Timothy Taylor on Shadow Banking

He writes,

if you still think banks are the core representative institutions in the financial system of high-income economies, you are a few decades out of date. If you are concerned about the dangers of financial sector risks cartwheeling into the real economy, you need to think about the shadow banking sector. Muscatov and Perez point out that while banking regulators do try to think about risks from the shadow banking sector, “Still, many areas of NBI remain obscured from regulators’ view, and not all NBI is subject to supervision.”

NBI is “non-bank intermediation.” Read the whole post.

Freddie and Fannie are non=bank intermediaries. Back in the late 1980s and the 1990s, they drove traditional lending institutions out of a large segment of the mortgage market. They did not do this through inherent advantages of scale or business model. They did it because they enjoyed small advantages from a regulatory standpoint, including lower capital requirements.

The moral of the story is that the “better” job you do of regulating banks, the more room you leave for other financial intermediaries to take over niches. I do not think that you can get financial regulation to achieve the goal of stabilizing the financial system. I think that it just winds up being a tool for allocating credit to politically preferred uses.

Testing for Housing Discrimination

Commenting on an article by Sun Jung Oh and John Yinger, Timothy Taylor writes,

Overall, the findings from the 2012 study find ongoing discrimination against blacks in rental and sales markets for housing. For Hispanics, there appears to be discrimination in rental markets, but not in sales markets…

However, the extent of housing discrimination in 2012 has diminished from previous national-level studies.

What was most interesting to me was the method of testing for discrimination, which involved sending pairs of auditors of different races with otherwise identical characteristics to ask real estate agents for help finding apartments or homes. It would be interesting to see such a method applied to mortgage lending, rather than trying to make inferences from observed data.

Timothy Taylor on the Tech Sector

He writes,

My own guess is that the applications for IT in the US economy will continue to be on the rise, probably in a dramatic fashion, and that many of those applications will turn out to be even more important for society than Twitter or Pokémon Go. The biggest gains in jobs won’t be the computer science researchers, but instead will be the people installing, applying, updating, and using IT in a enormously wide range of contexts. If your talents and inclinations lead this way, it remains a good area to work on picking up some additional skills.

This sounds right to me. The technological advances have been rapid, but the process of deploying applications goes more slowly.

What I’m Reading

A review copy of Erwin Dekker’s The Viennese Students of Civilization. He places Mises and Hayek in the intellectual circles of Vienna between the two world wars, as they watch a once-great civilization collapse. Capitalism and democracy simply could not take root in that part of Europe. I will have more to say about the book once I have finished.

Meanwhile, support for capitalism and democracy among young people in the U.S. is not exactly robust. Timothy Taylor reports,

In both the US and in Europe, young adults have become less likely to say that it is “essential” to live in a democracy.

It is, as Winston Churchill said, the second worst form of government.

Where to Expect Automation

Folks at McKinsey write,

Manufacturing, for all its technical potential, is only the second most readily automatable sector in the US economy. A service sector occupies the top spot: accommodations and food service, where almost half of all labor time involves predictable physical activities and the operation of machinery—including preparing, cooking, or serving food; cleaning food-preparation areas; preparing hot and cold beverages; and collecting dirty dishes. According to our analysis, 73 percent of the activities workers perform in food service and accommodations have the potential for automation, based on technical considerations.

Pointer from Timothy Taylor.

I can’t wait to see the results of higher minimum wages.

Timothy Taylor on Economic Epistemology

He writes,

There’s a widespread quick-and-dirty version of the relationship between theory and empiricism in economics, which is that one first creates theories, tests those theories with data, and then iterates with new theories and empirical tests. But in the 21st century, I’m not sure anyone really believes this. It’s well-known that you can create an internally consistent theory to reach pretty much any conclusion you want, as long as you tinker with the underlying assumptions. Moreover, it’s well-known that when doing empirical work, one can try out a bunch of different statistical tests until you find one that reaches the conclusion you want. To make matters worse, there’s no particular reason to believe that if some particular economic theory is validated by some particular empirical estimate in one context that it will also hold true in all other times and places. These concerns prove the case that a social science is not a natural science, but it would be as severe overreaction to hype them up into a claim that social sciences can’t lead to meaningful knowledge.

In my new book, I argue that economics is not a science. I say that we deal primarily in non-falsifiable frameworks of interpretation, rather than non-falsifiable hypotheses. Taylor’s comments speak to some of the reasons that this is the case.

