Crowding Out

Timothy Taylor writes,

Huntley describes the central estimate about the long-run effects of more government borrowing based on the review of the evidence like this: For each additional dollar of government budget deficit, private saving rises by 43 cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional dollar of deficit leads to a 33 cent decline in domestic investment.

Jonathan Huntley works for the Congressional Budget Office. Taylor links to the full report. I like the way that Taylor explains the issue.

A few remarks:

1. A Keynesian would be quick to note that crowding out varies over the business cycle. When the economy is weak, there is excess saving, and there is no crowding out.

2. Larry Summers’ hypothesis of secular stagnation says that there has not been crowding out for two decades.

3. I have never heard a conservative economist complain about crowding out during a Republican Administration.

4. I have never heard a liberal economist complain about crowding out, ever. Complaining about (3) does not count.

This report comes out at a time in which the CBO has gotten an unusual amount of negative press. See this WaPo story, for example. Some remarks about this:

1. I think it is difficult for journalists or the general public to understand that some economic estimates are more unreliable than others. For example, estimating the cost of a government program is subject to some error, but most of the time you can get in the ballpark. There is more uncertainty about revenue from tax changes, because of behavioral responses, but one can still arrive at a reasonable range of estimates. On the other hand, estimating the macroeconomic impact of fiscal policy (the so-called multiplier) poses a much higher level of difficulty. You need a macroeconomic model. You need to take a position on the theory of monetary offset. When I was invited to give a lunch talk at CBO, I tried to emphasize that the difference between the uncertainty involved in macroeconomic forecasting and analysis on the one hand and the uncertainty in forecast and estimating the cost of a government program is a matter of kind, not just of degree. And I recommended that CBO should do something to emphasize this to the public. The crowding-out analysis is one that I would put in the high-uncertainty category.

2. It disturbs me that the press takes shots at the CBO only when the analysis raises doubts about progressive policies. If you are not going to raise doubts about CBO analysis of the stimulus, which is based on models that by now are far out of the mainstream, then you should not raise doubts about legitimately mainstream analysis of minimum wages, the employment effects of Obamacare, and, yes, crowding out.

3. Progressives who attack the CBO may be seeking a short-term gain in material at a long-term positional cost. Looking ahead a few moves, I do not think it helps progressives if they convince the public to distrust nonpartisan government experts.

Eating Out More

Timothy Taylor finds a USDA report, which says that

Between 1977-78 and 2005-08, U.S. consumption of food prepared away from home increased from 18 to 32 percent of total calories.

Since 1970, the proportion of food spending that is spent on eating out has increased from about 25 percent to about 43 percent.

Taylor and the USDA focus on the consequences for obesity. I would add that this trend will increase measured GDP. When you spend time preparing a meal at home, it does not count as GDP. When you eat out, the time spent preparing the meal does count as GDP.

I believe that this represents a legitimate increase in GDP. My comparative advantage is not in food preparation. The same is true for most people. Spending less time in the kitchen represents economic progress.

Although I eat out much less than most people, I rarely spend more than 20 minutes preparing a meal. That means that I eat a lot of prepared foods. I do think that most meals that you eat at home have a higher ratio of nutrients to calories than most meals that you eat outside the home. Perhaps that will change at some point.

Larry Summers on Sectoral Productivity Disparities

He says,

people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen

and also

the simple fact is that the relative price of toys and a college education has changed by a factor of ten in a generation

Pointer from Timothy Taylor.

How do you connect these dots? One way is to scream “We need more government!” Because look at the inequality! Look at the low productivity in education and health care, and we know government ends up running the low-productivity sectors!

I had another way to connect the dots. You could say that the cost of living has gone way down for people who do not measure their self-worth by the prestige of the college to which their kids go and the breadth of their health insurance coverage. Many people can now afford what they think is a decent lifestyle without earning so much in the labor market. However, the anointed look at such people and say, “But you must attend an elite college. But you must have health insurance that covers all manner of medical services, not just major medical.”

