Category Archives: Tyler Cowen is my Favorite Blogger

Jeff Sachs on the Administration’s Budget Plans

Posted on by

He writes,

In effect, he would allow rising outlays on mandatory programmes such as Medicaid and Social Security and debt servicing to crowd out public investments that are vital for America’s long-term economic future…

Mr Obama probably hoped that when the moment of truth arrived, when the spending cuts started to bite, the American people would support higher taxes rather than the spending cuts long called for in his own budget proposals. And perhaps they will still do so. Yet he has never presented an alternative with more robust tax revenues in order to fund a higher sustained level of public investments and services.

Pointer from Tyler Cowen.

I know that the conventional wisdom is that Republicans and conservatives are hopelessly irrational and self-contradictory on fiscal policy. Let us stipulate that such is the case. That does not mean that the Democrats and progressives are rational and coherent. If someone on the left can point me to a budget that does what you want, does not lead to explosive deficits, and does not depend on spending an imaginary dividend of “lower health care costs, through magic,” I would like to see it.

To put it this another way, I think that even if the entire conservative side of the political spectrum were to collapse tommorrow, the left still could not govern.

Where Wages Are Stickiest

Posted on by

From the National Employment Law Project:

Industry dynamics are playing an important role in shaping the unbalanced recovery. We find that three lowwage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, fully 43 percent of net employment growth. At the same time, better-paying industries (like construction; manufacturing; finance, insurance and real estate; and information) did not grow, or did not grow enough to make up for recession losses. Other better-paying industries (like professional and technical services) saw solid growth, but not in their mid-wage occupations. And steep cuts in state and local government have hit mid- and higher-wage occupations the hardest.

Pointer from Tyler Cowen (also Mark Thoma).

Focus on the last sentence. What if pay for all government workers–federal, state and local–had been reduced by 5 percent at the start of the recession? How many jobs would have been saved?

In general, I think that we mis-frame the government budget issue when we talk about taxes vs. program cuts. Instead, we should be talking about taxes vs. reductions in compensation for government workers. It is not at all clear to me that we need to reduce incomes in the private sector in order to maintain incomes in the public sector.

The Debt the Italians Owe to Themselves

Posted on by

The Wall Street Journal reports on generational conflict in Italy.

Over the past two decades Italy has run €1.3 trillion in such [primary] surpluses, averaging 4% of GDP a year, says Giuseppe Alvaro, an economist in Rome and an expert on Italy’s national accounts. Public debt has nonetheless risen—it is now €2 trillion—and the austerity must continue. Because much of today’s working population has never benefited from excess public spending, “they may feel rather reluctant to give back what they never received,” Mr. Alvaro says.

Pointer from Tyler Cowen.

As I pointed out in Lenders and Spenders, the problem with deficit spending is that it creates an arbitrary distribution of burden within a country, causing political conflict.

We are very likely to replicate the Italian experience. Local governments are going to raise taxes and reduce services, in order to pay pension benefits to retired government workers. And at some point the Federal government will have to run large primary surpluses, just as Italy has been forced to do, with similar consequences.

In an earlier post, Tyler comments on the observation that few people in Washington are worried about the deficit. Tyler’s riposte:

That is why you should care about the budget deficit.

I have been thinking along similar lines. The arguments that Thoma, Krugman, and others make for not worrying about the deficit are, in fact, a major reason why I worry about the deficit. Conversely, if they would argue in favor of worrying about the deficit, then I might be less worried about it.

It All Sounds So Simple

Posted on by

Richard Thaler writes,

To me, the ideal health care delivery system would include…A fee for health rather than fee for service model. Doctors and hospitals should be paid for keeping their patients well. Paying them for doing more tests and surgeries creates bad incentives.

Pointer from Tyler Cowen and Mark Thoma.

When Thaler plays chess, does he think even one move ahead? I am sure that my readers do not need me to tell them how doctors would respond to a “fee for health” incentive system, do I?

To be fair, Thaler has some reasonable ideas in the column. But this particular gambit was so weak that he was “dead out of the opening” as far as I was concerned.

Tyler Cowen on Inflation: “Probably Not”

Posted on by

He writes,

Everything we were taught about the monetary base is wrong in a world with interest on reserves (IOR). A large base can sit there forever. The price level is not proportional to the base, changes in the base, etc. It just isn’t. The broader aggregates, such as M2, haven’t grown so rapidly.

But consider the scenario that worries me. Our debt continues to increase. Nominal interest rates rise, so the government has to borrow more just to finance the debt. Congress wants to avoid having to cut spending elsewhere, and the Fed is asked to do its part.

Tyler points out that the Fed could increase its purchases of Treasuries without increasing the money supply. However, the mechanism for doing this is to raise the interest rate that it pays on reserves. That mechanism does not solve the problem of lowering the government’s interest costs, which is what I think is the nub of the scenario that I am talking about.

My guess is that in practice, for a variety of reasons, when the cost of government debt starts to rise, the Fed is not going to be willing/able to sterilize its funding of the debt, through IOR or any other means. We are going to see both intended and unintended monetary expansion, and that will produce inflation.

As usual, let me say that I am not blaming the Fed or saying that inflation is just around the corner. When really out-of-control inflation emerges, it is a fiscal phenomenon.

