Category Archives: Tyler Cowen is my Favorite Blogger

Ashok Rao’s Platform

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I like much of it, but not this:

Get rid of the Department of Education and allocate every child into school by a random lottery. Public education is a bit (but not really) like the individual mandate. It works well if everyone uses it without segregation. There are big externalities in moving a rich kid from his bubble of a rich school to a poorer school…

Maybe Albert Hirschman would like this. I agree that we schools tend to segregate by income class. However, I disagree that public education “works well” as long as you get rid of income segregation.

Overall, he says that his list of points is “clearly progressive,” but “a bit of stuff…should appeal to a libertarian.” More than a bit, actually. I recommend reading his whole post.

Pointer from Tyler Cowen.

The Labor Share of Income

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Has fallen and it can’t get up, according to Michael Elsby, Bart Hobijn, and Aysegul Sahin.

the decline of the labor share, which has been driven by a decline in the share of payroll compensation in national income over the last 25 years, is likely due to the offshoring of the labor-intensive component of the U.S. supply chain.

Pointer from Tyler Cowen. I have called this the Great Factor-price Equalization.

If your model of a recession is that it is caused by sticky wages, then as far as I can tell labor’s share of income should rise during a recession. Or, to put it another way, if labor’s share falls (as it has during this recession), then makes the sticky-wage story less attractive. Labor’s share of income can be written as WL/PY, where w is the wage, L is employment, P is the price level, and Y is real GDP. We can re-write this as (W/P)(L/Y), or the real wage times the average productivity of labor. I labor’s share falls, then either real wages have fallen or productivity has risen. If real wages have fallen, then this directly contradicts the sticky-wage story. If real wages have risen, then productivity has risen faster, and I still have doubts about the sticky-wage story.

Median Household Income: Did You Two Visit the Same Country?

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Neil Irwin writes,

In 1989, the median American household made $51,681 in current dollars (the 2012 number, again, was $51,017). That means that 24 years ago, a middle class American family was making more than the a middle class family was making one year ago.

Pointer from Tyler Cowen.
James Pethokoukis writes,

real median household income indeed rose over the Long Boom of 1983 through 2007.

Welcome to the world of endpoint choice. Wapo’s wonkblog, the official regurgitator of White House talking points, wants you to start in 1989, end in 2012, and say it’s one long miserable period for the middle class. Ergo, not Obama’s fault.

Pethokoukis, who has a somewhat different narrative agenda, shall we say, suggests you start your 1980s comparison at a low point rather than a high point. More important, he says to end it in 2007. Using this new endpoint, it seems that the “30-year stagnation” in real median income is actually a 5-year decline, most of which took place on Obama’s watch.

I am inclined to fall somewhere in between. The peak for this statistic appears to be in 1999, at about $56,000. I would focus on the decline since that date, and I would not blame any President as much as I would blame structural change.

One thing I would like to see is a narrower statistic: the median household income for a household of a given size (say, 4) headed by someone of a given age range (say, 35 to 45). That would control for demographic changes. I am not saying it would tell a different story, but I would like to see things like changes in household size not mixed in with the numbers.

In a later post, Tyler Cowen downplays demographics. However, he links to Kevin Erdmann, who puts demographics front and center–in particular, the decline in the number of earners per household. Erdmann shows that income per earner has gone up, but earners per household has gone down. Reasons he gives for the latter:

1. As the population has aged, the number of zero-earner households as risen sharply. Remember that the income data does not include Social Security or other government transfer payments. [correction, the SS payments would be income. see Erdmanns comment below]

2. The importance of non-wage benefits may be holding down the number of two-earner households. Once one person can provide job-related health insurance to the household, there is not so much point in sending another person into the labor market to obtain a job whose compensation consists largely of health insurance.

Popular Delusions

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The Harvard School of Public Health reports,

Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

Pointer from Phil Izzo. Somehow, I don’t think Tyler Cowen would be surprised by these results.

Tyler Cowen on the Tobin Model

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Tyler Cowen writes,

Another option is that these non-stifled sectors have seen big boosts in demand and thus their prices are rising. Again, that violates the strong empirical regularity of business cycle comovement. In a traditional deflationary downturn, virtually all sectors are negatively affected, with a few notable exceptions. What kind of business cycle would this be, if half the economy is seeing a positive 3.2% worth of demand-side pressures?

In “Inflation and Unemployment,” James Tobin (1971) proposed that there might be two sectors of the economy, one with demand expanding and the other with demand contracting. If prices and wages were flexible, then you could reach full employment at any rate of inflation. However, if nominal wages will not fall in the contracting sector, then you get a trade-off between inflation and unemployment.

