Monthly Archives: November 2017

Disaggregating the economy: product scanner data

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David Argente, Munseob Lee, and Sara Moreira write,

In this paper, we exploit detailed product- and firm-level data to study the sources of innovation and the patterns of productivity growth in the consumer goods sector over the period 2006Q3–2014Q2. Using a dataset that contains information on the products of each firm and the characteristics of each product, we document new facts on product reallocation. First, we find that an important component of reallocation of products happens within the boundaries of the firm. Second, the largest changes in product quality come from new firms launching new varieties and from small firms expanding to other product lines. Third, we document that product reallocation within firms is procyclical. Fourth, we find that within-firm product reallocation is larger in high productive firms and firms that invest more in R&D. Finally, we quantify how important how product reallocation affects firm-level productivity growth and and innovation as reflected by changes in their total factor productivity.

NOTE: I am quoting a version that is labeled VERY PRELIMINARY AND INCOMPLETE. The published version is gated. Pointer to the published version from Tyler Cowen.

Apparently, during the recession, firms reduced the pace at which they added new products and retired existing products. I interpret this as a slowdown in investment.

As a first approximation, this is not supportive of my view of a recession as a breakdown of existing patterns of specialization and trade. One would expect to see an increase in the retirement of existing products if my view were correct.

One way to rescue my view would be to say that firms respond to a deterioration in the sustainability of existing patterns of specialization and trade by reducing their investment in creating new patterns. This seems like a counterproductive response, except that it does conserve cash in the short run.

Disaggregating the Polity: Colin Woodard

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He wrote a book called American Nations, which I just read for the first time. He offers a model of America as having a culture that can be thought of as eleven different nations, each dominant in particular geographic regions. It seems to me that it is a book that someone should have pressed me to read before. I will be recommending it often in the future, I am sure.

Woodard sees a centuries-long struggle for power between the nation he calls Yankeedom (New England) and the two nations that he calls Tidewater and Deep South. His antipathy toward the latter shows through, especially in the final chapters of the book.

More recently, he has some essays that I am checking out. In this essay, he claims that the urban-rural divide is simplistic and wrong, and that his 11-nations model works better.

In five of the regional cultures that together comprise about 51 percent of the U.S. population, rural and urban counties always voted for the same presidential candidate, be it the “blue wave” election of 2008, the Trumpist storm of 2016, or the more ambiguous contest in between. In Greater Appalachia, the Deep South, Far West, and New France, rural and urban voters in aggregate supported Republican candidates in all three elections, whether they lived in the mountain hollers, wealthy suburbs, or big urban centers. In El Norte, both types of counties always voted Democratic, be they composed principally of empty desert or booming cityscapes.

…The stark urban-rural divide in the country is to be found almost exclusively in the Midlands, where it has a disproportionate effect on the Electoral College, as that region straddles several historic swing states: Pennsylvania, Ohio, Iowa, and Missouri among them.

I am curious to delve into his 11-nations model and to consider each nation in economic terms. Are there likely differences in what they import and export? Differences in wealth? etc. Here is a first pass, using nine of his nations (omitting New France, which is mostly in Canada, and First Nation, which is locations with a lot of Native Americans). The table offers my impressions of the leading industries in the various regions.

Nation (Woodard’s name) Typical Cities Major industries
Yankeedom Boston, Madison Higher education, high tech, health care
New Netherland New York City, Greenwich Ct. Financial services, entertainment, international trade
Midlands Philadelphia, Peoria Agriculture, manufacturing
Tidewater McLean, Newport News Federal government, military
Greater Appalachia Wheeling, Muskogee Extractive (mining, forestry, etc.)
Deep South Charleston, Mobile Agriculture, manufacturing
El Norte El Paso, Tijuana Extractive, retirement services
Left Coast San Francisco, Portland, Ore. High tech, international trade
Far West Bozeman, Rapid City Extractive, tourism

I am wildly guessing about the industries for El Norte. I think he wants to limit it to the southwestern U.S. (plus northern Mexico), and he wants to exclude southern Florida.

I am not sure where Los Angeles fits in his scheme. It must be an amalgam of some sort. Some of New Netherland, with its ethnic diversity, ambition, and glamour. Some of El Norte, with its Hispanic population. Perhaps an element that is Far West, where there is dependence on government investment combined with resentment of government.

Any other criticisms or suggested modifications to my industry guesses are welcome.

Disaggregating the economy: Yelp data

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Edward L. Glaeser, Hyunjin Kim, and Michael Luca write,

Our results highlight the potential for using Yelp data to complement CBP by nowcasting – in other words, by shedding light on recent changes in the local economy that have not yet appeared in official statistics due to long reporting lags. A second potential use of crowd-sourced data is to measure the economy at a more granular level than can be done in public facing government statistics. For example, it has the potential to shed light on variation in economic growth within a metropolitan area. In Section V, we turn to New York City to see how Yelp does at measuring the micro-geography of a municipality. Yelp does seem capable of tracking the evolution of neighborhoods even below the ZIP code level.