Ezra Klein Stumbles Over the Truth

Posted on by

He writes,

In general, politicians are overworked and understaffed. They’re traveling constantly, buried under too many meetings and constituent requests, and working desperately to stay one step ahead of whatever they’re getting yelled at about that week. …however well or poorly the health-care reform effort turned out, the one thing that people on both sides agree about is that it didn’t go according to anyone’s plan. Almost nothing does, and that’s because there usually isn’t much of a plan, or because the plan that did exist was quickly overtaken by events and no one had the time to really update it.

Pointer from Tyler Cowen.

Mr. Klein, if you were to take a job in business, you would discover the same thing. Executives are overworked and understaffed, buried under too many meetings, etc. Plans are quickly overtaken by events, etc. In fact, Mr. Klein, even technocrats and regulators are subject to human frailty and organizational dysfunction.

However, I have confidence that Mr. Klein will pick himself up and go on advocating Washington wonkery as if nothing had ever happened.* Continue reading →

Long-Term Trends in Rent

Posted on by

Mark Gimien writes,

Crone, Nakamura and Voith estimate that this and other problems bring down the government’s measure of rent increases by about 1.4 percent a year for the whole period that runs from 1942 to 1985. Nakamura outlines these findings in a very readable paper published by the Philadelphia Fed. Over such a long period, 1.4 percent into a really big number. Add that in, and instead of falling 20 percent in real-dollar terms over six decades, rents rise 50 percent.

Pointer from Tyler Cowen.

The main problem mentioned in the article is that the government’s rent price measure ignored cases in which the rent changes when a new tenant occupies an apartment.

The article focuses a lot on New York City. I think most people believe intuitively that rents in New York have gone up a lot over the decades. By the same token, I think most people believe intuitively that rents in small and mid-sized cities, particularly in the Midwest, have gone down. So maybe we should not talk about “the” cost of rent as if the rental market were national.

Did Jewish Genius Really Decline?

Posted on by

Andrew Gelman summarizes some criticisms of the data that went into the Ron Unz article that I cited in this post.

Pointer from Tyler Cowen. Some of the criticisms seem powerful to me, others less so. Basically, it possible to come up with disparate measures for the proportion of Jews in a segment of the population. Unz appears to have over-estimated the proportion of Jews admitted to elite colleges and under-estimated the proportion with high achievement (such as wins in the Putnam math exam). Note, however, that the people proposing revised estimates may be stretching things in order to prove their point.

What Belongs on the Left-Hand Side?

Posted on by

Business Week reports,

The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average. But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.)

Pointer from Tyler Cowen.

Beware of the interpretation that there is a clump of “long-term unemployed” that is separate and distinct from the short-term unemployed. That is, I would not assume that the causality runs from long-term unemployment to the unemployment rate, with the former boosting the latter.

Consider the alternative of putting total unemployment on the right-hand side. That is, the length of time to find a job is a function of the number of unemployed people with whom you are competing. As the unemployment rate goes up, the rate of long-term unemployment goes up.

How much long-term unemployment can be mathematically explained by the overall drop in the job-finding rate, and how much represents a drop in the job-finding rate for the long-term unemployed relative to that for the short-term unemployed? The article hints that perhaps some of the latter has taken place, but it is not clear how much.

John Papola on the State of Economics

Posted on by

From a post on Facebook:

More than ever I am convinced that the professional study of economics peaked in the classical liberal era with John Stuart Mill and rapidly became a mostly destructive force in society thereafter. What was once an area of inquiry dedicated to counteracting intuitive-yet-bad ideas has overwhelmingly devolved into a pseudo-scientific industry of naval-gazing in support for some of the worst fallacies these classical thinkers devoted their lives to refuting, such as utterly absurd claims like “consumption increases output”.

My current theory for why this has occurred is that the classical thinkers were a diverse group with many of them devoting their lives to actual value creation for other people through commerce and most of them multi-disciplinary polymaths. They had an integrated view of the world that was rich and realistic. All of that has been sandblasted into oblivion. This seems to be the result of the mathematization and hyper faux-specialization of the “economics profession”, combined with the fact that most employment opportunities for economists are in academia (where the real world is irrelevant) or government directly (same problem, worse incentives).

If you want to glimpse economics from the inside, read Miles Kimball on three goals for Ph.D courses.

My instinct is that the profession is not as bad as Papola portrays it, although I have sympathy with where he is coming from.

1. I see strong gains in economic history, understanding the causes and consequences of economic growth, finance theory, mechanism design, game theory, and other areas. Yes, there is over-hyping, but I believe that the progress is genuine.

2. In academic economics, the emphasis is on “tools,” meaning mathematical techniques. This crowds out thinking either about deep philosophical issues or the real world. I wish that philosophical rigor were emphasized as much as mathematical rigor. In terms of the real world, what troubles me most about economists’ mindset is the failure to appreciate the importance of conflict within organizations and radical ignorance/uncertainty.

3. Macro is a disaster area. I have said before that it ought to be relegated to a “history of thought” course, rather than given equal billing with micro. But hardly anything else in economics is as bad as macro.

4. For a long time, applied econometrics was a disaster area. What Angrist calls the “credibility revolution” has helped, I think, although again there is over-hyping.

5. I have said before that I think that the economics profession is far too heavily influenced by a few “top” departments. I do not know how much worse things are in economics than in other disciplines. But in economics, the control that MIT, Chicago, and Harvard exert is so strong that they can pull several generations of economists in the wrong direction. Tyler Cowen cites relevant data and remarks,

It has been evident for a while that the former “top six” is in some ways collapsing into a “top two,” namely Harvard and MIT.

It is a self-perpetuating, in-bred, smug, narrow guild. I do not know what to do about it.