Category Archives: Tyler Cowen is my Favorite Blogger

Youth Unemployment

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Diana G. Carew writes,

Of the 17 million Americans age 16-24 not enrolled in school or working full-time in July 2013, 5.6 million were working part-time, 3.2 million were unemployed – a 17.1 percent unemployment rate – and another 8.4 million were not in the labor force altogether.

Together, these charts suggest the problem facing young Americans is structural. If worsening labor market conditions were a temporary effect of the recession, we would have expected to see improvement with the recovery. Instead, young Americans appear stuck in their post-recessionary state.

Pointer from Tyler Cowen.

Why is the gap between the reservation wage and marginal revenue product so much higher among young people than among others?

Some possibilities:

1. The trend in the Thete lifestyle is to work only sporadically, counting on support from relatives and the government.

2. The minimum wage is much more binding than we thought.

3. Downward wage stickiness is much more prevalent among people who are new to the labor market than among middle-aged workers. (I admit I am being sarcastic here)

Word of the Day

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Alex Harrowell writes,

So here’s an important German word, which we could well import into English: Deutungshoheit. This translates literally as “interpretative superiority” and is analogous to “air superiority”. Deutungshoheit is what politicians and their spin doctors attempt to win by putting forward their interpretations and framings of the semirandom events that constitute the “news”.

Pointer from Tyler Cowen I like Deutungshoheit so much better than “controlling the narrative.”

Nominal GDP and Employment

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The chart comes from Dan Diamond. Pointer from Tyler Cowen.

Let’s pretend that health care is the whole economy. The top line is the growth rate of nominal GDP. The lower line is the growth rate of employment. Growth in nominal GDP is growth in real GDP plus inflation. Growth in real GDP is growth in number of workers plus growth in output per worker. Inflation is growth in compensation per worker plus growth in the price markup over compensation. Putting this all together, we have

growth of nominal GDP = (growth of number of workers + growth of output per worker) + (growth of compensation per worker + growth of the price markup over compensation)

Scott Sumner would say that the two most reliable numbers here are the ones shown in the chart–growth in nominal GDP and growth in the number of workers. The division between nominal GDP and real GDP depends on making the correct quality adjustment for prices, which Sumner would argue is much less reliable than the other two measures. (I think everyone would agree that quality-adjustment is less reliable, but some of us prefer to believe that it is not much less reliable.)

The difference between the two lines on the chart consists of productivity growth, wage growth, and growth in the price markup. Diamond says that wage growth does not account for the slowdown in nominal GDP (although wage growth did decline–I think by about a percentage point, based on the data in Diamond’s link). He alludes to a mix shift. If people shift away from prescription drugs and toward other services, those other services could have lower productivity and/or a lower price markup.

In any case, it looks as if either productivity growth has declined or the growth in the price markup has declined. This should show up as a decline in corporate profits in the health care industry. Can anyone find data? I have trouble navigating the Commerce Department’s web site.

I did stumble across this paper, which tries to decompose the rise in health care spending from 2003 to 2007.

Our decomposition also sheds light on productivity in the treatment of cancer. Over the four-year sample period, expenditure per capita rose twice as fast for malignant neoplasms (48 percent growth in expenditure per capita) than non-malignant neoplasms (24 percent growth in expenditure per capita). A large reason for the discrepancy is the difference between growth in the cost of treatment (that is, expenditure per episode of care). Service prices for malignant neoplasms grew over twice as fast as service prices for non-malignant neoplasms. This may indicate that more expensive and innovative services are playing a role in cancer spending growth.

This is interesting, but for present purposes it is of little use. The chart above shows a slowdown in the rate of growth in overall health spending between 2003 and 2007.

But my main point is that we expect nominal GDP growth and employment growth to line up. If they do not, something must be going on with either productivity, compensation, or price markups. This is a matter of accounting.

Cowen vs. Caplan

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Tyler Cowen writes,

I postulate the wage return to signalling as going away within five years, in say a career of forty years

Some remarks:

1. Why does Bryan have to ask anyone’s opinion about the relative weight of signalling? Perhaps because this question may never be settled empirically. If it could be settled easily, then that $20 bill would have been picked up by now. If it cannot be settled easily, then perhaps the reason is that the signalling model is in many respects “observationally equivalent” to the human capital model.