CBP = County Business Patterns, a government statistical publication.

I am interested in the potential to be able to use new data sources to decompose the U.S. economy into regions. These might be actual regions, like the Mid-Atlantic or virtual regions, like the major metros on the two coasts.

Disaggregating the economy: cost of living

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Timothy Taylor writes,

here are the US states color-coded according to per capita GDP with an adjustment for Regional Price Parities: that is, it’s a measure of income adjusted for what it actually costs to buy housing and other goods. With that change, California, New York, and Maryland are no longer in the top category. Hoever, a number of midwestern states like Kansas, Nebraska, South Dakota, and my own Minnesota move into the top category. A number of states in the mountain west and south that were in the lowest-income category when just looking at per capita GDP move up a category or two when the Regional Price Parities are taken into account.

Taylor’s post indicates that the Bureau of Economic Analysis has some very interesting data on output and prices down to state and local levels. This would really help with a project of disaggregating the economy. Here is a recent press release about the data.

Hal Varian’s Rule

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I’ve come across it in several places recently, such as this podcast with Tim O’Reilly. The rule says,

A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade.

I can think of many exceptions off the top of my head, and it depends on definitions. There will always be a luxury form of something–the private jet, for example.

But overall I think it’s a view of the world that is more sensible than “robots are going to kill all the jobs and there will be mass poverty.”

Ray Dalio’s data points

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The essay is on inequality, but there are interesting statistics scattered throughout. For example,

While many of the major causes of death have been flat or falling over the last 15 years, deaths from drugs and alcohol more than offset it among the bottom 60%. And the rise in drug-related deaths is not happening across the world—the phenomenon is unique to the US.

Pointer from John Mauldin.

I could swear that when I first looked at Dalio’s piece, he had more tables with more statistics, including death rates that are preventable with health interventions (higher for the U.S.) Those tables, which are in the appendix, do not show up in the version of Chrome on my laptop. Ah, there they are. They show up fine on the Microsoft browser and on Chrome on my tablet. They appear to be graphics. If you don’t see a table called “Health Care Performance Measures Across Developed Nations,” try a different browser. Those tables are a big reason that I am sending you to his essay.

Equity without capital, twenty years later

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I received a review copy of Capitalism without Capital: The Rise of the Intangible Economy, by Jonathan Haskel and Stian Westlake, which has a 2018 copyright date.

1. My first reaction is to be a bit miffed that my name is not in the index. Nick Schulz and I wrote a book on the intangible economy, and the first edition appeared in 2009. Going back even further, in 1998 I wrote an essay called Equity without Capital. That essay is still interesting to read, and it anticipated some of the central issues in their book. But probably fewer than 200 people saw it when I wrote it.

2. Hal Varian and Carl Shapiro aren’t in the index, either. That is a less forgivable omission. Information Rules sold well.

3. I hurried through the book, and I was inclined to give it a mixed review. But when I re-read it, I only re-read the sections that I liked the first time. I decided that those sections are really good. Now I am inclined to give the book a strong recommendation.

4. The organization of the book is excellent. The good news is that you usually can skip to the end of the chapter and read its conclusion to get the main point. The bad news is, well, why not just condense the book into an extended essay? And if you left out the sections of the book that did not do much for me, the extended essay would work even better.

Gosh, I am really being hard on them, for some reason. It really is a first-rate book. I’m not sure why I keep wanting to talk about what I don’t like about it. But, here I go again:

5. They make a big deal about recent literature that arrives at measures of intangible capital. However, as they point out, such measures are fraught.

Their analysis says that intangible capital has four s’s: sunk costs (investments in assets that cannot be re-sold); scale (network effects and path dependency can bring very high returns); synergies (combinations of ideas are worth more than the ideas are worth separately); and spillovers (ideas are easily copied or imitated).

This implies, as they recognize, that intangible capital can be worth much more than what it costs to obtain, because of scale and synergies. But it can be worth much less than what it costs to obtain, because of sunk costs in non-marketable assets. In bankruptcy, you can sell off the office furniture and the fleet of trucks (tangible assets), but not the business process that proved unsustainable or the failed attempt to establish a brand (sunk costs).

But the measures of intangible capital use acquisition cost as the measure of investment in intangible capital. That may be a reasonable way to value tangible capital. But to me, their four s’s imply that intangible capital’s value cannot be reliably represented by its acquisition cost.

To get technical, Tobin’s q is the ratio of the market value of capital to its replacement cost. Think of it as the ratio of the stock price of a firm to the acquisition cost of its assets. For tangible capital, q should be close to 1. But for firms with a lot of intangible capital, like The Four, it is much, much greater than 1. Tyler Cowen’s recent column, Investors are celebrating the tech revolution, says that the current high values of q are a positive signal about future economic growth.

