Category Archives: Timothy Taylor is my Favorite Blogger

The formal sector and the informal sector

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Timothy Taylor writes,

Here’s are some columns from a table from the World Employmentand Social Outlook: Trends 2020 published by the International Labour Organization in January 2020. As the report points out, around the world about 60% of workers have informal jobs; in low-income countries, it’s more like 90%

Read the whole post. The ability to cooperate in groups above the Dunbar number is extremely important for economic development. You might hate big corporations, but they are actually a miracle of civilization, as Tim and others have pointed out.

Trends in poverty in the U.S.

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Timothy Taylor writes,

while it might seem that evidence suggesting that that US poverty level is actually far below the official rate is good news (to the extent that it is true), nothing is simple in a politically polarized world. Conservatives would have to accept that a number of government programs have had a dramatic effect in successfully reducing poverty rates. Liberals would have to accept that poverty is now a much smaller problem than several decades ago.

I recommend the whole post for its analysis of data and concepts.

My opinions:

1. The rising tide of economic growth has tended to lift all boats, and that accounts for some reduction in poverty, as properly measured.

2. Government transfer programs, such as food stamps, have also contributed to poverty reduction. Certainly this is true numerically.

3. But government transfer programs have, in my opinion, undermined social norms regarding work and marriage. The high implicit marginal tax rates that arise as people lose eligibility for benefits when they earn income have made it uneconomical for women to marry low-wage men. So low-wage men work less and marry less than they would otherwise.

Macroeconomics and the virus crisis, II

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Before I get to that, Matt Ridley writes,

There are already several different strains of the virus, one of which, the L strain, looks to be more lethal than others.

What? Whoa!! Somebody needs to shout this from the rooftops. It suggests that there is no such thing as the death rate, even controlling for other factors. To me, it may suggests that we should be testing for this specific “L strain.”

Also, if there is more than one strain, does immunity to one strain not necessarily confer immunity to another? So you could get “it’ (i.e., one of them) again?

Now on to some other economists, who mostly make sense.

1. Alan Blinder writes,

If most Americans who wanted a test could get one, and if people who tested positive stayed home and sought medical attention, fear of going out wouldn’t disappear, but it would dissipate. Think of it as a super-effective form of fiscal stimulus. Test kits are ridiculously cheap compared with the GDP and job losses they might forestall.

2. Tyler Cowen writes,

Do you want to give people cash if they will just go out and spend it on entertainment or in large, crowded stores? Is that what you are hoping they will do? To what extent do we want the “transmitting sectors” to be contracting right now? Does it do much good to send consumers money they will spend on Amazon or pizza deliveries, two sectors that may do fine or even prosper during the tough times?

I do not think we should bail out shale oil producers or cruise lines. Presumably we wish to support businesses with an income gap for coronavirus reasons, but what exactly should we do? I am puzzled by the degree of certainty people seem to exhibit about this issue.

3. Timothy Taylor tells us about a quickly-published booklet edited by Richard Baldwin and Beatrice Weder di Mauro. Taylor quotes Baldwin and Eiichi Tomiura writing

the supply-chain disruptions that are likely to be caused by COVID-19 could lead to a push to repatriate supply chains. Since they [sic] supply chains were internationalised to improve productivity, their undoing would do the opposite.

I intend to download the booklet and read it. Meanwhile, I recommend Taylor’s entire post.

The booklet evidently includes some quantitative estimates of the GDP cost of the virus crisis. I am quite sure that the models used to produce those estimates are worthless. There is no way for them to estimate the cost of shifting to less-efficient supply chains. More important, nobody has a model of how leveraged financial institutions interact with the economy. Consider a cruise line that owes debt service payments on its ships or an airline that owes debt service payments on its planes. If they cannot service their debts and they have to declare bankruptcy, it is hard to calculate the effect of that on GDP. It is even harder to calculate the effect hits when the banks with the outstanding loans have to deal with the effect on their balance sheets.

What is the Fed doing?

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Timothy Taylor writes,

Now, the primary tool for conducting monetary policy is the interest rate that the Federal Reserve pays for excess reserves. That interest rate will shape the desire of Federal Home Loan Banks to lend funds and the desire of foreign banking organizations to borrow them–and thus affect the federal funds interest rate.

This description should help to clarify why the federal funds interest rate will never exceed the interest rate on excess reserves paid by the Fed: The foreign banking organizations that are now the main borrowers in the federal funds market are receiving that interest rate on excess reserves, and they will only be willing to borrow at slightly lower interest rate.

So commercial banks don’t even factor in to the Fed Funds market any more. George Selgin has more discussion.

I would suggest not thinking of the Fed as a monetary authority. Instead, think of it as a large bank used by the government to allocate credit, especially to itself. I think that explains the opacity of Fed operating procedures.

What should universities aim for?

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Inn 1876, Johns Hopkins University President Daniel Coit Gilman said,

The object of the university is to develop character — to make men. It misses its aim if it produced learned pedants, or simple artisans, or cunning sophists, or pretentious practitioners. Its purport is not so much to impart knowledge to the pupils, as whet the appetite, exhibit methods, develop powers, strengthen judgment, and invigorate the intellectual and moral forces. It should prepare for the service of society a class of students who will be wise, thoughtful, progressive guides in whatever department of work or thought they may be engaged.

Quoted by Timothy Taylor.

The very top colleges historically have been for training elites. The college administrators decided who ought to be part of the elite and what training they should receive.

There has always been some tension between this mission and a more democratic/utilitarian conception of colleges as instruments for promoting equality and upward mobility.

