Monthly Archives: July 2016

Brad DeLong’s Manufacturing Demand Puzzle

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He writes,

If the income elasticity of demand for “manufactured goods” were one and the price elasticity of demand were zero, then we would have expected the decline in relative price to 40% of its initial value to be associated with stability in relative quantities, and for the nominal share of manufactures in GDP to fall on the same track as the price–as it has.

…For our demand for manufactured goods to have a price elasticity of zero seems to me to make little sense: Manufactured stuff is useful. When the price of manufactures drops relative to the price of other stuff, we ought to buy more manufactures

Pointer from Mark Thoma. DeLong is looking at the changes in reported price of manufactured goods relative to the rest of GDP and the reported nominal quantities over the past 70 years. A few of my thoughts:

1. We did increase our purchase of manufactured goods over the past 70 years, but we imported more and exported less. The price of foreign manufactures (including the cost of shipping them here) fell by more than did our cost of producing them. I doubt that this resolves the entire puzzle, but it must resolve some of it.

2. My guess is that the same sort of arithmetic applies to food. That is, the relative price of food has fallen, and the nominal share of food production in GDP has fallen by about the same amount. Even though food also is useful.

3. Robert Fogel told us that the income elasticity of food and manufactured goods is 0.6, not one.

Six Breakthrough Ideas in Economics (?)

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In the opinion of The Economist, they are:

1. Akerlof’s Market for Lemons
2. Minsky’s Financial Cycle
3. The Stolper-Samuelson Theorem (Wikipedia explanation).
4. The Keynesian multiplier
5. The Nash equilibrium
6. The Mundell-Fleming trilemma (Wikipedia explanation).

Pointer from Greg Mankiw.

In Specialization and Trade, I discuss many of these ideas.

I mention (1) as an example of economists finding a theoretical market failure for which markets have found solutions. Used cars are sold with guarantees, or with information provided by third parties, or by reputable dealers.

I endorse something like (2), although I offer a different mechanism for the financial cycle. Minsky describes it in terms of the risk proclivities of capitalists. I describe it in terms of the trust that people place in financial intermediaries.

I do not discuss (3) specifically, but I do say that the “two-by-two” model of international trade is an example of economic modeling that is more misleading than insightful. In any case, of all of the Heckscher-Ohlin-Samuelson results, I would have picked factor-price equalization over Stolper-Samuelson.

I explain why (4) is a terrible idea.

I do not mention (5) by name, but I do describe the maintenance of cultural norms from a game-theoretic perspective.

I do not discuss (6), but I argue against monetarism, and thus I implicitly discount the trilemma.

Should you vote Libertarian this year?

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From a Facebook friend, not a reader of the blog, this came via email.

I’m pretty sure I remember that you are a Libertarian (or had promoted Libertarian ideas at one point). I have issues with both major candidates in this year’s election and I’ve actually been pretty intrigued by Gary Johnson’s platform (or at least what I saw on his website). However, I’m getting a lot of “don’t throw your vote away”.

What’s your thought about Johnson and voting for a “3rd Party” in general?

This year, other people who are friends outside of my political/economist/blogging circle but who are vaguely aware of my libertarian leanings have asked similar questions. My thoughts:

1. In Maryland, any vote in the Presidential election is a throw-away. We live in a state that always votes Democratic.

2. Still, I plan to vote as if my vote mattered. Although I plan to vote for Gary Johnson, his libertarianism has almost nothing to do with my preference this year.

3. I am disturbed by the temperaments of both Mr. Trump and Mrs. Clinton. Moreover, I think that a victory by either one will lead to four years of worsening bitterness in politics in this country. A Johnson Presidency has the potential to be less divisive and make me less afraid to read the day’s news.

4. One way to think about this year is that Mr. Trump is the 3rd-party candidate, in the tradition of Ross Perot and George Wallace (with a core constituency inherited from those two), who happened to capture the Republican nomination. Johnson is a more credible major-party candidate who happens to be on the ballot as a Libertarian.

5. My first choice would have been for the Republicans to run a major-party candidate, meaning someone other than Mr. Trump or Dr. Carson. Had they done so, I would probably not be voting for Gary Johnson. So I am not such a dedicated libertarian, with either a small or capital L.

