Economics

Interview with Erik Hurst

by on August 28, 2016 at 12:15 am in Economics, Education | Permalink

From the Richmond Fed, it is excellent and interesting throughout, here is one good bit of many:

EF: Given the wage premium associated with a four-year degree and the availability of education financing, it seems like a real puzzle why more people are not obtaining degrees.

Hurst: I have been thinking a lot about that. What is it that’s causing so many young people, particularly young males, to not obtain skills required to be successful in today’s workforce? I have been working with Mark Aguiar and Kerwin Charles and Mark Bils to try to understand what these people’s lives look like. There’s a budget constraint that still has to hold. They have to eat. What you’re finding is that a lot of them are living in their parents’ basements or their cousin’s basement. So many are relying on family support. And a lot of them just aren’t even working at all. So when you go and take a look at the fraction of people in their 20s who haven’t worked in the prior 12 months in 2015, it’s 20 percent for men with less than a four-year college degree. In 1990, that number was 4 percent. So the first thing we are doing is documenting these facts and trying to find out what their lives look like: how they’re eating, what their living situations are like, what attachment they have to the labor force.

The second part we’re trying to think about is why. What we are considering is whether it’s possible that a leisure lifestyle is easier now in your 20s than it was in the past. In 1980, if you were in your 20s and you weren’t working, you were pretty isolated. You were sitting by yourself. You could watch a few channels on TV but no one else was out there. Now if you’re not working, you could be online on social media or you could be playing videogames in an interactive way, things that make not working more attractive than before. And those videogames and leisure goods generally are relatively cheap compared to what they were in 1980. So when you’re making your choice of working relative to your reservation wage, your reservation wage has gone up some because the outside option of not working is a lot more attractive. So that’s what we’re thinking but I don’t know how we’re going to test it.

Also, eventually these people will get older, of course, and many will have a spouse or kids. When that happens, their income requirements go up and they need jobs, but they probably haven’t been building the type of skills required to get a job. So that’s hard to understand. I have never written a paper before where people were myopic, but the behavior of a lot of people in their 20s now seems myopic.

I wish to suggest a related observation.  If one argues that some percentage of unemployment is “voluntary” in this manner, one is often met with scorn, and with a not entirely accurate redescription of the view, based on a rebuttal that a sudden outbreak of laziness is unlikely.  However if the return to higher education goes up, and the elasticity response is mediocre, sociological explanations are somehow entirely acceptable and perhaps even mandatory.  You might call this Quantity Stickiness for Me But Not For Thee.  It’s a bit like how wage stickiness is an acceptable behavioral postulate but employers’ “firing aversion” is not.

Hat tip goes to Justin Wolfers.

Paper Pushers

by on August 27, 2016 at 7:25 am in Economics, Law | Permalink

Excellent piece by Tim Carney:

Five years ago, a new quirky-sounding consumer-rights group set up shop in a sleepy corner of Capitol Hill. “Consumers for Paper Options is a group of individuals and organizations who believe paper-based communications are critically important for millions of Americans,” the group explained in a press release, “especially those who are not yet part of the online community.”

This week, Consumers for Paper Options scored a big win, according to the Wall Street Journal. Securities and Exchange Commission chairman Mary Jo White has abandoned her plan to loosen rules about the need to mail paper documents to investors in mutual funds.

Mutual funds were lobbying for more freedom when it came to mailing prospectuses — those exhaustive, bulky, trash-can-bound explanations of the contents of your fund. In short, the funds wanted to be free to make electronic delivery the default, while allowing investors to insist on paper delivery. This is an obvious common-sense reform which would save whole forests of trees.

You won’t be surprised to lean that Consumers for Paper Options is funded by paper mills, timber firms and the Envelope Manufacturers Association.

What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.

