Category Archives: Tyler Cowen is my Favorite Blogger

The Audience is in Control

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Tyler Cowen asks Which of the new mega-web sites will succeed?. He thinks that the answer depends on internal characteristics of the sites. I think it will depend on how the audience behaves.

I have always felt that the Internet supports only two types of group efforts (it supports a variety of individual voices, including Tyler’s). In terms of group efforts, either your are broad and shallow or you are narrow and deep. The linkers and the thinkers, if you will. What is not yet clear to me is where these new sites will fall in that classification. My guess is that success will require making a definite choice, and that the choice will involve giving up breadth. In any case, the only choices that can survive are ones that the audience buys in to.

There is a story about a class that was taking a course in psychology from a Skinnerian behaviorist who liked to pace in front of the classroom as he lectured. The students decided to play a prank on the professor. They agreed that every time the professor moved backward or toward the left side of the room, they would sit up, lean forward, and appear to be paying rapt attention. When he moved the other way, they would slump back and drop eye contact. By the end of the class, the professor was backed into the far corner, because that is where the students’ Skinnerian reinforcement had trapped him.

Where will the new web sites get their Skinnerian reinforcement, which will come in the form of high page views? Will Leonhardt only get reinforcement when he talks about business celebrities and the Fed? Will Silver get it only when he discusses sports? Will Klein get it only when he recycles Democratic talking points?

If you need to make a profit on the Web, then you do not have complete discretion in how you build your site. The audience is in control.

The Labor Market: Four Takes

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1. Josh Barro writes,

For four decades, even in stronger economic times, wage gains have not kept pace with economic growth. Wages and salaries peaked at more than 51 percent of the economy in the late 1960s; they fell to 45 percent by the start of the last recession in 2007 and have since fallen to 42 percent.

I would note that a very important part of that trend is the shift from “straight” wages and salaries to other forms of compensation, notably health insurance. Higher payroll taxes also play a role. The share of total compensation to GDP held up fairly well until recently. One might argue that with offshoring, capital-labor substitution, and the relentless climb of non-wage benefits costs, the elasticity of demand for labor is starting to yield declines in labor income.

2. Catherine Rampell writes,

The share of people getting laid off each month — as well as, more disturbingly, the shares getting hired and quitting their jobs — is near record lows. That’s according to Labor Department data released this week and calculations from John Haltiwanger , an economist at the University of Maryland. Haltiwanger estimates that private-sector layoffs, hires and resignations are 21 percent to 26 percent below their rates two decades ago.

This is important information, and Rampell wisely points out that there are a number of plausible explanations, with rather divergent policy import.

Incidentally, I agree with Tyler Cowen that it is good to have Barro and Rampell joining the ranks of columnists. I look forward to op-eds that I might actually have to read in order to find out what they have to say.

3. Bill Gates says,

I think tax structures will have to move away from taxing payroll. … Technology in general will make capital more attractive than labor over time. Software substitution — whether it’s for drivers or waiters, nurses … it’s progressing. And that’s going to force us to rethink how these tax structures work in order to maximize employment given that capitalism in general over time will create more inequality, and technology over time will reduce demand for jobs, particularly at the lower end of the skill set. We have to adjust, and these things are coming fast. Twenty years from now, labor demand for lots of skill sets will be substantially lower, and I don’t think people have that in their mental model.

James Pethokoukis points out, as I would, that Gates’ views align with a growing literature on this topic.

4. Mark Perry writes,

one of the reasons for the disappointing monthly employment reports is the persistent weakness in the public sector employment, which is offsetting the relatively healthy increases in private sector hiring that is 63% greater than private job creation during the last recovery.

I am not sure that his numbers line up with his rhetoric. Relative to the labor market as a whole, the weakness in public sector employment strikes me as pretty small. To put it another way, if you were to restore all of the government jobs that have been lost since the start of the recession, the employment-population ratio would be maybe .3 or .4 higher than it is now, but still about 4.0 below what it was before the recession hit.

