Disaggregating the economy: cost of living

Timothy Taylor writes,

here are the US states color-coded according to per capita GDP with an adjustment for Regional Price Parities: that is, it’s a measure of income adjusted for what it actually costs to buy housing and other goods. With that change, California, New York, and Maryland are no longer in the top category. Hoever, a number of midwestern states like Kansas, Nebraska, South Dakota, and my own Minnesota move into the top category. A number of states in the mountain west and south that were in the lowest-income category when just looking at per capita GDP move up a category or two when the Regional Price Parities are taken into account.

Taylor’s post indicates that the Bureau of Economic Analysis has some very interesting data on output and prices down to state and local levels. This would really help with a project of disaggregating the economy. Here is a recent press release about the data.

Posted in disaggregating the economy, Timothy Taylor is my Favorite Blogger | 11 Comments

Hal Varian’s Rule

I’ve come across it in several places recently, such as this podcast with Tim O’Reilly. The rule says,

A simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade.

I can think of many exceptions off the top of my head, and it depends on definitions. There will always be a luxury form of something–the private jet, for example.

But overall I think it’s a view of the world that is more sensible than “robots are going to kill all the jobs and there will be mass poverty.”

Posted in Growth Causes and Consequences | 6 Comments

Ray Dalio’s data points

The essay is on inequality, but there are interesting statistics scattered throughout. For example,

While many of the major causes of death have been flat or falling over the last 15 years, deaths from drugs and alcohol more than offset it among the bottom 60%. And the rise in drug-related deaths is not happening across the world—the phenomenon is unique to the US.

Pointer from John Mauldin.

I could swear that when I first looked at Dalio’s piece, he had more tables with more statistics, including death rates that are preventable with health interventions (higher for the U.S.) Those tables, which are in the appendix, do not show up in the version of Chrome on my laptop. Ah, there they are. They show up fine on the Microsoft browser and on Chrome on my tablet. They appear to be graphics. If you don’t see a table called “Health Care Performance Measures Across Developed Nations,” try a different browser. Those tables are a big reason that I am sending you to his essay.

Posted in Economics of Health Care, Four Forces Watch, income distribution-wealth-poverty | 6 Comments

Equity without capital, twenty years later

I received a review copy of Capitalism without Capital: The Rise of the Intangible Economy, by Jonathan Haskel and Stian Westlake, which has a 2018 copyright date.

1. My first reaction is to be a bit miffed that my name is not in the index. Nick Schulz and I wrote a book on the intangible economy, and the first edition appeared in 2009. Going back even further, in 1998 I wrote an essay called Equity without Capital. That essay is still interesting to read, and it anticipated some of the central issues in their book. But probably fewer than 200 people saw it when I wrote it.

2. Hal Varian and Carl Shapiro aren’t in the index, either. That is a less forgivable omission. Information Rules sold well.

3. I hurried through the book, and I was inclined to give it a mixed review. But when I re-read it, I only re-read the sections that I liked the first time. I decided that those sections are really good. Now I am inclined to give the book a strong recommendation.

4. The organization of the book is excellent. The good news is that you usually can skip to the end of the chapter and read its conclusion to get the main point. The bad news is, well, why not just condense the book into an extended essay? And if you left out the sections of the book that did not do much for me, the extended essay would work even better.

Gosh, I am really being hard on them, for some reason. It really is a first-rate book. I’m not sure why I keep wanting to talk about what I don’t like about it. But, here I go again:

5. They make a big deal about recent literature that arrives at measures of intangible capital. However, as they point out, such measures are fraught.

Their analysis says that intangible capital has four s’s: sunk costs (investments in assets that cannot be re-sold); scale (network effects and path dependency can bring very high returns); synergies (combinations of ideas are worth more than the ideas are worth separately); and spillovers (ideas are easily copied or imitated).

This implies, as they recognize, that intangible capital can be worth much more than what it costs to obtain, because of scale and synergies. But it can be worth much less than what it costs to obtain, because of sunk costs in non-marketable assets. In bankruptcy, you can sell off the office furniture and the fleet of trucks (tangible assets), but not the business process that proved unsustainable or the failed attempt to establish a brand (sunk costs).