6. I sometimes say that there are philosophical libertarians and there are pragmatic libertarians. Philosophical libertarians base their views on fundamental principles. Pragmatic libertarians believe only that the libertarian approach often turns out to be correct.

7. The philosophy of libertarianism is that individuals should not be coerced into making decisions. Instead, your transactions with other people should be based on voluntary consent. They should be based on peaceful persuasion and, in the case of economic transactions, on choice and competition. This philosophy sees government programs and regulation as coercive and therefore wrong in principle.

8. I put myself in the pragmatic libertarian camp. I do not make my stand against government action on principle, but I say that in practice government can be counted on to be less effective than nongovernmental processes. For example, when markets produce bad outcomes, I expect the competitive process of private entrepreneurs to do a better job of fixing things than the political process.

9. Part of the libertarian view is anti-interventionist in foreign affairs. The philosophical libertarian says that undertaking coercive acts abroad is at least as wrong as undertaking them at home. The pragmatic libertarian notes that the government that is going to intervene abroad is the same government that is inherently clumsy, stupid, and prone to producing adverse unintended consequences at home.

10. You should note that the libertarian view is antithetical to American government support for Israel. This follows from non-interventionism.

11. Moreover, I know libertarians who go beyond non-interventionism and who personally talk about Israel the way that the far left talks about it, holding Israel unilaterally responsible for the conflict with Palestinians. To me, this comes across as denying any moral agency to Palestinians, because it treats as irrelevant the past actions and current threats made by Palestinians against Jews. I believe in treating the Palestinians as having moral agency, with the power to change their situation by changing their approach. In any case, on this issue I do not agree with rigid, high and mighty libertarians.

12. Speaking of which, libertarians are temperamentally prone to being high and mighty, contemptuous of those who disagree. I very much do not wish to be associated with that temperament. I believe that nobody is 100 percent right 100 percent of the time.

On Trump and Hitler, from the comments

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The commenter writes,

Should Trump win the election, he will take it as proof of his infallible instincts. How does an infallible man behave in a position of power? A bit like Hitler, no?

I never defined authoritarian, but if I had I would come up with something close to that. Let me define an authoritarian as someone who believes that being in a position of power entitles that person to make policy decisions by fiat. Further thoughts:

1. The nature of the Presidency, as an elected office occupied by a single individual, lends itself to authoritarianism. It inspires awe among journalists, worship among citizens, and sycophancy among aides. It selects for narcissists.

2. I think that in the United States, the “Overton Window” has moved mostly in the authoritarian direction over the last century.

3. Woodrow Wilson very much wanted to go in the authoritarian direction, and our entry into World War I gave him a bit of an opportunity to do so. Calvin Coolidge went in the other direction.

4. FDR moved the U.S. in authoritarian direction. Ike tried to go in the other direction.

5. On domestic policy, I believe that Lyndon Johnson was not authoritarian, in that he played by the existing rules. However, with Vietnam, he set a precedent for deception and unilateral warmaking.

6. Richard Nixon unintentionally caused a reversal in authoritarianism. Congress impeached him and also tried to (re-)assert authority over the budget process.

7. Because Barack Obama is convinced of his own absolute moral righteousness, he acts as if his instincts were infallible. Thus, I believe that he meets the commenter’s definition of authoritarian. Of course, those who share Mr. Obama’s outlook woulds say that he has merely responded appropriately to Republican obstruction.

8. By my definition, Mr. Trump speaks like an authoritarian.

9. However, I am more worried that the the country will move in authoritarian direction if Mrs. Clinton wins. Many in Mr. Trump’s own party are opposed to his authoritarianism. Not so with Mrs. Clinton and her party. She is Nixon without anyone to play the role of Howard Baker.

10. Hitler was more than an authoritarian (by my definition). He used murder and physical intimidation to try to eliminate all opposition. I am not worried about either Mr. Trump or Mrs. Clinton doing that.