At the prices they are offering, a lot of bugs in their software are going undetected.  Yet the company has the funds to pay more, and you might think for Coasean reasons the value to Apple of maintaining the franchise is pretty high.  So why don’t they pay more?  From Russell Brandom, this may be the reason:

If Apple really did put its enormous cash reserves behind catching every bug, the result might have unintended consequences for its own security workforce. Building and deploying patches is hard work, every bit as delicate and creative as finding vulnerabilities. Companies need dedicated teams to do that work — but with skyrocketing prices for iOS vulnerabilities, why not put in a few months to find an exploit, turn it in for the bounty, and then spend the rest of the year working on your tan? “If Apple or other defense bounties tried to outbid or even match offense bug prices, they may lose the employees they need most to fix the issues,” Moussouris says.

The article is of interest more generally.

A simple parable of crowding out

by on August 27, 2016 at 1:05 am in Economics | Permalink

Think tank X decides to expand its policy output on urban economics, so it hires some new scholars in the area.  That means fewer people teaching urban economics in academia, or maybe fewer people driving Uber.

It also means more computers in the think tank sector and fewer computers elsewhere.

Or make the example corporate.  Microsoft hires more economists, so fewer economists work for banks.

None of this has to involve higher interest rates, whether on government securities or corporate bonds, yet still there is an opportunity cost from the new decisions.  Do interest rates have to go up every time resources are switched across sectors?  No.  Will there in general be a significant “multiplier” from these sectoral shifts?  I say that question is a category mistake, but if you insist the multiplier could easily be negative rather than positive.

There is some upward wage pressure from these labor reallocations, and you could consider such wage changes as evidence for this crowding out.  Note three points.  First, real wages have been rising as of late.  Second, the sectoral shift also could cause some wages to fall.  Third, a lot of wage groups have seen falling real wages since 1999-2000, at least as we measure wages by traditional means.  The “rising wage” pressure therefore may take the form of “wages fell less than otherwise.”  Pointing at stagnant wages for an economic group therefore is not, in the recent environment, evidence for no crowding out of labor.

These are all simple points, but they are being forgotten in today’s discussion.  A good rule of thumb is to start by viewing the problem in real terms rather than focusing on “finance capital.”  As the point applies to labor, so does it apply to tractors.

Here is an earlier post on related topics.

A recent piece from the excellent Conor Sen has attracted some disputation.  The main claim is that building restrictions aren’t as bad as they might at first seem.  If you keep people out of Manhattan they move to Atlanta, and that produces synergies too:

Here in Atlanta, as in the rest of the Sun Belt, job migration is the driving force of the economy. Corporate relocations and expansions are celebrated here the way billion-dollar tech startups are celebrated in Silicon Valley. The “New South” would not have developed were it not for people looking to flee the crowded and expensive cities of the Northeast.

…Housing constraints in some cities accelerate economic development in emerging parts of the country. They decrease economic inequality between metro areas and lead to economic interdependence that drives civil rights. And they offer some promise to ease the pain of waning communities in the Rust Belt, Appalachia and beyond. A country where the vast majority of talented people move to one or two cities might be an economist’s idea of utopia, but a nightmare to those of us concerned about equality of economic opportunity.

Analytically, the first question is whether the biggest cities would attract too many people in the absence of building restrictions.  To answer that, you have to balance crowding costs vs. synergy benefits.  It can be said that average social returns to living in cities will equalize, even if marginal social returns do not.  Cross-city migration equates the average returns, even in the presence of externalities, just as in the classic “two roads” problem.  If one road is going faster than the other, people will switch, although the “final driver” still is not taking his entire social impact into account.

Note that if urban synergies are constant across scale, equality of the average across two cities will in turn imply equality of the marginal, and an efficient allocation of population across the larger and smaller cities will result.  Building restrictions won’t change that, although they do shift where the equalization margin will be at.

(Building restrictions also may mean NYC space is used inefficiently, even if the distribution of population across cities is more or less optimal.  Building restrictions are not identical to urban entry fees, but rather they shift space allocations at various margins of construction, though to potential movers their “entry fee” aspect may seem most important.  These marginal distortions may interact with the “entry fee” aspects of building restrictions in various ways, muddying the analysis.  Complicated!)

