Category Archives: Tyler Cowen is my Favorite Blogger

The Forgotten Sixties

Posted on by

Frank Diebold reports,

I am sad to report that Lawrence R. Klein has passed away. He was in many respects the father of modern econometrics and empirical macroeconomics; indeed his 1980 Nobel Prize citation was “for the creation of econometric models and their application to the analysis of economic fluctuations and economic policies.”

Pointer from Tyler Cowen.

In my macro book, I talk about the 1960s as The Little Moderation, in order to stress its similarity to the Great Moderation of 1986-2007. However, another term might The Forgotten Sixties. Some of what has been forgotten is the excitement that was generated by macroeconometrics. Economists who made significant contributions in this area were awarded several of the early Nobel Prizes–Frisch and Tinbergen (1969, the first year of the Nobel in economics), Koopmans (1975), and Klein (1980). Yet I will venture to guess that one cannot find a single graduate school syllabus today that mentions the work of those laureates.

The same holds for the leading policy makers of the era. Who under the age of 50 has heard of Walter Heller or Otto Eckstein? I assume that Alan Greenspan will be long remembered and will continue to receive credit for the presiding over The Great Moderation (his culpability for the financial crisis is still being assessed). During the Little Moderation, the Federal Reserve received no credit. The Fed Chairman was William McChesney Martin, who today is remembered only for the “punch bowl” metaphor, which he evidently borrowed.* In the 1960s, everybody attributed good economic performance to fiscal policy, not to the Fed.

The macroeconometricians and the Kennedy-Johnson economists were at the top of the economics profession in the 1960s. As the Great Stagflation gathered force in the 1970s, they lost all of their prestige. Hence, the Forgotten Sixties.

*In October of 1955, he said,

The Federal Reserve, as one writer put it, is in the position of the chaperone who has ordered the punch bowl removed just as the party was warming up.

Pointer from Timothy Taylor.

Two Types of Confidence

Posted on by

Watch this video of Robert Shiller from a few years ago.

Source here. Pointer from Tyler Cowen.

Shiller’s body language, speaking style, and content suggest discomfort. He is like a kid (and of course he has very boyish looks for someone in his 60s) talking about why he never gets picked by the other kids to play in team games at recess.

And yet, when I showed the video to my students, one of them reacted by saying that Shiller seemed arrogant. And I think there is something to that, as well.

Contrast the confidence of Stanley Fischer, the voice of authority. Fischer knows that when he speaks, respectable macroeconomists stand with him. Over the years, he had make-or-break power over the careers of most of them.

Shiller has a different type of confidence. His is the confidence of the boy who sees the naked emperor. He has found what he is pretty sure are fundamental flaws with the mainstream world view.

So, there is establishment confidence. That is the confidence that you have the establishment with you, agreeing with your world view and respecting your power. Then there is outsider confidence, the confidence that you have in your ideas and a belief that it is better to be a low-status person with good ideas than a high-status person with mainstream ideas that are not as good.

It is easy for me to see Timothy Geithner not wanting to have Shiller in the room. Geithner has establishment confidence, which is threatened by outsider confidence.

Having said that, I myself am not heavily influenced by Shiller’s ideas. In finance, I like Frydman and Goldberg’s critique of rational-expectations modeling. In particular, different people are bound to have different information and different models. In macro, I am inclined toward a Schumpeterian story of difficult adjustment to changes in productivity in different sectors. However, if you want tell an aggregate-demand story, then I am with Shiller that “animal spirits” sounds like a better place to start than the Euler equation of a single representative consumer/worker.

Wither the World’s Manufacturing Employment?

Posted on by

Dani Rodrik writes,

Consider China. In view of its status as the world’s manufacturing powerhouse, it is surprising to discover that manufacturing’s share of employment is not only low, but seems to have been declining for some time. While Chinese statistics are problematic, it appears that manufacturing employment peaked at around 15% in the mid-1990’s, generally remaining below that level since.

Pointer from Tyler Cowen.

Rodrik’s main point is that newly-developing countries, like China and Brazil, seem to have maxed out on their manufacturing employment without reaching the levels of income achieved by earlier industrializers, such as South Korea. He is concerned that this means poor growth prospects in the newer developing countries.