Two Findings in Search of Explanations

1. Yihui Pan, Tracy Yue Wang, and Michael S. Weisbach find that

disinvestments are fairly common in the early years of a CEO’s tenure, and that these disinvestments decrease with tenure. Investments, on the other hand, are relatively low in the early years of a CEO’s tenure and increase over time. As a result, the firm’s assets and employment grow more slowly early in the CEO’s tenure than in later years.

Pointer from Timothy Taylor, who speculates

the analysis makes CEOs sound a bit like coaches of sports teams: they arrive to clean up the mistakes of the past regime, but over time many of them gradually drift into their own set of mistakes.

This analogy would suggest that whatever the incumbent’s excesses (too much investment, too little investment), the new CEO would do the opposite. But instead the pattern seems to be that the incumbent eventually tends to over-invest.

The authors’ preferred explanation is that the CEO wants to over-invest, and only over time does a CEO gain control of the board and carry out the over-investment. When the CEO exits, the new CEO is more subservient and understands the need to pare back.

My proposed explanation may be the least dramatic. My thinking is that major projects go through a long gestation period. A new CEO needs to get comfortable before he/she can approve major new projects, so major new projects get put on hold for a year or two. Meanwhile, existing projects wrap up, so you get a lull. My explanation would predict that you would not see a burst of investment just as a CEO is getting close to exit. Rather, you would see low investment when a CEO starts, then ramping up to a higher level that is maintained until the CEO exits.

2. Alison Jane Rauh writes,

While blacks of the second generation have equal or higher education and earnings levels than the first generation, the return on their unobservable characteristics is converging to that of native blacks…Convergence across generations is mostly driven by low-educated second generation blacks that drop out the labor force in greater numbers than low-educated first generation immigrants do. Similarly, convergence within a generation is mostly driven by low-educated blacks who immigrate when they are young dropping out of the labor force in greater numbers than those who immigrate when they are older. A social interactions model with an assimilation parameter that varies by age of immigration helps explain this phenomenon. When making their labor force participation decision, immigrant men of all races, but not women, generally place more weight on the characteristics of natives the earlier they immigrate.

Pointer from Tyler Cowen. Both he and the author embrace a “peer effect” explanation, in which black immigrants start out trying to achieve, but assimilation leads them to see achievement-orientation as acting white.

An alternative explanation is that first-generation immigrants of all races are more willing to strive and sacrifice than are their children. However, suppose that there are differences in average ability by race, and that even high-ability first-generation immigrants are hampered by lack of cultural background. As immigrants assimilate, differences in outcomes start to reflect differences in ability.

I am not saying that my alternative explanations are necessarily correct. My point is that these are both papers that strike as presenting interesting findings that might have many possible explanations.

Factor-Price Equalization, Illustrated

Timothy Taylor writes,

It used to be said back in the 1960s that the global distribution of income was bi-modal–that is, it had one hump representing the large number of people who were very low-income and then a smaller hump representing those in the high-income countries…But over time, the highest point in the income distribution is shifting to the right, and by 2008, the world has moved fairly close to having a unimodal or one-hump distribution of income.

Read the whole post, which discusses a paper by Christoph Lakner and Branko Milanovic. Globalization, and in particular the growth of China, has flattened out the rich-country “hump,” leaving only the global hump. Average is over for the rich countries, in part because average has started for China.

Is the Flat Tire an AD Shock?

I recently suggested that if the economy is a car and monetary policy is the gas pedal, then perhaps the financial crisis was a flat tire. Keeping with the metaphor, we can ask.

1. Was the flat tire fixed by early 2009?

2. Was the flat tire an AD shock? Can monetary and fiscal expansion restore full employment?

I think that the mainstream view is “yes” to both questions. Of course, that depends on how one interprets the flat tire. If one interprets it as troubled banks and a high TED spread, then it was fixed. In that case, I am not sure how you would explain why the the macroeconomic problems lasted five years.