Now maybe synergies aren’t constant across urban scale, but suddenly the costs of building restrictions in Manhattan look lower.  They are defined by the differences in synergies across scale, which may not be such a huge number.  Furthermore synergies might be more important for the Atlantas than for the Manhattan, in which case the building restrictions in Manhattan could be welfare-improving.

(Note that if a city or region has really big firms, the chances that interpersonal synergies will be internalized into initial wage offers will be higher.  And there is a time horizon issue.  Circa the 1920s, Los Angeles synergies may have appeared much lower than those for NYC, but it probably ended up better for the nation as a whole that the racist “entry fee” for movie-making in NYC led to the creation of Hollywood on the West Coast.  Similarly, was it not also a good thing that NYC blew its chances of being the center of the American venture capital market?  If Peter Thiel were here, and communing with Kenneth Arrow, he might see too many risk-averse, conformist entrants into New York and look for a remedy, just as New York was itself once a respite from an overcrowded, restrictionist, religiously conforming Europe.)

OK, that’s scale but what about congestion costs?  They do seem to go up in a non-linear manner with scale, and that lowers the costs of building restrictions in Manhattan.  Manhattan is more likely to be too crowded than is Atlanta, as a first-order approximation.  Of course differential endowments across regions can complicate this, for instance NYC has better mass transit.

Now, to push this all one step further, is Peoria just a smaller Atlanta?  Does it too have synergy benefits?  (Or can we say that too many people stay in Peoria and too few go to NYC + Atlanta?)  Don’t we observe the very largest synergy benefits at small scales, namely going from households of one to two, two to three, etc.?  Might Peoria have the highest synergy gains of them all?  At least in utility terms if not in dollar terms?  Or do we need an ongoing risk of “Peoria brain drain” to induce Peoria residents to acquire the skills that they may or may not end up taking out of Peoria?

In any case, worth a ponder.

City_ArtMichael Heizer, the large-scale sculpture artist, has been building City, a sculpture in the Nevada desert since 1972. City is reputedly on the scale of the Washington, DC’s National Mall and something like Teotihuacan but no one knows for sure since “Visitors are explicitly not welcome, and due to its orientation away from the road and system of earthen berms no part of “City” can be viewed from the ground without trespassing on posted property.” A few photos have been smuggled out.

The New Yorker has an interesting article on Heizer. Naturally I appreciated his thoughtful consideration of the economics of building something for the ages:

“City” is made almost entirely from rocks, sand, and concrete that Heizer has mined and mixed on site. The use of valueless materials is strategic, a hedge against what he sees as inevitable future social unrest. “My good friend Richard Serra is building out of military-grade steel,” he says. “That stuff will all get melted down. Why do I think that? Incans, Olmecs, Aztecs—their finest works of art were all pillaged, razed, broken apart, and their gold was melted down. When they come out here to fuck my ‘City’ sculpture up, they’ll realize it takes more energy to wreck it than it’s worth.”

When it comes to contingent government pension liabilities as a percentage of gdp, Poland appears to be above 350%.

France, Denmark, and Germany are next in line, with figures well over 300%.  For purposes of comparison, the United States is considered to have a serious pension problem but the corresponding number is only slightly above 100%.

Here is the John Authers and Robin Wiggelsworth FT story.  Australia seems to be doing best.

One reason for this high Polish sum is that the Polish government has semi-nationalized a lot of the private sector pension liabilities.  In 2014, this procedure (FT) did not receive much discussion:

As part of an overhaul of the country’s pension system, Warsaw will next week transfer from privately-managed funds to the state 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, which will then be cancelled.

I believe this idea will reenter the broader policy debate sooner or later.