When the US, Britain, Germany, and Sweden began to deindustrialize, their per capita incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturing has begun to shrink while per capita incomes have been a fraction of that level: Brazil’s deindustrialization began at $5,000, China’s at $3,000, and India’s at $2,000.

By the way, the title of my post is not a typo.

To think about this, start with the idea that employment increases in sectors where demand grows faster than productivity, and employment declines in sectors where productivity grows faster than demand. That is not a very deep theory–it is arithmetic.

In rich countries, the share of goods in consumption has been declining for decades. The best hope for manufacturing growth in the newer developing countries is that their own consumers will want to accumulate physical stuff, the way we did in the middle decades of the twentieth century.

However, households in China today are not going to want what households in the U.S. wanted fifty years ago. Analog television? Stereos? Landline phones? Cars that don’t last more than a few years?

Maybe no country today has to go through a phase in which 1/4 of its labor force works in manufacturing. Middle-class households around the world can get the stuff they want without devoting so much labor to that sector.

It may be that the cost of the manufactured goods that a middle-class household wants nowadays is so low that Brazil, China, and India are already middle class in that respect. Our own middle-class incomes are much higher, but we fritter that away on cost-ineffective health care and education.

I think that this is an important point about the nature of inequality, both in the U.S. and in the world. A higher proportion of people can afford food. A higher proportion of people can afford useful goods, ranging from refrigerators to cell phones. However, a lower proportion of people can afford elite schools and unsubsidizedinsulation from having to pay directly for health care.

This is not your grandfather’s inequality. It may be better or worse, but it is different.

Is Age the Key Variable?

Posted on by

The Guardian reports,

in England, adults aged 55 to 65 perform better than 16- to 24-year-olds at foundation levels of literacy and numeracy.

Pointer from Tyler Cowen. Several of his commenters raise the issue that seemed obvious to me: how much of this reflects the higher number of immigrants in the younger cohort?

Remember that the null hypothesis is that schooling practices do not matter. That would imply that the problem of the younger generation is not that schools in England have gotten worse.

Three Axes Meets Average is Over

Posted on by

William Galston sees things along the oppressor-oppressed axis.

There’s nothing we can do, says Mr. Cowen, to avert a future in which 10% to 15% of Americans enjoy fantastically wealthy and interesting lives while the rest slog along without hope of a better life, tranquilized by free Internet and canned beans…He seems not to have considered the possibility that his depiction of our future might fill [us] with justified revulsion.

Patrick J. Deneen chimes in along the civilization-barbarism axis.

Thus, a philosophy that places in the forefront a theory of human liberty arrives at the conclusion that certain historical, technological, and economic forces are inevitable, and it is futile to resist them. One might bother to ask the Amish if this is true, but they didn’t go to Harvard. Clearly, they don’t value human freedom, since they are not on the historical merry-go-round to inevitable human liberty—and degradation.

Pointer from Tyler Cowen.

Risk Premiums and Short-term Rates

Posted on by

Jeremy Stein sees a connection.

over a sample period from 1999 to 2012, a 100 basis point increase in the 2-year nominal yield on FOMC announcement day–which we take as a proxy for a change in the expected path of the federal funds rate over the following several quarters–is associated with a 42 basis point increase in the 10-year forward overnight real rate, extracted from the yield curve for Treasury inflation-protected securities (TIPS).

…These changes in term premiums then appear to reverse themselves over the following 6 to 12 months.

…Banks fit with our conception of yield-oriented
investors to the extent that they care about their reported earnings–which, given bank accounting rules for available-for-sale securities, are based on current income from securities holdings and not mark-to-market changes in value. And, indeed, we find that when the yield curve steepens, banks increase the maturity of their securities holdings.

Thanks to Tyler Cowen for the pointer.

If this is correct, then monetary policy affects long-term real rates, although having the effect reverse itself within 6 to 12 months makes me wonder. In fact, this whole thing makes me wonder….

The Rentership Society

Posted on by

From the econtalk with Russ Roberts and Tyler Cowen. Tyler says,

I do think there will be a big generational shift away from the physical product. There will be a general decline of stuff, including the desire to own a home of your own. And we see this in the data–lower rates of household formation, lower rates of owning stuff… we see in collectibles markets is that overall the prices of collectibles have fallen after the advent of e-Bay. That to me suggests a net desire to get rid of stuff

I hear that the bike-sharing network in Manhattan is doing well. Driverless cars, if and when they become commonplace, call out to be rented rather than owned.