2. Tyler is suggesting that the signalling proportion of the wage premium for a college degree ought to decay as employers learn from experience about workers, reducing the premium they are willing to pay for an old signal. On the other hand, human capital obtained in school might not decay to the same extent. However, I am confident that someone can come up with a signalling story that is consistent with persistence of a premium or come up with a human capital story that is consistent with decay.

Sentences to Ponder

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Charles Hill wrote,

To understand the current Islamist assault on world order, it is necessary to recognize that every major war of the modern age has been an ideologically driven attempt — no two alike — to overthrow and replace the Westphalian international state system.

The quote is from page 49 of Trial of 1000 Years: World Order and Islamism, cited by Roger Kimball.

I have not read the book, but I would be curious how Hill fits World War I into this framework. Instead, this might be an example of over-reaching along the conservative civilization-vs.-barbarism axis.

Pratap Bhanu Mehta writes,

Let us take at face value the claim that the protections of US citizens against surveillance were violated only incidentally. Let us also accept that states will privilege their own citizens over others. Implicit in the debate is a premise few seem to have questioned: that it is justified for the US to violate the privacy rights of citizens of other countries without just cause. It has rendered meaningless whatever domestic protections citizens of other nations may enjoy against their own democratic governments. Why should an Indian citizen fight unregulated surveillance at home when the US can carry it out anyway?

Pointer from Tyler Cowen.

I wish more people took David Brin’s approach to thinking about surveillance. We do not necessarily have to see surveillance as a tool of coercion or as oppression. But once people put it one of those axes, it is hard to get them to reconsider.

Nothing is ever Democratized

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So says Nick Pinkston.

Did inkjet printers democratize printing? Does Amazon have a bunch of HPs printing off their books? No way – they have very specialized machines doing this, and the same is true for everything in engineering. Remember that old saying: “Good, Fast, Cheap – pick two” – this applies to all engineering problems. You optimize for “good” and “fast”, and this comes at the expense of “cheap” – which means it’s not democratized (few people can own it).

…
you may democratize prototype-grade 3D printers, but then others will be make huge, fast printers that are able to beat your per-unit cost by an order of magnitude – but at high capital cost.

Pointer from Tyler Cowen.

His skepticism about 3D printing sounds right to me. But the claim that nothing is ever democratized sounds too strong. Computers became democratized. Internet access became democratized. In some sense, wealth has become democratized.

What I mean by democratized is that lots of people were able to use them to be productive. Not everyone, of course. And if people look at their well-being primarily in comparison to others around them, then a democratized increase in well-being is mathematically impossible.

DSGE Models–Blogs vs. Academics

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Tyler Cowen writes,

The blogosphere is more likely to criticize DSGE models, whereas the profession is more likely to see such models of as providing discipline for any business cycle explanation, Keynesian included.

…On all of these questions my views are closer to those of the specialists in the economics profession.

I count myself as strongly opposed to DSGE models. In my view, macroeconomic models are much more speculative and metaphorical than microeconomic models. Take supply and demand. In microeconomics, I believe that when you draw a supply and demand diagram, you are providing an interesting theoretical description that has empirical use. But “aggregate supply and demand” does neither.

DSGE constrains macroeconomic models to describe a “representative agent” undertaking “dynamic optimization.” This constraint does not make macro models any less speculative or metaphorical. The advocates of DSGE implicitly claim that a certain mathematical approach is both necessary and sufficient to make macro models rigorous. I view that claim as a baloney sandwich.

Adding Knut Wicksell to the List of the Wrong

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Tyler Cowen writes,

I don’t think I ever wrote this view up, but I was of the same opinion nonetheless.

He refers to a post by Paul Krugman arguing that the Fed’s purchases were not what was holding bond rates down. Cowen notes that this week’s rise in interest rates increases the probability that they were wrong.

I would add myself to the list of economists who have some ‘splainin’ to do. I am always willing to be counted among those who doubt the Fed’s power over interest rates, especially long-term real rates. By the way, Scott Sumner used to say that a rise in long-term interest rates could be a bullish indicator. Would he say that now? UPDATE: No.