That is my latest Bloomberg column, here is one excerpt:

The virtues of business startups have led to many a success story. These enterprises start with clean slates. They embody the focused and often idiosyncratic visions of their founders. The successful ones grow faster than their competitors. Even after they become larger and more bureaucratic, these companies often retain some of the creative spirit of their startup origins.

It is less commonly recognized that some nations, including many of the post-World War II economic miracles, had features of startups. For instance, Singapore started as an independent country in 1965, after it was essentially kicked out of Malaysia and suddenly had to fend for itself. Lee Kuan Yew was the country’s first leader, and he embodied many features of the founder-chief executive: setting the vision and ethos, assuming responsibility for other personnel, influencing the early product lines in manufacturing and serving as a chairman-of-the-board figure in his later years.

Other start-ups nations have been UAE, Israel, Taiwan, Hong Kong, Cayman Islands, Estonia, South Korea, and of course way back when the United States.  You will note that many of these examples are imperfectly democratic in their early years, and they do not in every case grow out of it.  And this:

The world today seems to have lower potential for startup nations. This is in part because international relations are more peaceful and also because most colonial relationships have receded into the more distant past. Those are both positive developments, but the corresponding downside is not always recognized, namely fewer chances for reshuffling the pieces.

This is the close:

To paraphrase John Cleese from Monty Python, the startup nation concept isn’t dead, it’s just resting. Whether in business or in politics, the compelling logic of the startup just isn’t going away.

The best chances for future start-ups may be in Africa, around the borders of Russia, and perhaps someday (not now) Kurdistan.  Do read the whole thing.

The Efficient Markets Hypothesis

by on August 24, 2016 at 7:35 am in Economics | Permalink

In the first video in the Personal Finance section of our Principles of Macroeconomics course we pointed out that mutual fund managers do not beat the market on average. Why is this? In the second video, we take a look at the efficient markets hypothesis.

I’m rather fond of this video as it has some good story-telling elements, features Einstein in an important cameo (do you know why?) and yet also covers important ideas in an intuitive yet deep way.

The Return of Glass-Steagall???

by on August 24, 2016 at 7:25 am in Economics, Law | Permalink

The Atlantic writes:

Hillary Clinton and Donald Trump, have included plans to reintroduce the [Glass-Steagall] bill in their economic platforms. The argument for the act is that it could have prevented (or at least dampened) the 2008 financial crisis, and that reinstating it could ward off future ones. Is that the case?

The Atlantic’s editors reached out to economists and experts in financial regulation to ask them why Glass-Steagall is seeing renewed popularity right now, and what they think would make America’s financial system safer in the future.

Here’s part of what I had to say:

When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. No, restoring the Glass-Steagall Act would not end racism. Nor would restoring Glass-Steagall have done much, if anything, to have avoided the 2008-2009 financial crisis. Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”

The financial crisis is best understood as a run on the shadow banking system, that collection of financial intermediaries who based their credit creation not on deposits but on repo, money market funds, structured investment vehicles, asset-backed securitizations and other financial structures. Separate commercial and investment banking? Please. The problem was that by 2007 the shadow banking system had become so separated from commercial banking that the Federal Reserve didn’t know that a majority of credit was being generated by the shadow banks.

…“Nothing has been done!” may play well in some quarters but the Obama administration has in fact imposed systematic reform on the financial system. Most importantly, capital requirements have been increased (leverage has been reduced), forcing financial intermediaries to have greater skin in the game and to provide a cushion in the event of a fall in asset prices. Moreover, capital requirements have been extended far into the shadow banking system. Most recently, the Fed has imposed a capital surcharge on the biggest institutions i.e. the too big to fail institutions.

…Ironically, despite the political power of the financial sector it seems that more has been done to raise bank capital ratios than to require homeowners to raise their capital ratios by requiring larger down payments. There is a lesson there.

Robert Reich, Sheila Bair, Lawrence White, Stephen G. Cecchetti and others also comment. Only Reich, with some support from Blair, is enthusiastic.