But the measures of intangible capital use acquisition cost as the measure of investment in intangible capital. That may be a reasonable way to value tangible capital. But to me, their four s’s imply that intangible capital’s value cannot be reliably represented by its acquisition cost.

To get technical, Tobin’s q is the ratio of the market value of capital to its replacement cost. Think of it as the ratio of the stock price of a firm to the acquisition cost of its assets. For tangible capital, q should be close to 1. But for firms with a lot of intangible capital, like The Four, it is much, much greater than 1. Tyler Cowen’s recent column, Investors are celebrating the tech revolution, says that the current high values of q are a positive signal about future economic growth.

Of course, for many dotcom stocks in the 1990s, q shot way up before dropping to zero, which is what my essay was predicting. But by the way, one of the stocks I was skeptical about back then was Amazon, and if you held onto that, the losses on the rest of your 90’s doctcom portfolio might not trouble you.

Looking at this balance between superstar value and failure, the authors propose that, well, on average, the value of intangible capital for the whole economy ought to be somewhere close to what it costs. I thought they were just hand-waving at that point.

They understand well enough that intangible capital is not exactly like tangible capital in the neoclassical model. But I do not think that they are ready as I am to take the next step and jettison the neoclassical framework.

Posted in books and book reviews, business economics, disaggregating the economy, links to my essays, Tyler Cowen is my Favorite Blogger | Tagged , , | 1 Comment

Missing from the St. Louis merger story: Clayton

The WSJ reports,

A group of business leaders with bipartisan political backing see a common issue behind the problems—the region’s multitude of local governments.

They are pushing a plan to explore the reunification of the city and county to make the region of 1.3 million people more efficient and economically competitive.

My first thought was, “This is a hostile takeover of Clayton,” but the story takes a different focus. For example, it quotes the mayor of Olivette, which is where I lived until 6th grade, on the street with the white-trash folks that I have mentioned before. Of course, in other streets not far away, there were respectable professionals, and I became friends with their children when I started going to elementary school (while keeping the friends from my street).

Back to Clayton. That is where we moved when I started 7th grade. Super-affluent. I was just back there visiting last week, and it is sort of like Bethesda in Maryland or Brookline in Massachusetts or Menlo Park in northern California or Beverly Hills in southern California.

I am sure that all of the other municipalities, including the city of St. Louis, would love to get their hands on more of Clayton’s wealth. I am guessing that Clayton’s wealthy are not so keen on it. But a Ctrl-F for “Clayton” in the story comes up empty, so I do not know.

Posted in income distribution-wealth-poverty | 6 Comments

Housing finance in other countries

In testimony before a House committee, Mike Lea writes,

The standard mortgage instrument in other countries differs significantly from the US FRM. The standard product in Canada, Germany and many other European countries is a short to medium term fixed rate mortgage sometimes referred to as a rollover. The rate is fixed for a 1 to 5 year period (up to 10 years in Canada and Germany) after which the rate is reset at the current market interest rate. The loans have amortization terms of 25-30 years. The borrower can select the same or a different fixed rate term at reset. This feature allows borrowers some protection against potential interest rate shocks (e.g., if the reset rate is high and the borrower expects it to fall she can select a one year fixed rate term; conversely if she believes rates are low and likely to rise she can opt for a 5 or 10 year fixed rate term). There is a prepayment penalty during the fixed rate period (a yield maintenance penalty that removes the financial incentive for refinance).

…Mortgage loans are recourse obligations in all of the countries surveyed and default rates have been and are significantly less than in the US. With recourse lenders have the right to pursue deficiency judgments against borrowers providing a significant deterrent to mortgage default.

If you are at all interested in the subject, read the whole thing.

If we want a housing finance system that is as safe as that of, say, Canada, then we need to evolve away from the 30-year fixed-rate mortgage. But if you take the 30-year fixed-rate, no-recourse mortgage as a given, then my line is that our current housing finance system is about as safe as we are going to get.

