Timothy Taylor and Russ Roberts

Self-recommending.

Taylor says,

it just seems to me that often when people talk about growth, the first thing they talk about is not the role of the private sector or firms. They talk about how the government can give us growth, through tax cuts or spending increases or the Federal Reserve. When they talk about fairness and justice, they don’t talk about the government doing that. They talk about how companies ought to provide fairness and justice in wages and health care and benefits and all sorts of things. So it seems to me that our social conversation about those things is topsy turvy.

Bureaucratic Rump-Covering

Timothy Taylor points to a report by a new bureaucracy, the Office of Financial Research. Taylor writes,

The report emphasizes three main risks facing the US economy: 1) credit risks for US nonfinancial businesses and emerging markets; 2) the behaviors encouraged by the ongoing environment of low interest rates; and 3) situations in which financial markets are not resilient, as manifested in shortages of liquidity, run and fire-sale risks, and other areas.

There is a difference between actionable intelligence and bureaucratic CYA. If somebody says, “we are seeing a lot of chatter laately among these four terror cells. We had better watch these individuals closely,” that is actionable. If somebody says, “there is a risk that in the current climate terrorists will attempt a major attack,” that is not actionable, it is just CYA.

Reading Taylor’s post, I doubt that there is anything actionable in the OFR report. If the OFR had existed in 2006, we would have been told that the high level of house prices posed a potential risk. Which everyone already knew. They just did not have actionable intelligence about the state of the portfolios of key players, like Merrill Lynch, Citigroup, and Freddie and Fannie.

James Poterba on the Mortgage Interest Deduction

He says,

the real place where the tax code provides a subsidy for owner-occupied housing is not by allowing mortgage deductibility, because if you or I were to borrow to buy other assets — for instance, if we bought a portfolio of stocks and we borrowed to do that — we’d be able to deduct the interest on that asset purchase, too. If we bought a rental property, we could deduct the interest we paid on the debt we incurred in that context. What we don’t get taxed on under the current income tax system is the income flow that we effectively earn from our owner-occupied house, what some people would call the imputed income or the imputed rent on the house. The simple comparison is that if you buy an apartment building and rent it out, and you buy a home and you live in it, the income from the apartment building would be taxable income, but the “income” from living in your home — the rent you pay to yourself — is never taxed. This is the core tax distortion in the housing market: the tax-free rental flow from being your own landlord.

Pointer from Timothy Taylor. The interview covers other topics, all interesting.

He goes on to say that it is unlikely that people would accept being taxed on a made-up number representing this “rental flow from being your own landlord.” However, people do accept being taxed on the appraised value of their property, which is arguably also a made-up number. It seems to me that you could tax homeowners on a made-up “appraised rental value” just as easily. Or just tax them a percent of the appraised value, as is done now.

Let’s go with the notion that the goal is to tax owner-occupied and investment property identically. Then my thought is you should just exempt landlords from paying tax on their rental income. But I find the whole notion of how the tax system should and should not work to give me a headache. Even if you start with the idea of a consumption tax, do you want to include the use of housing as consumption? Presumably you do, and then you are right back into these conundrums of rental vs. owner-occupied, are you not?

Regulation and Financial Complexity

CFTC Commissioner J. Christopher Giancarlo said,

At the heart of the 2008 financial crisis was the inability of regulators to assess and quantify the counterparty credit risk of large banks and swap dealers. The legislative solution was to establish swap data repositories (SDRs) under the Dodd-Frank Act. Although much hard work and effort has gone into establishing SDRs and supplying them with swaps data, seven years after the financial crisis the SDRs still cannot provide regulators with an accurate picture of bank counterparty credit risk in global markets. That is because international regulators have not yet harmonized global reporting protocols and data fields across international jurisdictions. Certain provisions of Dodd-Frank actually hinder such harmonization, despite widespread bipartisan legislative support for their correction over the past two Congresses.

Pointer from Timothy Taylor. Read the whole speech, which is wide-ranging and thought-provoking. Among other topics, Giancarlo discusses the significance of blockchain and the outsized role of the Fed in key securities markets due to its enlarged balance sheet.

My view is that the financial market is a complex, adaptive system, and attempts to reduce systemic risk will backfire. Several years ago, I focused on the discrepancy between knowledge and power. Regulators seek more and more power, and at times they get it. But what they really lack, and will never possess, is the information needed to understand market processes well enough to be able to predict the ultimate effect of regulation on behavior. That information is dispersed, so that no one individual or regulatory body can obtain it.

Not So Renewable?

Timothy Taylor writes,

annual global production of lithium has more than doubled from from about 16,000 metric tons in 2004 to over 36,000 metric tons by 2014. Even with this rise in quantity produced, the price of a metric ton of lithium carbonate has risen from $5,180 in 2011 to $6,600 in 2014.

He cites a report from Goldman Sachs on emerging themes, one of which is “Lithium is the new gasoline.” (The other claims in the report are also provocative.)

