From Cyclical Force to Rounding Error

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Mark Perry reports,

Employment in the durable goods sector for motor vehicles and parts increased in July to 818,000, the highest employment level in that sector since October 2008. Over the last quarter, employment in the US auto industry has increased by 10.8% at an annual rate.

Jeffrey Sparshott of the WSJ blog reports,

Residential and specialty trade contractors — home builders — added 6,300 jobs in July.

Autos and new home construction used to be the big cyclical sectors of the economy. If I take 10 percent of 818,000, I get 82,000. If I multiply 6300 by 12, I get 75,000. So at an annual rate these erstwhile behemoths are adding 157,000 jobs, which amounts to rounding error in a work force of 140 million.

One of the ways in which my macro view differs most from that of the textbooks is that I believe that it is very hard to identify repeatable patterns in an economy that undergoes such important evolution. Developments that probably change the way the economy reacts to fiscal and monetary policy include:

–deregulation of deposit interest ceilings in the 1980s , which reduced the credit-rationing impact of higher interest rates

–change in the labor force participation behavior of men and women

–big drop in the proportion of work force employed as manufacturing production workers

–big increase in the use of credit cards, Internet banking and ATM machines; we can go months without using our checkbook).

–big shift toward education and health care, or what Nick and I called The New Commanding Heights

Howard Dean on IPAB

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He writes,

If Medicare is to have a secure future, we have to move away from fee-for-service medicine, which is all about incentives to spend more, and has no incentives in the system to keep patients healthy. The IPAB has no possibility of helping to solve this major problem and will almost certainly make the system more bureaucratic and therefore drive up administrative costs.

He does not say what we need to move to. Of course, I would say we should move to a system where consumers pay for their health care, and insurance covers catastrophic expense.

Keep in mind that there is no perfect system for compensating doctors. For example, if you pay them a fixed amount of money per patient, then their incentive is to see a lot of healthy patients and avoid the sick ones. If you pay them a fixed salary, their incentive is to work short hours. If you pay them for “quality care,” that means that a central bureaucracy, comparable to IPAB, has to define the meaning of quality.

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.”

Health Care Budget Implosion

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Not just in the U.S. Frances Woolley writes,

Right now all of the provinces and territories except for Newfoundland, Saskatchewan and Yukon are running deficits

In Canada, provinces run the health care system(s).

Canada has a very pronounced baby boom – a big bulge of people born between 1947 and 1962 (when the birth control pill was introduced). That oldest members of that cohort are now 66. As people get age, their health care needs increase. Pick your metaphor. Health care as Pac Man, that gobbles up the provincial budget.

Joel Mokyr vs. Technopessimism

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He writes,

But if the bulk of unpleasant, boring, unhealthy and dangerous work can be done by machines, most people will only work if they want to. In the past, that kind of leisurely life was confined largely to those born into wealth, such as aristocrats. Not all of them lived boring and vapid lives. Some of them wrote novels and music; many others read the novels and listened to the music. Some even were engaged in scientific research

I predict that within two decades, the big issue in this country will not be the distribution of income but the distribution of leisure. The Vickies will resent the Thetes for their leisure.

Excerpts from Another Section of the Book

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In this section, I want to introduce four possibilities for the effectiveness of policy instruments in helping to reach a target for the unemployment rate. In the classical model, neither instrument is effective. In the crude Keynesian model, deficit spending is effective, but changes in the Fed Funds rate are not. In the textbook AS-AD model, both instruments are effective. In the crude monetarist model, changes in the Fed Funds rate are effective, but changes deficit spending is not. We can summarize this in a table.