Of course, for many dotcom stocks in the 1990s, q shot way up before dropping to zero, which is what my essay was predicting. But by the way, one of the stocks I was skeptical about back then was Amazon, and if you held onto that, the losses on the rest of your 90’s doctcom portfolio might not trouble you.

Looking at this balance between superstar value and failure, the authors propose that, well, on average, the value of intangible capital for the whole economy ought to be somewhere close to what it costs. I thought they were just hand-waving at that point.

They understand well enough that intangible capital is not exactly like tangible capital in the neoclassical model. But I do not think that they are ready as I am to take the next step and jettison the neoclassical framework.

Missing from the St. Louis merger story: Clayton

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The WSJ reports,

A group of business leaders with bipartisan political backing see a common issue behind the problems—the region’s multitude of local governments.

They are pushing a plan to explore the reunification of the city and county to make the region of 1.3 million people more efficient and economically competitive.

My first thought was, “This is a hostile takeover of Clayton,” but the story takes a different focus. For example, it quotes the mayor of Olivette, which is where I lived until 6th grade, on the street with the white-trash folks that I have mentioned before. Of course, in other streets not far away, there were respectable professionals, and I became friends with their children when I started going to elementary school (while keeping the friends from my street).

Back to Clayton. That is where we moved when I started 7th grade. Super-affluent. I was just back there visiting last week, and it is sort of like Bethesda in Maryland or Brookline in Massachusetts or Menlo Park in northern California or Beverly Hills in southern California.

I am sure that all of the other municipalities, including the city of St. Louis, would love to get their hands on more of Clayton’s wealth. I am guessing that Clayton’s wealthy are not so keen on it. But a Ctrl-F for “Clayton” in the story comes up empty, so I do not know.

Housing finance in other countries

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In testimony before a House committee, Mike Lea writes,

The standard mortgage instrument in other countries differs significantly from the US FRM. The standard product in Canada, Germany and many other European countries is a short to medium term fixed rate mortgage sometimes referred to as a rollover. The rate is fixed for a 1 to 5 year period (up to 10 years in Canada and Germany) after which the rate is reset at the current market interest rate. The loans have amortization terms of 25-30 years. The borrower can select the same or a different fixed rate term at reset. This feature allows borrowers some protection against potential interest rate shocks (e.g., if the reset rate is high and the borrower expects it to fall she can select a one year fixed rate term; conversely if she believes rates are low and likely to rise she can opt for a 5 or 10 year fixed rate term). There is a prepayment penalty during the fixed rate period (a yield maintenance penalty that removes the financial incentive for refinance).

…Mortgage loans are recourse obligations in all of the countries surveyed and default rates have been and are significantly less than in the US. With recourse lenders have the right to pursue deficiency judgments against borrowers providing a significant deterrent to mortgage default.

If you are at all interested in the subject, read the whole thing.

If we want a housing finance system that is as safe as that of, say, Canada, then we need to evolve away from the 30-year fixed-rate mortgage. But if you take the 30-year fixed-rate, no-recourse mortgage as a given, then my line is that our current housing finance system is about as safe as we are going to get.

Back when they were planning these hearings, they solicited my testimony. They ended up not soliciting it for the actual hearing. I am not complaining, because I don’t glory in giving this sort of testimony. But below is what I wrote. Continue reading →

Economic segmentation

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Jerry W. Thomas wrote,

What is market segmentation? At its most basic level, the term “market segmentation” refers to subdividing a market along some commonality, similarity, or kinship. That is, the members of a market segment share something in common.

I have argued before that the economy is illegible. By that I mean that aggregate measures of labor input, capital input, “the” price level, and output are useless when the economy is dominated by services and the value of labor and capital is dominated by intangible elements. Aggregate measures of “the” standard of living are useless when housing expense, which is a large component of living costs, is so divergent across locations.

Instead, I believe we need to think in terms of multiple economic realities. Perhaps one way to address this would be to start with market segmentation analysis. In the marketing world, demographic analysts have sorted U.S. zip codes into clusters of similar consumer tastes. Suppose that we were to find occupational clusters, consisting of people with similar industry groups and similar skill types.

Next, imagine a matrix, with occupational clusters down the side and consumer market segments across the top. Might we see interesting patterns?

We might think about the occupational clusters in terms of the traditional theory of international trade. What do they produce? What do they tend to consume? Which clusters supply savings to other clusters, and which receive savings? How much of each cluster’s economy is internal trade and how much is external trade? What are the terms of trade (exchange rate) between a cluster’s imports and its exports, and how have the terms of trade changed over time?

I am thinking that perhaps this is the next big theme I will be working on. That is, the illegibility of the economy as measured using traditional statistics and the possibility of getting more useful information by thinking in terms of multiple economic realities.