Unemployment: Long-term vs. Short-term

Posted on by

Tyler Cowen points to an analysis that says that short-term unemployment is at reasonably low levels, but long-term unemployment is much higher than normal. I have written about this before, and there is no single uncontested interpretation. Possibilities:

1. The long-term unemployed really are different. They are destined to drop out the labor force. In some sense, we are now close to full employment.

2. As I wrote before, when the job-finding rate falls, it is natural for some unemployment spells to lengthen.

3. Firms have finished firing, but they have not started hiring. So initial claims for unemployment insurance are low, and short-term unemployment is low. But the job market is still weak. However, the problem is concentrated among young people, who transition in and out of the labor force quickly. Instead of remaining unemployed for a long time, they might go back to school.

By the way, from a PSST perspective, I cringe at writing “the job market is still weak.” Jobs are not some commodity that is scarce. Jobs are created when the decentralized trial-and-error of entrepreneurs leads to the discovery of comparative advantage.

The Toady Class On Average is Over

Posted on by

Random notes from a discussion of Tyler Cowen’s Average is Over:

Michael Mandel is optimistic. He thinks that the baby boomers are about to retire in droves (in part because of health reasons), helping to solve the unemployment problem of the young. Tyler, Robin Hanson, Megan McArdle, and I are unpersuaded.

Tyler pictures an economy evolving over the next twenty years to one with a slice of high earners (the 20 percent or so whose skills complement the ever-expanding power of computers) and then a large group that lives comfortably but without a financial cushion to protect against adverse shocks to health or other major risks.

Matt Yglesias wonders how, in a world that requires technical skill and social skills, those of us in the room have survived. It seems that most work for think tanks, newspapers, and other non-profits. Tyler replies that our presence in the room is indicative of marketing skills. Each of us has proven adept at marketing, with wealthy donors as our consumers in most cases. Steve Teles points out that as society’s rich accumulate wealth beyond what they can consume, their philanthropic ideas will, for better or worse, allocate society’s resources. Afterward, it occurs to me that this suggests that there will emerge a toady class, meaning people whose work in one way or another flatters the wealthy.

James Manzi points out that many people work in fields where output is hard to evaluate, such as education and health care, and I would add that entry to these fields is restricted by credentials. Tyler thinks that as we gather more data we will overcome our inability to evaluate performance sooner than people expect. If that is correct, then the credentials cartel would seem to be destined to fall. I believe that a lot of the thesis of his book stands or falls on whether such data-driven evaluation systems pan out. He would agree that we are far away right now, but he would argue that progress is fast.

What most concerns the discussants, including McArdle, William Galston, Jonathan Rauch, and Brink Lindsey, are the social implications of losing the middle class. (Hanson comments on this focus.) Tyler insists that societies will not fracture, nor will redistributionist demagogues take power. Factors favoring stability include aging, surveillance technology, the skill of the rich at controlling the political environment, nativism, NIMBYism, and the basic comfort achieved by the lower class. He points out that Britain and Germany are farther along than the U.S. in the growth of the new lower class, and their societies appear to be stable–Merkel just won re-election by a wide margin.

Tyler says that in the long run mood-altering drugs may be a solution. Teles suggests that Tyler’s next book will be The Great Medication.

Christopher L. Smith on Job Polarization

Posted on by

Recommended. A few highlights:

the inflow rate to middle-type jobs from unemployed formerly non-middle-type workers appears to be falling over time. Further, these transition rates appear to drop discretely following the 1990, 2001, and most recent recessions.

There is no evidence of an increase in the rate at which unemployed middle-type
workers transition to non-middle-type jobs (bottom middle plot). Instead, there
is an upward trend in the rate at which these workers remain non-employed,
though this is true of unemployed workers of all types…

For all horizons, the rate at which persons from low- or middle-type jobs transition to high-type jobs is rising over time… This is particularly true for the transition rates from middle-type jobs.

Conversely, the rate at which persons transition from low-type jobs to middle-type jobs is falling over time…

Later, he suggests that it is workers 55 and older who are transitioning out of (I assume losing) middle-type jobs, while it is younger workers who are not transitioning into middle-type jobs.

Pointer from Tyler Cowen, although I had seen an article on the paper somewhere else, also.