The problem becomes how to evaluate competing frameworks if scientific epistemology (i.e., falsificationism) does not apply. Taylor is discussing essays by Harrod and Keynes, who, each in his own way, seems to argue for an “I’ll know it when I see it” approach to evaluation. However, I think we should try harder to spell out the criteria that are most helpful.

Un-taxed Owners of Corporate Shares

Steven M. Rosenthal writes,

In a report published today in the journal Tax Notes, my Tax Policy Center colleague Lydia Austin and I found the other three-quarters of shares now are held in tax-exempt accounts such as IRAs or defined benefit/contribution plans, or by foreigners, nonprofits or others.

Pointer from Tyler Cowen. Other things equal, this should lead corporations to pay higher dividends. What other implications are there?

Timothy Taylor has thoughts.

Tyler Cowen on Trends in Leisure and Work

The video is here. Recommended.

I agree with most of what he says, and to the extent that I differ I am probably wrong.

He frames the question in terms of Keynes’ prediction that by 2030 we would see a work week of about 15 hours. My thoughts:

1. As William Gibson said, the future is here, it is just not evenly distributed. Tyler says, correctly, that the elderly have grabbed a huge share of any increase in leisure. But “elderly” is not some different social class. It is us when we get to be that age.

2. Suppose that the median adult male in 1930 started working at age 16 and worked until he died, and that the median adult male today starts working at age 20, retires at age 60, and dies at age 80. Take those 20 years of leisure and spread them across the working ages of 20-60, and that amounts to 1/3 of a year of leisure. If you think that you have about 100 hours a week to allocate (otherwise you are engaged in required activities like sleeping), 1/3 of a week is about 33 hours. So maybe you can say that we’ve taken about 33 hours off the typical work week, but we’ve decided to save those 33 hours for when we’re old. So if you worked 60 hours in Keynes’ day, now in effect you work 27 hours, and he is not so far off.

3. Note that the natural distribution of leisure might be quite different, but the eligibility rules for Medicare and Social Security are a major influence.

4. Another point Tyler makes that I would have made also is that the disutility of work has fallen. My guess is that Keynes did not foresee this or take it into account.

5. In fact, one of Tyler’s claims, which I do not dispute, is that for many people the utility of work is actually positive. In any event, if you gave people the wealth they have in 2016 but they faced the composition of jobs that existed in 1930, I bet a lot fewer people would choose to work full time.

6. Tyler points out that one factor increasing reported work hours is women substituting market work for home production. Again, I agree. In a variation on (5), suppose you offered a modern working woman a chance to earn her current wage for doing housework and child care as it was done in 1930. How many women would take you up on that? I’m guessing not many.

7. Tyler predicts that more people will work more hours going forward. His reasoning is that in cross-section, we observe the highest earners tending to work more hours. If that same pattern holds in time series, and earnings go up, then we should see more hours of work.

I think that is a dubious inference. The “one percent” are different not just in terms of ability but also in terms of preferences. They choose wealth-maximization with more gusto than the rest of us.

There are plenty of reasons to choose something other than the wealth-maximizing career path. In my case, I have inexpensive tastes. I also have a low tolerance for interpersonal stress. Others may have a low tolerance for risk. Some may have a strong attachment to living in a location that does not offer the highest nominal salary.

There are many margins along which people can adjust to higher wealth. I do not think that we can extrapolate from the behavior of the “one percent” to predict how the rest of us will choose.

Related: Timothy Taylor on what is a good job.

A good job has what economists have called an element of “gift exchange,” which means that a motivated worker stands ready to offer some extra effort and energy beyond the bare minimum, while a motivated employer stands ready to offer their workers at all skill levels some extra pay, training, and support beyond the bare minimum.

Overblown, you say?

Timothy Taylor writes,

I’ll add my obligatory reminder here that just because past concerns about automation replacing workers have turned out to be overblown certainly doesn’t prove that current concerns will also prove out to be overblown. But it is an historical fact that for the last two centuries, automation and technology has played a dramatic role in reshaping jobs, and also helped to lower the average work-week, without leading to a jobless dystopia.

He quotes from a speech warning of technological displacement of workers that was given in 1927 by then Secretary of Labor James J. Davis.

Taylor writes as if the dire prediction proved false. And yet, within 5 years, unemployment hit 25 percent. Those dots connect in the PSST story, but too many economists are fixated on Keynesian AD.