I suspect that state and local governments have been constrained by low property taxes and increases in Medicaid spending. Also, if they have to hold down employment because of the strain of pensions, that would not surprise me.

Off Topic

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Tyler Cowen links to a new book by John Judis on Jewish influence on President Truman’s Middle East policy. I have read and suggested to friends another book on Israeli history that Tyler recommended, Ari Shavit’s My Promised Land. Also, I recommend Like Dreamers, which looks at the 1967 war in terms of intended and unintended consequences. I will not read Judis, because of some completely unrelated personal issues, which I will put below the fold.

Consider this exercise: flesh out an alternate history in which President Truman does not recognize the Jewish state and Israel’s war for independence fails. State what happens to

1. Arabs in the region
2. Jews in the region
3. Jewish holocaust survivors
4. Jews in Russia
5. Jews in the U.S.
6. The rest of the world

Let me sketch out one ideal scenario: Arabs become secure in terms of sovereignty and status. Feeling good about themselves, they give Jews full rights to own property anywhere and engage in commerce with anyone. They establish democratic modern states embodying civil rights and the rule of law. Holocaust survivors and Russian Jews migrate to the region, as do some American Jews (although not as many as actually migrated). The rest of the world lives quite happily.

I do not think of that as the only scenario, or even the most likely. But the larger alternate-history concept might make for an interesting discussion, if it can be kept civil. Continue reading →

Internet Bubble 2.0 Watch

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Ryun Chittum writes,

Is the news going to become a $5 trillion industry? No. That would be one-third of the US economy. Could the news become a $500 billion industry? No. All advertising spending in the US comes to about $170 billion a year, and only a small portion of ad money goes to news organizations.

He is applying some arithmetic to Marc Andreessen’s claim that the news business will grow by a factor of 10 or a factor of 100 over the next couple of decades. Internet Bubble 1.0 was also vulnerable to arithmetic, as I pointed out in July of 1999 (i.e., when the bubble was inflating).

Speaking of the Internet news bubble business, Tyler Cowen points to the soft launch of vox.com.

The Financial Crisis and Wealth Transfer

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Amir Sufi writes (with Atif Mian).

The strong house price rebound in high foreclosure-rate cities likely reflects these markets bouncing back after excessive price declines. But these foreclosed properties are not being bought by traditional owner-occupiers that plan on living in the home. Instead, they have been bought by investors in large numbers.

This is from a new blog spotted by Tyler Cowen, and both of the first two posts are worth reading in their entirety.

The picture that I get is of a pre-crisis economy in which middle- and lower-middle-income households thought they were doing well in the housing market. Then their house prices collapsed. Vulture investors swooped in to buy. Meanwhile, the government bailed out big banks and the stock market boomed. Some folks will credit the Fed for the latter. I don’t, but that is a bit beside the point here.

Net this all out–the sucker bets on housing by the non-rich, followed by big gains by wealthier folks in stocks and in foreclosed houses, and you get a picture of a huge regressive wealth transfer engineered in Washington. Carried out primarily by those who profess to be outraged by inequality.

Labor Force Participation Chartfight

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1. John Cochrane presents a chart showing that over the last 25 years, the employment-population ratio tracks the ratio of people aged 25-54 to the total population.

Pointer from Mark Thoma. The chart is from Torsten Slok of Deutsche Bank.

2. John Taylor has a chart showing that the labor force participation rate is several percentage points that which was projected several years ago based on demographics. The chart comes from a paper by Chris Erceg and Andy Levin.

The first chart suggests that most of the decline in the employment/population ratio in recent years is due to demographic changes. The second chart suggests the opposite. How to reconcile the two?

3. And then there is Binyamin Appelbaum:

In February 2008, 87.4 percent of men in that demographic had jobs.

Six years later, only 83.2 percent of men in that bracket are working.

Pointer from Tyler Cowen.