The annuities puzzle

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Timothy Taylor writes,

Among economists, it’s sometimes known as the “annuities puzzle”: Why don’t people buy annuities as frequently as one might expect?

I think that the puzzle is why economists insist that annuities are a terrific idea.

The idea of an annuity is this:

1. Suppose that at age 65, you have $500 K and you retire.

2. If you are going to live to age 75, you can afford to spend a lot of money every year. But if you are going to live to be 100, you can afford much less.

3. If you trade your $500 K for an annuity, you can then spend the amount appropriate for an average life expectancy, regardless of how long you actually live. If you don’t live very long, the company that sells you the annuity wins. If you live longer than the average person, then the company loses.

Economists think that old people who do not annuitize their wealth are dumb. I decided a long time ago that it is the economists who are dumb.

Old people face many risks other than the risk of living longer than average. Many risks give rise to needing to spend a lot of money at once. You might develop an illness that is treatable but very expensive to deal with. You might find that you have grandchildren living in a different city, and while you are still relatively healthy you want to visit a lot or even pick up and move there.

The risk of excess longevity is one that you can transfer to your children. That is, you might plan to leave $250 K to your children if you die at age 85, but you leave them nothing if you die at age 95.

Hiring miscalculations

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Peter Capelli writes,

The recruiting and hiring function has been eviscerated. Many U.S. companies—about 40%, according to research by Korn Ferry—have outsourced much if not all of the hiring process to “recruitment process outsourcers,” which in turn often use subcontractors, typically in India and the Philippines. The subcontractors scour LinkedIn and social media to find potential candidates. They sometimes contact them directly to see whether they can be persuaded to apply for a position and negotiate the salary they’re willing to accept. . .

The big problem with all these new practices is that we don’t know whether they actually produce satisfactory hires. Only about a third of U.S. companies report that they monitor whether their hiring practices lead to good employees; few of them do so carefully, and only a minority even track cost per hire and time to hire.

Pointer from Timothy Taylor.

The article suggests that modern firms are leaving $20 bills on the sidewalk, in that there are better hiring practices that could easily be adopted. Perhaps.

But I want to emphasize that this reinforces a key point that I make in The Great Miscalculator: In business, it is very difficult to measure the performance of employees.

The measurement challenge is bound to create discrepancies between pay and marginal product. And it is bound to make the hiring process quite error-prone.

A green bad deal

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Timothy Taylor finds a paper by Michael Greenstone and Ishan Nath on the cost of renewable energy mandates for utilities.

this study finds that the cost of reducing carbon emissions through an RPS policy is more than $130 per ton of carbon abated and as much as $460 per ton of carbon abated—significantly higher than conventional estimates of the social and economic costs of carbon emissions. For example, the central estimate of the Social Cost of Carbon (SCC) tallied by the Obama Administration is approximately $50 per ton in today’s dollars.

It is plausible to me that when all of the general-equilibrium repercussions are in, the increase in cost leads to an overall increase in carbon emissions. For example, suppose that due to higher electricity costs in your home state in the U.S., you end up moving your plant to a place where the electricity comes from coal.

Alice Rivlin, 1931-2019

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Timothy Taylor has a helpful obituary. Brookings has a useful intellectual bio.

She was the first director of the Congressional Budget Office. She was a straight shooter and highly competent, and that is how the CBO is regarded to this day. The reputation of the CBO is, if anything, too good. See my essay, The Congressional Budget Office and the Demand for Pseudoscience.

She had various connections in the economics profession, most notably with some very nice economists at Swarthmore, Penn, and elsewhere. One of her friends was Bernie Saffran, the center-right professor at Swarthmore who was my mentor.* Her second husband, Sidney Winter, a highly-regarded academic economist, was also a Swarthmore alum (but more than a decade before Bernie came to teach at Swarthmore).

*It says something that Swarthmore College, of all places, had a center-right econ professor 5 decades ago. Rather unlikely to happen today.

Her daughter, Cathy, went to Swarthmore, and Cathy married a classmate and friend of mine. Both she and her husband are extremely nice.

In fact, one of the shocks that hit me when I went to MIT for graduate school in 1976 was finding economists who were not so nice. Some were downright nasty. Most were highly egotistical. Alice Rivlin and her colleagues were free of those traits.

Through the connection between Alice and Bernie, I got a job as a research assistant at CBO in June 1975, not long after it opened. It was a very rich experience for me. You can read about that in my macro memoir.

She had to overcome adversities of various sorts. Being a female grad student in the mid-1950s. Having a voice that would go uncontrollably from a near-falsetto high pitch to a near-bass low pitch. Having a first husband (Lew) who seemingly went off the rails in late middle age. They were divorced in 1977, and two decades later he was accused of financial fraud.

At Brookings, she was one of the economists involved in the project known as “setting national priorities.” Unfortunately, that project has been discontinued. Back in 2015, I tried unsuccessfully to obtain a grant to undertake a project that was a conscious imitation of that old Brookings project.

Alice Rivlin’s family and friends should be proud of her work and also proud of her as a decent human being.

How the Scandinavians encourage work

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Timothy Taylor writes,

But Kleven also points out that the higher Scandinavian taxes finance government policies that make it easier for many people to work — in particular “provision of child care, preschool, and elderly care.” He writes: “Even though these programs are typically universal (and therefore available to both working and nonworking families), they effectively subsidize labor supply by lowering the prices of goods that are complementary to working. … [T]he Scandinavian countries … spend more on such [labor] participation subsidies … than any other country. …”

I like the phrase “complementary to working.” Obviously, getting transfer payments is a substitute for working. But getting support for child care and elder care is complementary to working.