Doug Elmendorf on the Debt

He writes,

Together with Brookings Senior Fellow Louise Sheiner, I have analyzed alternative explanations for low Treasury rates and the implications of each for budget policy (Elmendorf and Sheiner, 2016). We found that most explanations imply that the country should have a higher debt-to-GDP ratio than otherwise. We find that most explanations also imply that federal investment should be higher than otherwise, and I will come back to that later. The intuition for these results is that interest rates show the direct cost to the Treasury of its borrowing and provide information about the indirect cost to the economy of Treasury borrowing—and if costs will be persistently much lower than we are accustomed to, then more borrowing, especially for investment, passes a cost-benefit test.

Pointer from Tyler Cowen.

Of course, one possible explanation for low interest rates is that growth prospects are poor. Another possible explanation is that we are in a bond bubble. If either of those turns out to be the case, then we are going to wish that we had less debt to contend with.

How Fractal is High-skilled Immigration?

Sari Pekkala Kerr, William Kerr, Çaǧlar Özden, and Christopher Parsons write,

The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010, while low skilled (primary educated) migrants increased by only 40 percent during that time. A pattern is emerging in which these high-skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia.

Pointer from Tyler Cowen.

I wonder if this pattern is fractal. That is, within the United States, do we see a net influx of high-skilled individuals to only a few metro areas? Within metro areas, do we see a net influx to only a few hot spots?

Alex vs. Tyler on Automation

A ten-minute video. A bit of talking past one another. In short, Alex says that smart machines are making us rich, and Tyler says that only some of us are getting rich.

My favorite line was Tyler’s, talking about the challenges of adapting to technological change. He pointed out that even though the transition from agriculture to manufacturing was largely completed more than 50 years ago, to this days we still have lots of farm subsidies. I would add that by contemporary standards, the agriculture-to-manufacturing transition was gradual. We might expect even more dislocation from the transition to the New Commanding Heights.

Hart and Holmstrom win the Nobel

1. Alex Tabarrok and Tyler Cowen (also here) have the most useful posts.

2. I was very relieved that the prize did not go to a macroeconomist. I do not see how I could write a charitable post if there is another Nobel Prize given for macro. I especially did not want to have to write a post about Bill Buckner getting into Hall of Fame.

3. On Holmstrom, Alex writes,

Suppose that you are a principal monitoring an agent who produces output. The output depends on the agent’s effort but also on noise. It wouldn’t be a very efficient contract to just reward the agent based on output since then you would mostly be responding to noise–punishing hard-working agents when the noise factors were bad and rewarding lazy agents when the noise factors were good. Not only is that unfair–if you setup a contract like this the agents will a) demand that you pay them a lot of money in the good state because they will be taking on a lot of risk that they don’t control and b) the agents won’t put in much effort anyway since their effort will tend to be overwhelmed by the noise, either good or bad. Thus, rewarding output alone gets you the worst of all worlds, you have to pay a lot and you don’t get much effort.

As I read Cosmides and Tooby, hunter-gatherers understood this. You want to let gatherers keep their output, which is not luck-driven, but you want hunters to share output, which is very dependent on luck.

Sometimes, theorists use a lot of math to come up with results that people operating in the real world have arrived at through experience. Indeed, this is a good thing, in my view. Because often the alternative is to come up with results that have no real-world relevance at all.

4. Maybe Cosmides and Tooby should get some consideration for the Nobel.

The Three Iron Laws, Illustrated

Tyler Cowen writes,

I find few people are willing to embrace the more consistent statistical preference plus agnosticism, rather they play the game of “statistical noise for thee but not for me.”

He is writing about what is now a seemingly ancient question about the stock market’s reaction to the ups and downs of Mr. Trump. I want to say that this issue illustrates Merle Kling’s three laws of social science.

1. Sometimes it’s this way and sometimes it’s that way. In this case, sometimes one can find an affect of a change in Mr. Trump’s prospects and the market, and sometimes one cannot.

2. The data are insufficient. In this case, there is not enough data to make a definitive judgment.

3. The methodology is flawed. In this case, one can argue that the analyst is basing a conclusion on statistical noise.

Maybe the quote from Tyler suggests a fourth iron law: if the issue is emotionally salient, given that the first three iron laws hold, motivated reasoning and confirmation bias take over.

Thete Watch

Mark Aguiar, Mark Bils, Kerwin Charles, and Erik Hurst write,

we explore the decline in work hours for young men since 2000. Using standard parameterizations, we show that the decline in hours for LEYM (both in absolutely and relative to all prime-age men) is inconsistent with a stable labor supply curve. We propose a new methodology that exploits detailed micro data on how individuals allocate their time away from work to infer how changes in leisure technology have altered labor supply. We find that changes in leisure technology for computer goods broadly, and video games in particular, shifted in the labor supply curve for LEYM by an amount between 10 and 25 percent of the observed decline in market work hours for prime age men and between 20 and 45 percent of the decline in market work hours for LEYM.

LEYM is less educated young men. Pointer from Tyler Cowen.

Tonight’s Debate

I’m guessing that the people most motivated to watch will be those who already have made up their minds which of the two they are voting for. I have already made up my mind, not to vote for either one of them. And I will not watch. (Note: Peggy Noonan has encountered a lot of people who are undecided. That goes against my experience, but I don’t deny living in a bubble. I remember in previous elections Jonah Goldberg wondering who the heck these undecided voters were. I sympathize with his befuddlement.)