My verdict is that Slok’s chart, referred to by Cochrane, is misleading. Here is the chart:

The way that the two lines are superimposed makes it appear that 2007 was a glorious year of over-employment, and the plunge in the employment-population ratio looks like a reversion to trend. Suppose you were to slide the blue line up vertically so that it just touches the red line at the peak in 2007. That would make the chart look much more like Appelbaum’s, shown below:


Some other issues:

–I suspect that some of the drop-off in employment has occurred among youth, who are outside of the 25-54 bracket that Slok uses.

–Another issue is what you think should have happened outside Slok’s bracket at the other end, namely 55-64 year olds. These are baby boomers, so that their share of the labor market has been soaring. The most likely reconciliation of the two charts is that the baby boomers have been retiring early at rates higher than historical norms.

As far as labor force participation goes, is 55 the new 65? If so, then somebody should trace out what that means for Social Security. Fewer people paying in and more people collecting disability cannot be a good thing for solvency.

Update: Cochrane offers another take, more nuanced.

MOOC spelled backwards

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Hollis Robbins writes,

Thousands of qualified, trained, energetic, and underemployed Ph.D.s are struggling to find stable teaching jobs. Tens of thousands of parents are struggling to pay for a good college education for their children. Home-schooling at the secondary-school level has proved itself an adequate substitute for public or private high school. Could a private home-college arrangement work as a kind of Airbnb or Uber for higher education?

Read the whole thing. Pointer from Tyler Cowen.

I could do this. I could easily teach college-level courses in economics, statistics, history, and philosophy. This would be the opposite of Massive Open Online Courses. It would be College Of One Mentor, or COOM. As Robbins points out, higher education used to work this way.

Education does appear to be ripe for unbundling and disintermediation. However, just as with banking, there is a tight link between education and the state.

Karl Smith’s Question

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As reported by Tyler Cowen.

Name the period or event in economic history where we looked backed and said “hmm, money was less important than we thought at the time

Of course, the trend over the past fifty years has been to assign a large role to money in economic history. I believe that this trend in thinking is wrong-headed.

Let me digress for a moment. A few days ago, I watched “Money for Nothing,” a documentary about the Fed that was sent to me to review. On the positive side, I would say that

1. It includes excerpts of interviews with an outstanding and diverse set of experts, including Allan Meltzer, Alan Blinder, and Janet Yellen.

2. Its rendition of the history of the Fed is well done.

On the negative side, I would say that I have never walked away from a documentary feeling satisfied. That is an understatement. Every documentary, regardless of whether I am sympathetic to its point of view, leaves me feeling swindled. I think the format is suited to leaving people with impressions and illusions, not with genuine understanding.

For example, “Money for Nothing” devotes about 15 seconds each to Brooksley Born and Ned Gramlich. If all you knew about them came from this documentary, then you would have not sense of the ambiguity that surrounds their alleged farsighted desire to increase regulation.

Born was fighting an unlikely turf war, attempting to get the dealer markets in financial derivatives to be overseen by the Commodity Futures Trading Commission, which has expertise in a very different area–standardized contracts traded on organized exchanges. Now, if you abolished the dealer market in derivatives and forced them onto an exchange, then you could place derivatives under the CFTC’s jurisiction. First, there has to be a debate over whether or not this is a good idea (in the wake of the crisis, many people think it would be a good idea. I do not.) But if we take as given the existing dealer market, Born’s claim of turf was untenable.

Gramlich was worried about consumer protection issues in mortgage lending. There were a lot of mortgage brokers behaving like old-time car salesmen, always trying to make customers pay more than necessary. As the housing boom accelerated, more and more borrowers were on the lower end of the scale in terms of income and sophistication, and the abuses and exploitation by lenders tended to increase. (Keep in mind, however, that down payments were so low that the bulk of the losses from the crash were born by investors, not borrowers. The phrase “predatory borrowing” is not unjustified.) To the best of my knowledge, what Gramlich was not doing was warning that the whole financial system was vulnerable because of what was going on in mortgage markets.