What Tyler is arguing is that if this model were applicable in reality, then we would observe recessions as sharp contractions in some sectors while other sectors continue to expand. Instead, he suggests that declines are broad-based. Of course, many people claim that if many sectors are declining at once, then we must be experiencing a decline in aggregate demand, as opposed to structural unemployment.

My thoughts:

1. Has the shortfall in employment been widespread or concentrated? I think that if one looks across industries, it seems fairly widespread. Yes, health care has held its own. Yes manufacturing has taken a large share of the job losses. But overall, things look widespread.

2. However, if one looks at demographics, I think it looks more concentrated. Older workers have held their own (and moreso, relative to the previous trend). Young people are being devastated.

3. What would a central planner (or a ruthless free market) do with average young people in an “average is over” world? (I have not yet read Average is Over, but let me steal the phrase.) I think that the solution would be to have many young people become personal servants, taking care of old people or rich people. However, this is not something that young people want to do. It is not what their parents, teachers, and political leaders are telling them to do. Instead, our society has arrived at a tacit agreement that is it is preferable for young people to live off of a combination of government benefits and parental support.

4. This “tacit agreement” would hold at any rate of inflation. If we managed to raise the rate of inflation, I do not think it would do much to deal with unemployment.

Youth and Non-Work

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Tyler Cowen writes,

For Americans aged 16 to 24 who aren’t enrolled in school, the employment picture is grim. Only 36 percent are working full time, down 10 percentage points from 2007. Longer term, the overall labor-force participation rate for that age group has dropped 20 percentage points for men and 14 points for women since 1989.

…If we consider four-year college graduates only, average starting salaries, inflation-adjusted, were higher in 2000 than they are today

Some hypotheses:

1. We now have many college graduates who could not actually graduate in a rigorous major.

2. The young people I know who are not working full time have all formerly had full-time jobs, so that they are showing a lifestyle preference. I am admittedly looking at a small sample, not necessarily representative.

3. Young people who are not interested in having children do not feel compelled to work full time. Again, my evidence is anecdotal, but it seems to me that compared to when I was their age, there are a lot more young people these days who do not seem at all interested in having children. Admittedly, there could be causality running from weak job prospects to less interest in having children.

Overall, I see this as part of the Vicky-Thete polarization trend. If you do not have Vicky values, there may not be a compelling reason to work full time.

Miles Kimball on Currency Reform to Resolve the ZLB

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I missed this the first time Kimball posted it.

The bottom line is that all we have to do to give the Fed (and other central banks) unlimited power to lower short-term interest rates is to demote paper currency from its role as a yardstick for prices and other economic values—what economists call the “unit of account” function of money. Paper currency could still continue to exist, but prices would be set in terms of electronic dollars (or abroad, electronic euros or yen), with paper dollars potentially being exchanged at a discount compared to electronic dollars. More and more, people use some form of electronic payment already, with debit cards and credit cards, so this wouldn’t be such a big change. It would be a little less convenient for those who insisted on continuing to use currency, but even there, it would just be a matter of figuring out with a pocket calculator how many extra paper dollars it would take to make up for the fact that each one was worth less than an electronic dollar. That’s it, and we wouldn’t have to worry about the Fed or any other central bank ever again seeming relatively powerless in the face of a long slump.

…for paper dollars, the interest rate would be made at least another 1% per year lower by having the discount for paper dollars gradually change over time.

I got to that piece from this post. Thanks to Tyler Cowen for the pointer.

A country that is ready to stop hyperinflating will often go for a currency reform. We cut the budget deficit so that we have to stop printing so much money. And we issue a new shekel, which is worth 100 of the old shekels. We phase out the old shekels.

Kimball’s proposal made me think of a currency reform for when inflation is too low. Imagine issuing a new dollar that eventually will trade at parity with old dollars. However, in the first month, for currency exchanges only, the government offers 10 new dollars for 9 old dollars. The next month, it offers 9.99 in new dollars for 9 old dollars. The following month, the exchange rate is 9.98 to 9. And so on, until the parity value is reached.

With this exchange policy, the interest rate on old currency will effectively be negative. Thus, you avoid the zero lower bound on interest rates.

I am not advocating this. I am suggesting that it is perhaps related, or even equivalent, to Kimball’s proposal.

Wit and Wisdom of Tyler Cowen

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1. In the New York Times.

We’ll need a new name for the group of people who have the incomes of the lower middle class and the cultural habits of the wealthy or upper middle class. They will spread a libertarian worldview that working for other people full time is an abominable way to get by.

2. From a Diane Coyle’s teaser/preview of his forthcoming book.

“Economics is becoming less like Einstein or Euclid and more like studying the digestive system of a starfish.”

I think that the blogosphere backlash against economic pseudo-physics is gathering force. And I look forward to reading Tyler’s new book.