James Hamilton on the Rise in Interest Rates

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He writes,

The yield on 10-year U.S. Treasuries has jumped 50 basis points since the start of May, leading some to speculate that the market is already starting to price in anticipation of an end to the Fed’s bond-buying program. There may be some truth to that, but it’s only part of the story.

…It’s worth emphasizing that the recent rise in interest rates has been a global phenomenon, not just something seen in the United States.

It would be nice if you could attribute the rise in interest rates to a rise in expected growth in nominal GDP. However, my portfolio, which should benefit from an increase in expected inflation, instead was hurt by the rise in rates. I infer that there has been an increase in the expected real rate of interest. It’s not clear where that is coming from, other than the fact that real rates cannot stay absurdly low forever.

Of course, the rise in real rates could indicate that investors have become optimists like Tyler Cowen.

Richard Green Disses Car Dealers

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He writes,

The Wall Street Journal has a good story today about how car dealerships are (successfully) lobbying legislatures to ban Tesla Motors from marketing their cars directly to consumers. GOP legislators, who get the willies about regulation that actually solves real problems, are on board with supporting protectionist policies for auto dealerships.

In economics textbook, government acts to correct market failures. I am tempted to say that, in the real world, government acts to create market failures.

I wish that the car-dealer case were an unusual exception. But basic public choice theory (which ought to be in more economics textbooks) suggests that concentrated interests win and broader interests, including correcting market failures, lose.

I was tempted to title this post, “Richard Green shoots at Republicans, hits mainstream economics,” but that would have been uncharitable.

Supply-Side Housing Policy

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From the Center for an Urban Future.

An Accessory Dwelling Unit is a small, self-contained residential structure sharing a lot with an existing house. In Seattle, Vancouver and Santa Cruz, legislation was enacted to permit ADUs on sufficiently sized lots in one- and two-family zones. Building regulations were also relaxed to allow formerly illegal subdivisions to be safely brought to code without facing severe fines.

They argue that this could be useful in the outer boroughs of New York city. Overall, our country’s policy on housing is to raise demand (think HUD, Freddie Mac, Fannie Mae, etc.) and restrict supply (think urban zoning laws). We also do that in higher education and in health care. The result is what you would predict, given the laws of supply and demand.

The Great K-L Substitution

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Loukas Karabarbounis and Brent Neiman have a paper on the decline in labor’s share of income.

We start by documenting the pervasive decline in labor shares around the world at the country, U.S. state, and industry levels. Next, we document a decline in the relative price of investment goods, which we later show to be the key factor explaining the global trend in the labor share.

Recall that Timothy Taylor blogged on this topic (although not on this paper in particular). The story is that computers and computer-driven machines are getting cheaper, leading businesses to substitute capital for labor, causing labor’s share of income to fall.

To me, this, along with factor price equalization, is the most intuitively plausible account for trends in the distribution of income over the past twenty years.

On K-L substitution, TechReview has a new article on Brynjolffson and McAfee, although scanning it I did not see anything new (I liked their e-book and their debate with Tyler Cowen.)

College and Career Skills

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the highly dubious notion that college and career skills are the same. On its face, the idea is absurd. After all, do chefs, policemen, welders, hotel managers, professional baseball players and health technicians all require college skills for their careers? Do college students all require learning occupational skills in a wide array of careers?

No, that is not Bryan Caplan. It is Robert Lerman. Read the whole thing.

We Need 250 States

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Have you heard about the folks who want to create North Colorado? The reader who sent me the link suggested that it was time to plug my essay We Need 250 states. There, I wrote,

In 1790, the largest state in the union, Virginia, had a population of under 700,000. Today, Montgomery County has a population of over 900,000. Our nine-member County Council answers to about the same number of registered voters as the entire House of Representatives of the United States at the time of the founding of the Republic.

We cannot have an accountable democracy with such large political units. We need to break the political entities in the United States down to a manageable size.

I have just started reading America 3.0, by James Bennett and Michael Lotus. One of the early chapters offers a utopian scenario for America in 2040 in which there are 71 states. In that scenario, people have sorted themselves in part by political preferences. That would not work for someone like me, who lives in a blue state but who does not want to move. I think we need the option of virtual citizenry. Imagine I paid user fees in Maryland for specific services here, but for most tax and policy purposes I lived in a virtual state with other libertarian-minded folks.

