its deficits with low-cost borrowing.

Ron Bailey’s New Book

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It is called The End of Doom. From the final paragraph:

New technologies and wealth produced by human creativity will spark a vast environmental renewal in this century. . .the world will be populated with fewer and much wealthier people living mostly in cities fueled by cheap no-carbon energy sources. As the amount of land and sea needed to supply human needs decreases, both cities and wild nature will expand, with nature occupying or reoccupying the bulk of the land and sea freed up by human ingenuity.

Other notes:

1. Bailey is another devotee of North, Wallis, and Weingast. He argues that open access orders achieves sustainability, but limited-access orders do not and hence collapse. He worries less about environmental doomsday than about the United States slipping back into a limited-access order, in which political elites and business cronies are able to thwart human ingenuity.

2. From the introduction:

Canadian environmental researcher Vaclav Smil calculates that back in 1920 in the United States it took about 10 ounces of materials to produce a dollar’s worth of value, but that same value is now accomplished using only about 2.5 ounces

3. Also from the introduction:

wherever someone sees an environmental predicament in the world. . .the problem is occurring in an open-access commons, an area no one owns and for whose stewardship no one is responsible.

He is a fan of fish farms and private ownership of aquifers. For atmospheric pollution, such as chlorofluorocarbons that threaten the ozone layer, he sees a role for international treaties and regulations.

Bailey spoke here, and I enjoyed attending the talk.