Also, I think that Gary Johnson deserves to be in the debate. The threshold of 15 percent in the polls may have been appropriate when the two major parties were nominating acceptable candidates. However, that is not the case this year. Simply being on the ballot in every state should qualify Johnson to be in the debates in a year when the majority of people have a negative view of both Mr. Trump and Ms. Clinton. I think that the threshold for keeping Johnson out of the debates should be that the polls show that the unfavorability ratings for the other candidates should be less than, say, 40 percent.

While I am on the topic of the election, Tyler Cowen recommends David Brooks. Brooks writes,

We have an emerging global system, with relatively open trade, immigration, multilateral institutions and ethnic diversity. The critics of that system are screaming at full roar. The champions of that system — and Hillary Clinton is naturally one — are off in another world.

There is a strong case to be made for an open world order, and a huge majority coalition to be built in support of it.

In the nearly twenty years since Brooks wrote Bobos in Paradise, coining the expression “bourgeois bohemians,” have the Bobos achieved the status of a “huge majority coalition”? My guess is that Peggy Noonan, based on her conversations with potential voters, would have doubts.

The guardians of the open world order helped encourage a revolution in Syria that became a civil war. The guardians of the open world order were unable to stop this civil war. The guardians of the open world order have yet to convincingly demonstrate that they can cope with the refugee problem created by this civil war.

I am not joining the anti-Bobos here. But I do think that one should not over-estimate the Bobo vote, and where Mrs. Clinton needs help is with people who are not Bobos. If you talk to them about an “open world order,” they are likely to want to know where the “order” part is going to come from.

As a final point, I endorse the view that democracy works best when elections do not matter much. Let us all hope that this election does not matter much, and that the system is robust enough that we can get through the next four years regardless.

Friedman and Samuelson

I think of Specialization and Trade as an attempt to redirect economics away from the path that it followed after the second World War. This recently produced the following train of thought.

Who has been the most influential economist since 1945? I am inclined to go with Paul Samuelson, and that is implicit in the book. But some people might have said Milton Friedman. In neither case, do I think that the influence on academic economists was good. [somewhat related: Tyler Cowen’s simple theory of recent intellectual history, which he apparently still propounds]

With the public, their impact differed. Friedman argued that people should admire markets and be wary of government. Samuelson said it the other way around. Those of us who agree with Friedman approve of Friedman’s influence. Those who agree with Samuelson disapprove of Friedman’s influence.

Back to academic economists. I think that both Friedman and Samuelson were guilty of promoting economic methods that involved imitating hard science (at least as they thought of science as being practiced). Instead, in my book I argue that economic analysis can yield frameworks of interpretation, but economic hypotheses are not verifiable the way that they are in chemistry or physics.

In macroeconomics, Friedman enjoyed influence starting in the 1970s, because the Solow-Samuelson Phillips Curve broke down and Friedman’s alternative view that emphasized monetary policy seemed to work better. However, my view is that both monetarism and Keynesianism are misleading as interpretive frameworks.

In fact, what started out as monetarism ultimately degenerated into deity-worship of the Fed chairman. First it was Paul Volcker, who slew the dragon of inflation. Then it was Alan Greenspan, the Maestro of the Great Moderation. Until in hindsight he became the Randian ideologue, who turned the banks loose to create a financial crisis. The crisis came on Ben Bernanke’s watch, and he is deified as the man who saved us from another Great Depression.

I think that the effect of each of those three on the economy is vastly over-rated. Instead, I think that financial markets and the economy in general simply took the course that they took, and story-tellers wrongly attribute the outcomes to the policies of the Fed at the time.

Status Games

Tyler Cowen writes,

In essence, (some) media is insulting your own personal status rankings all the time. You might even say the media is insulting you. Indeed that is why other people enjoy those media sources, because they take pleasure in your status, and the status of your allies, being lowered. It’s like they get to throw a media pie in your face.

With material goods, we can play a positive-sum game. With status goods, the game is zero-sum. In a footrace, someone finishes first, someone finishes second, and so on. If I move up, someone else must move down.

Political power tends to act like a positional good.

New Commanding Heights Watch

Two posts from Matthew Klein.


96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity (construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth) and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques (healthcare, education, government, and finance explain the remaining 50 percentage points)


since 1990. . .a whopping 88 per cent of the total rise in the price level boils down to four sectors of the US economy [health care, education, housing, and prescription drugs]:

Pointer from Tyler Cowen. There is much to chew on, and probably much to quibble about. What I want to suggest is that the relative price shifts involving the New Commanding Heights sectors of health care and education in relation to goods-producing sectors ought to be considered much more important than the comparatively trivial amounts by which the “aggregate price level” (a concept for which I have little use, but so be it) has wiggled around.

Over the past 25 years we have had major structural shifts in the economy. I claim that those structural shifts have played a larger role than monetary policy in the behavior of employment and “the aggregate price level.” But if you look at both the journalistic accounts and the academic literature, I am confident that you will find many more mentions of monetary policy than of structural change in interpreting economic events. If I had any influence, that would change.