Or, take Knut Wicksell. He’s not around to defend himself, but I interpret him as saying that the real interest rate will tend to move in the direction needed to reach the natural rate of unemployment. The real interest rate only rises if we are in danger of going below the natural rate of unemployment. In what way has that danger increased this week?

I suppose one could tell a story that says that the market respects the Fed’s forecasting ability. Further, suppose that the market’s view of the latest Fed moves is that the Fed has a surprisingly upbeat forecast for the economy, or else a surprisingly downbeat view of the natural rate (meaning that the natural rate is perhaps close to 7.0 percent). That in turn would mean that the market should revise upward the mean of its distribution for interest rates. Note that the drop in the stock market is more consistent with a newly-bearish view of the natural rate than with a newly-bullish view of the economy.

I am not sure that Knut would want to go to the mat to defend that story, but what else has he got? I fall back to the view that financial markets moves are not really subject to interpretation in terms of macroeconomic models.

The Future of American Health Care Policy

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Tyler Cowen prefers,

The Singapore system, involving single payer for catastrophic expenses and health savings accounts for smaller expenditures. To varying degrees you can combine this with forced savings for the HSAs and price controls on service provision, both of which you will find in Singapore. Where “catastrophic” starts can vary as well. This is my first choice, although if you wish to dismiss it as “utopian” for the United States you have a point.

My view is that we are headed toward a two-tier system regardless of the political configuration. We will have a government system under which doctors are unhappy with how they are paid and how they are regulated, and in which consumers are denied some treatments that they otherwise would want. We will have a private system in which doctors and patients have more choice, but patients bear much more of the cost directly. People who rely almost entirely on the government system will tend to have lower wealth than people who use the private system.

I do not think that Americans are egalitarian enough or tolerant enough of a price-control regime to be willing to destroy the private tier. On the other hand, I do not think that they have enough confidence in markets to do without a large government tier.

I do not think that Americans would vote for the Singapore system. Maybe Singaporeans would not vote for it, either, but that country runs differently. Consider three choices:

1. Uninsured

2. Comprehensive insurance

3. Catastrophic insurance

Economists strongly prefer (3). But I think that most people around the world would prefer (1) or (2) to (3).

That does not mean that I want to give up on reforms that make catastrophic insurance competitive. On the contrary, I am willing to make the case for it any time I get the opportunity. Obamacare is designed to make it harder, not easier, for people to choose catastrophic insurance. That means either that Obama’s economic advisers failed, or perhaps didn’t try, to make a case that I believe they should have been making. As a result, I am pessimistic about the prospects for Obamacare. My book still needs to be read.

New Commanding Heights Watch

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Timothy Taylor writes,

there are clearly countries that spend less per student than you would expect given their level of per capita GDP, like Iceland, which is labelled, and Italy, which is the unlabelled point more-or-less under Spain. There are also countries that spend more per student than you would expect given their GDP, including Ireland, Canada, and especially the United States.

He is referring to higher education.

Returning to the Oregon Medicaid study, Tyler Cowen writes,

The key question here is how we should marginally revise our beliefs, or perhaps should have revised them all along (the results of this study are not actually so surprising, given other work on the efficacy of health insurance). For instance should we revise health care policy toward greater emphasis on catastrophic care, or how about toward public health measures, or maybe cash transfers? (I would say all three.) One might even use this study to revise our views on what should be included in the ACA mandate, yet I haven’t heard a peep on that topic. I am instead seeing a lot of efforts to distract our attention toward other questions.

Nick Schulz and I have referred to health care and education as the new commanding heights. That is, they are as important in the 21st century as steel and electric power were in the 20th. However, steel and electric power had major scale economies that lent themselves to top-down, bureaucratic management. Health care and education do not.

What I think this means that those who want to apply centralized, technocratic solutions in health care and education (“Obamacare,” “No Child Left Behind”) are on the wrong side of history. Perhaps my views are mistaken. But in any case, I wish that people were less emotionally invested in the technocratic approach, so that if it does prove to be dysfunctional they are able to back off.