Larry Ball Gets Pushback

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From Stephen G. Cecchetti and Kermit L. Schoenholtz:

There is certainly room for debate, but we see the question of whether Lehman’s net worth was negligible or sharply negative as ancillary to the real issue. In important ways, lending to a bank of doubtful solvency is little different from lending to one that is certainly so. It will continue to put other institutions, and therefore the system, at risk. In this case, central bank lending to Lehman, an institution widely thought to be bankrupt, would have tarnished everyone else.

Pointer from Mark Thoma. My thoughts:

1. For those of us inclined to agree with this point, an implication is that Citigroup should have been allowed to fail. In fact, the whole bailout policy was misguided. Remember how some banks were forced to take bailout funds even if they did not want them? The idea was exactly to “tarnish everyone else” in order to avoid tarnishing the insolvent banks!

2. Regardless of the merits of letting Lehman fail, one of Ball’s main points still stands. That is, Bernanke and others have been lying by claiming that the decision was based on legal considerations. Ball did not find any evidence that the Fed made a judgment based on such considerations. In fact, it appears that it was not the Fed’s judgment at all, and instead Hank Paulson was calling the shots.

The Privatization Opportunity

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Chris Edwards writes,

Congress imposes a rigid monopoly on the nation so that we can continue to receive mainly “junk mail” in our mailboxes six days a week — while 205 billion emails blast around the planet every day. Retaining special protections for the government’s old-fashioned paper delivery system makes little sense.

He suggests privatizing the post office, as well as Amtrak, the TVA, government buildings, and many other government “businesses.” He does not even mention communications spectrum, much of which is restricted to government use and is wasted.

I found the paper depressing to read, because the case he makes is so compelling and the likelihood that privatization will take place appears to be so close to nil.

Where are the Servants?

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I asked this question five years ago. Recently, on Facebook, Nathan Smith wrote,

Consider the following hypothesis. Once upon a time, there was a notion of “respectability.” Society, represented chiefly by the gossip of housewives, imposed honesty, chastity, and maybe some degree of piety, not so much by force as by public opinion. And I think that mere “respectability” qualified one for certain jobs, such as child care, handling money, personal service, etc. Nowadays, tolerance and the Sexual Revolution have abolished the category of respectability, but there are still a lot of jobs where people don’t need special skills but do need to have good character, so some filter is needed. So education has become the new respectability. . .A whole social stratum finds it hard to get access to jobs they could do, because our nonjudgmental society refuses to circulate the information about people’s characters that potential employers need, and the substitute for respectability, education, can’t be universal because, while everyone could be chaste and honest, many don’t have the academic ability to succeed in college, and/or can’t afford it. So personal service, which almost vanished during the economically egalitarian mid 20th century, but would be well worth reviving today, doesn’t make a comeback for lack of an identifiable class of respectable people whom the rich would allow to be present in their homes. . .

My thoughts.

1. There are a lot of jobs that involve personal care. Elder care and child care are what I have in mind.

2. What Smith calls “character” might be described as conscientiousness.

3. I do not get the impression that the personal care market fails in any dramatic sense. That is, I do not get the impression that there are many conscientious people willing to take jobs in personal care who are unable to find such jobs. If such a market failure were to present itself, it could be solved by entrepreneurs forming companies to vet and guarantee the quality of individual providers of elder care and child care.

4. Not that Smith was responding to my original post, but there I was suggesting that the high concentration of wealth would imply not so much that every middle class family should have personal servants but that rich people should have hundreds or thousands of personal servants. I think it is an instructive issue to ponder, but I have not come up with any new theories in the past five years, although I would add that the “supply problem” might include the fact that there are many people who are not conscientious.

How Authoritarian is Donald Trump?

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Reviewing the written version of Donald Trump’s acceptance speech, Matt Welch writes,

here are seven* lines that drip with alarming levels of authoritarianism: [Welch proceeds to list the lines]

My question is, compared to who?

Compared to some mythical libertarian ideal, Trump is an authoritarian, but so is every politician in the two major parties. In fact, I am pretty sure that you could find a speech by President Obama with more alarmingly statist rhetoric and even more of what Welch calls Great Man rhetoric (it is not as if Mr. Obama is shy about using the word “I”).