Notes from a Civilization-Barbarism Symposium

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I heard a number of former Bradley Prize winners speak at a symposium Wednesday morning. That evening, there was an awards reception, at which this year’s winners were announced. Yuval Levin said,

Conservatives tend to begin from gratitude for what is good and what works in our society and then strive to build on it, while liberals tend to begin from outrage at what is bad and broken and seek to uproot it.

You need both, because some of what is good about our world is irreplaceable and has to be guarded, while some of what is bad is unacceptable and has to be changed. We should never forget that the people who oppose our various endeavors and argue for another way are well intentioned too, even when they’re wrong, and that they’re not always wrong.

…That’s not to say that conservatives are never outraged, of course. We’ve had a lot of reason to be outraged lately. But it tends to be when we think the legacy and promise we cherish are threatened, rather than when some burning ambition is frustrated.

Overall, I think that he spoke to the civilization-barbarism axis, as one would expect. He also tended toward Thomas Sowell’s “conflict of visions” analysis of the difference between liberals and conservatives.

The Bradley folks are conservatives, not libertarians. In the hallway conversations at the morning symposium, I heard lots of support for government snooping. (Speaking of the snooping program, David Brooks certainly took the conservative line, didn’t he? I think others have pointed out that Brooks is more concerned about the lack of checks and balances against Edward Snowden than about the lack of checks and balances against the intelligence agencies.)

One of the panels at the Bradley symposium addressed the topic of threats to freedom (other than economic policy, which was the subject of a separate panel). A couple of panelists cited Charles Murray’s “coming apart” thesis. Heather MacDonald thought that perhaps too much individual freedom was leading the lower classes into behaviors that lead to dependency. Later, after Robby George voiced similar concerns in response to a luncheon speech by Charles Krauthammer, Krauthammer replied that the Constitution was not designed to require virtuous citizens. On the contrary, it is meant to be robust to human failings. While I appreciate both sides, I think that in the end I come down on the side that a culture of virtue matters more than the Constitution. I think where I would differ from Murray/MacDonald/George is on where the cultural problem lies. I think it lies not with the lower classes but instead with certain parts of the elite. Another panelist, Brad Smith, spoke of the need for conservatives to regain control over the K-12 curriculum. I think that is closer to being on track, and if that is the case, then lamenting the breakdown of the traditional family is barking up the wrong tree.

MacDonald also cited the atmosphere of censorship in academia. Topics on which there is not freedom of speech include gender differences and IQ. But note that, again, this is a problem among the elite.

Krauthammer offered an optimistic take on the electoral prospects of conservatives. Among his reasons:

1. Polls show more conservatives than liberals.

2. The 2012 election was idiosyncratic. Romney lost on the issue of “who cares more about people like you?” in which Obama swamped Romney in exit polls by 60 percentage points. (Krauthammer did not give figures, but one can imagine something like 75 Obama, 15 Romney, 15 undecided)

3. The current scandals hurt Democrats, because they are the party of government.

4. The key issue of our times is the crisis of the welfare state, an issue on which conservatives are better positioned than liberals.

The immigration issue came up in the earlier panel on the economy. Victor Davis Hanson carried the ball for the restrictionist civilization-vs.-barbarism team. Gary Becker proposed using tariffs rather than quotas (although he did not use that terminology). I used that term in my essay ten years ago, and in fact you should read that essay to see how little the issue has changed during the interim.

Hamilton, Hooper, Greenlaw, Mishkin

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I thought I linked to their paper before, but I cannot find the post.*

we calculate the level of the primary government surplus that would be necessary to keep debt from continually growing as a percentage of GDP. We argue that if this required surplus is sufficiently far from a country’s historical experience and politically plausible levels, the government will begin to pay a premium to international lenders as compensation for default or inflation risk.

This sounds a lot like my Guessing the Trigger Point paper, in which I say that a key variable is the “pain threshold,” which is my term for “politically plausible levels” of the required fiscal adjustment.

I heard Jim present a different paper, on estimating the off-balance-sheet liabilities of the U.S. government, at a recent Cato event. I questioned the usefulness of an exercise that tries to come up with a single number, when so many of these liabilities are contingent (the government has written a lot of put options). Douglas Holtz-Eakin shot back that policy makers cannot handle multiple possibilities. They need one number.

Fine, then. If policy makers cannot handle something that is essential to financial management in any public corporation in America, tell me why we want them to manage trillions of dollars?

*Ah, here is where I linked before.