Changing our energy technology does not automatically eliminate scarcity. It is instead a form of substitution.

Social Security is Still Going Broke

Timothy Taylor writes,

the gap between benefits and receipts doesn’t change much after about 2035. This tells you that the Social Security problem is essentially a one-time problem, occurring as a result of the retirement of the boomer generation. If we can enact a series of reforms that moves up the receipts line and moves down the benefits line, then after about 2035 the system can be fairly stable for decades into the future.

I have a different view. Longevity has been going up pretty steadily at a rate of 2.5 years per decade. In recent decades, much of that increase has occurred at the high end (reductions in infant mortality used to be a big factor, but that has reached an asymptote). The age of government dependency (aka the Social Security retirement age) has not been increased as much. If those trends continue, then the ratio of government-dependency years to working years goes up inexorably. A system in which workers pay for retirees faces very troubling arithmetic.

Having said that, Taylor does a nice job of summarizing a CBO report on options for improving Social Security finances. I think he is more charitable than I would be toward the left’s approach, which strikes me as more of a “deny that there is a problem” strategy.

Timothy Taylor on Hansonian Medicine

He writes,

The good news is 50,000 fewer deaths, along with health improvements and saving money. The bad new is that the rate of hospital-acquired conditions basically fell from one patient in every seven patients to one out of every eight. Sure, hospital-acquired conditions will never fall to zero. But it certainly looks to me as if at least tens thousands of lives were being lost each year because that rate had not been reduced, and that tens of thousands of additional could be saved be reducing the rate further.

Read the whole post.

Robin Hanson has observed that:

1. Some medical interventions clearly prolong life.

2. On average, medical interventions do not prolong life.

He infers from this that the successful interventions must be offset by interventions that make things worse.

Trade Facilitation

Timothy Taylor writes,

reforming the legal and regulatory processes around customs, and reducing delays, means that there is less reason to pay bribes to facilitate the process–and thus reduces corruption.

Read the entire post. It takes some nuggets from one of those reports that only Taylor seems to find, the source in this case being the World Trade Organization. The point is that there are many administrative and legal processes that inhibit cross-border trade, and reform of these processes could generate a lot more trade and economic improvement.

Another AS-AD Anomaly

Timothy Taylor writes,

[Alan] Krueger argues that the patterns of wage changes and unemployment are roughly what one should expect. He focuses only on short-term employment (that is, employment less than 27 weeks), on the grounds that the long-term unemployed are more likely to be detached from the labor force and thus will exert less pressure on wages. Increases in real wages are measured with the Employment Cost Index data collected by the US Bureau of Labor Statistics, and then subtracting inflation as measured by the Personal Consumption Expenditures price index. In the figure below, the solid line shows the relationship between short-term unemployment and changes in real wages for the period from 1976-2008. (The dashed lines show the statistical confidence intervals on either side of this line.) The points labelled in blue are for the years since 2008. From 2009-2011, the points line up almost exactly on the relationship predicted from earlier data. For 2012-2014, the points are below the predicted relationship, although still comfortably within the range of past experience (as shown by the confidence intervals). For the first quarter of 2015, the point is above the historical prediction.

As an aside, note the particular selection of data series. I am not saying that Krueger is wrong for choosing short-term unemployment, the employment cost index, and the PCE deflator. In fact, I think he shows good taste here. But there are other choices available, and I can think of economists who have defiantly done so, cheered on by other prominent economists.

What I wish to point out is that the relationship as depicted is an anomaly with respect to textbook AS-AD, including both Keynesian economics and Sumnernomics. Timothy Taylor refers to the relationship as a Phillips Curve. However, the Phillips Curve relates nominal wages to unemployment, and the chart shows real wages and unemployment. Although in standard macro nominal wages may rise as the unemployment rate falls, real wages are supposed to move in the opposite direction. In standard macro, aggregate supply is derived from movement along the demand curve for labor. When real wages rise by less than productivity increases, demand for labor rises and output goes up. When real wages rise by more than productivity increases, demand for labor falls and output goes down.

Thus, rather than confirming conventional macroeconomic analysis, Krueger’s chart demonstrates an anomaly. In fact, this is hardly a new anomaly. The procyclical behavior of real wages was something that I had observed when I was in graduate school more than 40 years ago.

Of course, you can modify the Keynesian model to accommodate procyclical real wages. Or, you can find data that you believe demonstrate countercyclical real wages (I think that Sumner would try this latter approach). But that is because Keynesian economics is what I call an interpretive framework. How many anomalies you can tolerate before you discard an interpretive framework is a matter of choice. For me, the AS-AD paradigm has too many anomalies to live with.

Other Countries Matter

Timothy Taylor writes,

the number of cars sold in China has exceeded the number sold in the U.S. market for several years now.

…in 2001 the US was about half of the global market for movies. Now the US/Canada share of the global market for movies is just over one-quarter, and falling.

…more and more, Americans are going to be seeing brands and titles and products where the US market is just one among several–and not necessarily the most important one.

Read the whole post.