Also, the issue of how money affects the economy is too deep and controversial to be captured in a documentary. “Money for Nothing” appears to claim that both high interest rates and low interest rates are bad for investment. High interest rates choke off investment, while today’s low interest rates choke off saving–which is supposedly hurting investment. Maybe they do not mean to make the latter claim, but, again, it is a format that lends itself to leaving you with impressions, rather than helping you think through an issue. The documentary does not raise the issue of the distinction between short-term inter-bank interest rates (which the Fed can affect) from other interest rates (where the effect of the Fed is in doubt among many economists). It does not bring up the issue of the “zero bound,” which some economists (not me) make a big deal out of.

Finally, and this gets back to Karl Smith’s question, I think that “Money for Nothing” vastly overstates the Fed’s role in the economy. Going forward, the big issue is fiscal policy. Remember the ad from Hillary Clinton’s campaign for President where she played the role of Santa Claus, handing out gifts to various constituency groups? Well, going forward, given the excess of the government’s promises relative to its ability to pay, politicians are going to be playing a lot less Santa and a lot more Scrooge. That is going to cause a fraying of our politics, which is already taking place.

In the coming drama, the Fed is a bit player. If we end up with hyperinflation, it will be the result of a total breakdown on the fiscal side, in which the monetary authorities are given no choice but to try to meet the government’s revenue needs by collecting the inflation tax. Not the most likely outcome, and even if it were to take place, the fault would not lie with the Fed.

More broadly, my inclination in macroeconomics is to get away from aggregate supply and demand. I think that the obsession with money and the Fed is one huge attribution error. It is human nature to look for simple causes and scapegoats. I think we should lean against that.

So I would like to see us place less blame on the Fed for the Great Depression. I would like to see us assign less blame to Arthur Burns for the inflation of the 1970s and assign less credit to Paul Volcker for ending it. I think that we may be over-emphasizing the role of money in all of these cases.

Karl Smith is correct to imply that over time we have come to assign a greater role to money than contemporaries did at the time. That does not necessarily mean that we are wiser.

Lots of Megan McArdle

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The video of the event on Megan McArdle’s book is here. My talk starts about 26 minutes in, but I recommend listening to her talk, which starts about 2 minutes in.

If you want to watch Megan and Tyler Cowen discuss the book, you can check out this AEI event this evening at 5:30 eastern time–it will be shown live on line if you are nowhere near DC.

Incidentally, in 2004, I collected a series of essays that I had written, and I self-published a book. Prior to publication, I sent the manuscript to my former thesis adviser, Robert Solow, hoping he would write an endorsement that I could put on the cover. He sent me a peevish letter in response, saying that he looked at one of the first essays in the book and saw that one of my citations was to a “blogger,” and he thought that this showed a total lack of rigor and seriousness on my part.

That blogger was Megan McArdle.

Lots of Diane Coyle

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My review of GDP: An Affectionate History is here.

Overall, one arrives at a mixed verdict on GDP. On the one hand, it is the best way that we have to measure economic capability. On the other hand, because it fails to account for consumer surplus, GDP statistics lead us to take an overly pessimistic view of the economy. There is no Great Stagnation. There is only a widening gap between the rate of economic improvement and our ability to measure that improvement.

Tyler Cowen’s review is here:

Yet markets are developing new innovations whose benefits probably are undervalued by the GDP concept. This is the potential revision to GDP that commands the most attention from Coyle. For instance, consumers attach great value to Facebook, Google and Wikipedia, all of which are absolutely free to their users and do not enter directly into GDP calculations. I would go further yet, noting that the modern world also better matches plans and goals. Perhaps you can meet your ideal spouse on Match.com or at least pick up cheaper collectibles, better suited to your taste, on eBay. Who makes mistaken purchases of music these days, when you can hear a lot of the songs in advance online? Just about everything is reviewed online, which helps us spend with greater effectiveness. These gains are not well-represented by the older methods of calculating GDP.