My Facebook feed is filled with comparisons of Trump with Hitler, which I find unconvincing. Hitler was the leader of a very large paramilitary organization. When Hitler was appointed chancellor (he was not elected), his paramilitary organization went about killing and intimidating men, including other Nazis, that Hitler wanted removed as threats. The Nazis in the Reichstag (Germany’s parliament) physically intimidated their colleagues into approving a law that essentially gave Hitler dictatorial powers.

Donald Trump has fervent supporters, but they are not an organized paramilitary. He has neither the plans nor the means to carry out any plans to alter the Constitution to establish a dictatorship.

Many of us believe that Mr. Obama violated the spirit of the Constitution and took Presidential power too far. For example, waivers and subsidies under the Affordable Care Act were created administratively rather than by Congress. Another example would be his decision to not enforce immigration deportation.

Some of us believe that the appropriate response to Mr. Obama is to return to the spirit of the Constitution. That view appeared to be represented in the Presidential race by Rand Paul and Ted Cruz. Instead, Trump supporters seem to be saying that they want to respond with a power-aggrandizing President of their own. I enjoyed Jay Nordlinger’s quip that what Trump’s acceptance speech needed was a Republican response. I still plan to vote for Gary Johnson.

It is fair to say that Mr. Trump is further from libertarianism than the other contenders for the Republican nomination, but I think to go beyond that is hysterical. I am yet to be convinced that he is more of an authoritarian threat than what we have already experienced, or even that he is a more authoritarian threat than his opponent.

As Reihan Salam points out, Trump’s language fits my model of the conservative civilization-barbarism axis, even though his platform has little in common with recent conservative policy positions. I think it is that intense civilization vs. barbarism tone that leads people to see him as authoritarian. But to a libertarian, an intense oppressor-oppressed tone also comes across as authoritarian.

Paulson, Bernanke, and Lehman, continued

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James B. Stewart writes,

One of the more intriguing questions Professor Ball tackles is why Mr. Paulson, rather than Mr. Bernanke, appears to have been the primary decision maker, when sole authority to lend to an institution in distress rests with the Fed. The answer, he suggests, is to be found more in psychology than data.

“By many accounts, Paulson was a highly assertive person who often told others what to do, and Bernanke was not,” Professor Ball writes. “Based on these traits, we would expect Paulson to take charge in a crisis.”

Pointer from Mark Thoma.

Stewart, who did his own reporting on the events, supports Professor Ball’s view. My reading of Paulson is that he is a high-testosterone guy. My reading of Bernanke is that he isn’t. I have always viewed Paulson as the great villain of the financial crisis response. I do not believe that any of the bailouts were justified, and I view him as the driver of the bailouts.

Suppose you take a Bagehot view, which is that in a crisis the central bank should lend freely, on good collateral, at a penalty rate. In the case of Bear Stearns, my recollection is that the Fed took on crummy collateral. Ball claims that Lehman had good collateral that the Fed could have lent against.

Finance, Fragile, and Anti-Fragile

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Tyler Cowen writes,

The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed.

America’s mortgages are structured so that the lender-investor is going short on volatility. If interest rates do not move much, the lender does well. If home prices do not move much, the lender does well. But if interest rates rise, the lender is stuck with a below-market asset. And if home prices fall, the lender gets stuck with a house with a value below the amount of the loan.

Tyler is saying that for the typical financial market player, going short on volatility is a great personal strategy. When it works, you get a nice salary and bonus. When it fails, someone else–a shareholder, a taxpayer–bears much of the cost.

If you know your Nassim Taleb, you will recognize going short volatility as “fragile,” with the opposite strategy as “anti-fragile.”

I wonder if stock market investment is one of those fragile strategies nowadays. You can make money year after year going long the market–until it stops.

Anyway, Tyler argues that the changes in the income distribution of recent decades

a) have been focused at the top 1 percent, not between the 99th percentile and the lowest percentile

b) been driven by finance

c) and within finance have been driven by these short-volatility, fragile strategies.

He is pessimistic about regulators’ ability to stop the short-volatility strategies. I think he is wise in that regard.