How many who think we should subsidize manufacturing also think high corporate tax rates are harmless?

That is from Modeled Behavior.

This is perhaps the best and most instructive one I have heard:

…Mr Xi’s authority remains hemmed in. True, his position at the highest level looks secure. But among the next layer of the elite, he has surprisingly few backers. Victor Shih of the University of California, San Diego, has tracked the various job-related and personal connections between the 205 full members of the party’s Central Committee, which embodies the broader elite. The body rubber-stamps Mr Xi’s decisions (there have been no recent rumours of open dissent within it). But the president needs enthusiastic support, as well as just a show of hands, to get his policies—such as badly needed economic reforms—implemented. According to Mr Shih, the president’s faction accounts for just 6% of the group.

That is from The Economist.  Along related but not identical lines, here is a good story of the weak control of the Chinese central government:

Through July, claimed capacity reductions were less than half the target for the year (and less than 40% of the target for coal capacity reduction).  Some provinces were reported by the NDRC to have achieved only 10% of their annual targeted cuts.

…This resistance has led to more and more shrill directions from Beijing to act on instructions.  Now Beijing is sending out 10 inspection teams across the country to check on claimed capacity removal and to require follow through on additional closures.  I have one suggestion for them: The only way to ensure a closed plant remains closed is to physically destroy or remove key pieces of equipment.  Otherwise don’t be surprised when it starts back up again.

Don’t forget this:

Many steel mills are the key employer and tax payer in their city. In boom times, they might have provided as much as 30% of the tax revenue for local government.  Workers from the steel mill were at the forefront of buying property in the town, creating a positive cycle of additional demand for housing and steel.  If these workers are now laid off, even with one-time transfers from the center, local government faces an enormous challenge in trying to find new jobs for people who have been in a steel mill all their life.  They can’t all become part-time Uber/Didi drivers. Many government officials see delay as the most logical course of action.

That is from Gordon Orr.

Hong Kong’s streets are safer, with fewer murders by the fierce crime organizations known as triads that figured in so many kung fu films. And its real estate is among the world’s most expensive, making it difficult for training studios to afford soaring rents.

Gone are the days when “kung fu was a big part of people’s cultural and leisure life,” said Mak King Sang Ricardo, the author of a history of martial arts in Hong Kong. “After work, people would go to martial arts schools, where they’d cook dinner together and practice kung fu until 11 at night.”

With a shift in martial arts preferences, the rise of video games — more teenagers play Pokémon Go in parks here than practice a roundhouse kick — and a perception among young people that kung fu just isn’t cool, longtime martial artists worry that kung fu’s future is bleak.

High studio rents are of course a big problem:

…According to Mr. Leung’s organization, the International WingTsun Association, former apprentices have opened 4,000 branches in more than 65 countries, but only five in Hong Kong…

“Kung fu is more for retired uncles and grandpas.”

That is from Charlotte Yang at the NYT, interesting throughout and yet I hear the author is only a summer intern.

I’ve been hearing plenty of calls for a higher inflation target, perhaps four percent.  I do understand the case for this, and furthermore it is not obvious that the higher rate of inflation would bring significant social costs.

The thing is this: whether rationally or not, the American public hates higher rates of price inflation.  Perhaps they mis-sample or mis-estimate prices, or perhaps the higher prices really do erode their real wages in a way they can’t get back through a new labor market bargain.

So a higher price inflation target would mean that everybody would hate the central bank.  It would not shock me if the first thing they did was to dismantle…the higher price inflation target.

Under nominal gdp targeting, the rate of price inflation would not have to significantly rise until worse times were upon us.  That is precisely when such upward price pressures would be most useful.

In 2015 our iron ore exports alone were four times the value of all of our combined services exports to China. And in services the only things that really count are tourism and education. That’s not going to change for a long, long time.

The alas now gated article, by Greg Sheridan, is of interest more generally and concerns some myths about China and Australia.

Addendum: To read the piece, try here.