Model Fed Funds Rate Effective? Deficit Spending Effective?
Classical No No
Crude Keynesian No Yes
Textbook AS-AD Yes Yes
Crude Monetarist Yes No

…First, a purely classical theory would say that employment is determined by productivity and workers’ preferences for labor and leisure… There is nothing left for macroeconomic policy to do, other than determine the price level…

In the crude Keynesian model, the budget deficit affects real output, because a larger deficit raises the interest rate, which increases the velocity of money…However, the Fed Funds rate has no effect on output. A decline in the Fed Funds rate raises the money supply, but this leads to an offsetting decline in the velocity of money…

In the textbook model, both instruments affect real GDP. As in the crude Keynesian model, a larger budget deficit raises the interest rate and increases the velocity of money. However, unlike in the crude Keynesian model, in the textbook AS-AD model when the Fed Funds rate goes down and consequently the money supply increases, there is not an offsetting decline in the velocity of money…

Finally, we have a variation on textbook AS-AD called the crude monetarist model…Monetary policy is powerful, because with velocity fixed, aggregate demand depends entirely on the money supply. Since the Fed can raise the money supply by lowering the Fed funds rate, and conversely, the Fed controls aggregate demand. However, with velocity fixed, there is nothing that fiscal policy can affect. An increase in interest rates does not increase velocity. Instead, it leads to reduced investment spending by businesses, offsetting the increased spending by consumers and government. Such an offset is called “crowding out.”

China and Democracy

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Eric Li gives a talk. He argues that China’s process for selecting leaders is more open and competitive than the typical democracy.

Thanks to Greg Mankiw for the pointer.

My thoughts:

1. Exit is much better than voice.

2. We over-romanticize democracy and the leaders it produces.

3. Li probably over-romanticizes the Chinese system and the leaders it produces.

John Cochrane on Valuing Government Pensions

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He writes,

A good response occurred to me, to those cited by Josh who want to argue that underfunding is a mere $1 trillion. OK, let’s issue the extra $1 trillion of Federal debt. Put it in with the pension assets. Now, convert the pensions entirely to defined-contribution. Give the employees and pensioners their money now, in IRA or 401(k) form. If indeed the pensions are “funded,” then the pensioners are just as well off as if they had the existing pensions. (This might even be a tricky way for states to legally cut the value of their pension promises)

I suspect the other side would not take this deal. Well, tell us how much money you think the pension promises really are worth — how much money we have to give pensioners today, to invest just as the pension plans would, to make them whole. Hmm, I think we’ll end up a lot closer to Josh’s numbers.

That is, one way to value government pensions is to ask workers how much they would be willing to take in the form of an individual retirement account to give up their pensions. Of course, if the government workers believe that their pensions are at risk, they might take a low figure. But if we take that possibility off the table, then workers are likely to demand a lot more money than the current stated value of the pension obligations.

I think others have pointed this out before, but when the subject of Social Security privatization comes up, aggressive assumptions about stock market returns seem reasonable to those on the Right and crazy to those on the Left. But their positions reverse when the subject changes to state and local pension funding. My own preference is to make conservative assumptions about stock market returns for both discussions.

Comparing Vickies with Thetes

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Dave Ramsey, citing Tom Corley, has a list of twenty differences.

63% of wealthy parents make their children read 2 or more non-fiction books a month vs. 3% for poor.

I don’t recall making my children read 2 non-fiction books a year…but I’m pretty sure they did.

Here’s an interesting one that ought to make Robin Hanson’s antennae twitch:

6% of wealthy say what’s on their mind vs. 69% for poor

Here’s an obvious one:

86% of wealthy love to read vs. 26% for poor.

I think I’ve said before that fifteen years ago, when I had a relocation web site and we acquired some data on neighborhood socioeconomic characteristics, the consumer purchase most correlated with affluence was hardbound books.

When Econ Bloggers Changed My Mind

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Noah Smith started this game.

Don Boudreaux convinced me that respect for political leaders is a cultural bug, not a feature.

Robin Hanson convinced me that things are not what they seem.

Scott Sumner convinced me that low nominal interest rates are not a sign of easy money.

Tyler Cowen convinced me that Fischer Black had useful things to say about macroeconomics, and also to think about the question

Is the financial crisis — which is rapidly becoming the “real economy” crisis — somehow the “dual” of the socialist calculation problem?

Bryan Caplan convinced me that immigration is a fundamentally important issue.