Perhaps it is more promising to say that the flat tire was not fixed by early 2009. Maybe the best one can say is that it was patched before even more was let out of it. Yes, the banks did not collapse, but financial confidence remained low, as reflected in tighter credit conditions for mortgage loans and business loans (can we really demonstrated the latter)?

I find it more promising still to suggest that the flat tire was a broader loss of confidence. Confidence in certain types of financial transactions fell. But it also fell in business in general. So older businesses rushed to let go of excess workers, and entrepreneurs did not rush to form new businesses.

So my inclination is to say “no” to both questions. Perhaps the air stopped running out of the tire, but it was not really fixed. Also, I do not think that it helps to view the economy as suffering from an AD shock. If the financial sector is not functioning properly, and the analogy is with having a nation-wide electrical power failure (as Larry Summers suggested in his “stagnation” talk), then that is more of supply-side issue. Moreover, if some businesses are shedding excess workers while other businesses are not hiring, then that is a PSST issue.

Possibly related, here is Timothy Taylor on Alvin Hansen. Taylor concludes,

I worry that the current U.S. economic policy agenda is all about fiscal and monetary policy, along with financial regulation and health insurance. I hear relatively little discussion focused directly on an agenda for creating a supportive environment for private domestic investment.

P(A|B) != P(B|A)

Timothy Taylor writes,

those in the top 1% are almost surely paying the top marginal tax rate of about 40% on the top dollar earned. But when all the income taxed at a lower marginal rate is included, together with exemptions, deductions, and credits, this group pays an average of 20.1% of their income in individual income tax.

…The top 1% pays 39% of all income taxes and 24.2% of all federal taxes.

Assume you are in the top 1 percent. For any particular dollar of your income, there is 20.1 percent chance that it winds up with the government. However, for any particular dollar (not necessarily yours) that winds up with the government, there is a 39 percent chance that it came from your income.

Does QE Steal from Savers?

This issue seems to come up a lot. For example, Timothy Taylor writes,

Of course, lower interest rates help borrowers pay less, while those who are receiving interest payments get less. Thus, the big winner from ultra-low interest rates is the U.S. government, which over the 2007-2012 period could owe $900 billion less in interest payments. Indeed, the McKinsey report also notes that central banks like the Federal Reserve have been buying assets as part of the “quantitative easing” policies in recent years, and funds earned by the Fed over and above operating expenses go to the U.S. Treasury. They estimate that the quantitative easing policies gained the U.S. government another $145 billion or so during this time period. So overall, the ultra-low interest rate policies have been worth about $1 trillion to the U.S. government.

At this point, I think I prefer to think in terms of consolidating the government balance sheet. The Treasury issues long-term debt, and the Fed buys some of this long-term debt with short-term instruments (such as interest-bearing reserves). You could get the same result without QE–just have the Treasury not issue long-term debt and issue short-term debt instead (or even buy back some of its outstanding long-term debt while issuing more short-term debt).

From that perspective, what QE does is change the mix of outstanding government debt so that more of the debt is short-term and less of the debt is long-term. I do not see that as taking money away from savers and giving a profit to the Treasury. To a first approximation, it is simply a fair swap of equal-value assets.

Suppose that expected returns are equalized across maturity structures. In that case, over the next 20 years, the government’s interest costs will be the same regardless of whether it issues a 20-year bond or instead issues one-month bills and rolls them over for 240 months.

Any saver who thinks that the short-term rate is being held down artificially is welcome to buy long-term bonds instead. You will find some right-wingers outraged over what the Fed is doing to savers. I have no plans to join that chorus.

Bad Demographic News for Libertarians

Timothy Taylor writes,

Married households with children were 40.3% of all US households in 1970; in 2012, that share had fallen by more than half to 19.6%. Interestingly, the share of households that were married without children has stayed at about 30%. Other Family Households, usually meaning single-parent families with children, has risen.

I am afraid that the number of households married to the state has soared.