Back when they were planning these hearings, they solicited my testimony. They ended up not soliciting it for the actual hearing. I am not complaining, because I don’t glory in giving this sort of testimony. But below is what I wrote. Continue reading

Posted in Housing and housing finance | 7 Comments

Economic segmentation

Jerry W. Thomas wrote,

What is market segmentation? At its most basic level, the term “market segmentation” refers to subdividing a market along some commonality, similarity, or kinship. That is, the members of a market segment share something in common.

I have argued before that the economy is illegible. By that I mean that aggregate measures of labor input, capital input, “the” price level, and output are useless when the economy is dominated by services and the value of labor and capital is dominated by intangible elements. Aggregate measures of “the” standard of living are useless when housing expense, which is a large component of living costs, is so divergent across locations.

Instead, I believe we need to think in terms of multiple economic realities. Perhaps one way to address this would be to start with market segmentation analysis. In the marketing world, demographic analysts have sorted U.S. zip codes into clusters of similar consumer tastes. Suppose that we were to find occupational clusters, consisting of people with similar industry groups and similar skill types.

Next, imagine a matrix, with occupational clusters down the side and consumer market segments across the top. Might we see interesting patterns?

We might think about the occupational clusters in terms of the traditional theory of international trade. What do they produce? What do they tend to consume? Which clusters supply savings to other clusters, and which receive savings? How much of each cluster’s economy is internal trade and how much is external trade? What are the terms of trade (exchange rate) between a cluster’s imports and its exports, and how have the terms of trade changed over time?

I am thinking that perhaps this is the next big theme I will be working on. That is, the illegibility of the economy as measured using traditional statistics and the possibility of getting more useful information by thinking in terms of multiple economic realities.

Posted in PSST and Macro | 4 Comments

Organizing the causes of the Industrial Revolution

Mark Koyama writes,

Consider some prominent views about what caused the British Industrial Revolution. At the risk of grossly simplifying matters we can put them into three bins.

…Third, there are those who argue that ultimately only innovation can explain the transition to modern economic growth. This is the position of the majority of economic historians. Label them group 3. However, this third group is divided between those who seek to explain the increase in innovation in purely economic terms (3a) and those who see this as an impossible task and argue that the answer has to be sought elsewhere, perhaps in something that can be broadly defined as culture (3b).

Pointer from Tyler Cowen. The essay is about whether Rome could have had an industrial revolution. Recommended.

Posted in Economic History, Tyler Cowen is my Favorite Blogger | 1 Comment

The Servant Aggregators

Several years ago, I asked,

In an economy where some folks are very rich and many folks are unemployed, why are there not more personal servants?

Recently, someone pointed me to Umair Haque’s column from two years ago.

I’m going to call it a Servitude Bubble. For the simple reason that it is largely based on creating armies of servants. You can call them whatever buzzwords you like — “tech-enabled always-on super-hustling freelance personal brand capitalists”. But the truth is simpler. The stuff of the Servitude Bubble makes a small number of people something like neofeudal masters, lords with a corncucopia of on-demand just-in-time luxury services at their fingertips. But only by making a very large number of people glorified neo-servants…butlers, maids, chauffeurs, waiters, etcetera.

Dog walkers, Uber drivers, etc. My question was answered.

But it’s not just a few rich people with access to these services.

Posted in business economics, Growth Causes and Consequences, PSST and Macro | 12 Comments

Telepresence

I put up a short science fiction story on Medium about telepresence using augmented reality. You may wonder why.

1. Aaron Ross Powell put in a strong plug for Medium.

2. I remember when Robert Metcalfe once was asked what would be the Internet’s ultimate killer application. He replied, “telepresence.”

3. When I posted the other day about the shortfalls in technology relative to Ray Kurzweil’s predictions, it made me think of my own questionable prediction, Headsets, which I’m still longing for in a way. Think of this as an upated version of that essay. Sort of.

Posted in links to my essays | 4 Comments