Month: March 2011

Libya and our budget

From Ezra Klein’s Wonkbook:

The war in Libya is making defense cuts less likely, reports Carrie Budoff Brown: “For once, the unthinkable in Washington seemed within reach. From liberals to tea party conservatives to a defense secretary who served in a Republican administration, all agreed — it was time to begin reining in the Pentagon budget. Then along came Libya. Just as the debt debate ramps up on Capitol Hill, the lead role the United States is playing in the military action against Libya threatens to scramble an emerging consensus over the need to trim defense to reduce the deficit…The airstrikes are already being used by some in the Republican establishment to blunt momentum in favor of the cuts, long considered heretical in a town in which defense contractors constitute a formidable lobby and members of Congress view the Pentagon budget as a jobs program and fear being tagged as unpatriotic.”

How much productivity growth was there during 2007-2009?

Michael Mandel has a long and excellent blog post on this question.  He claims that the supposed productivity gains were concentrated in a small number of sectors (one of which, by the way, was financial services ha-ha) and that they are mostly illusory when cross-checked with other sources of data.  Here is his final conclusion:

However, the effect of the adjustment on the 2007-2009 period is spectacular.  Productivity growth, which had been 1.6% annually in the original data, basically disappears. The decline in real GDP is twice as large  (-1.3% per year in the original data, -2.9% in the adjusted data).  And economists are no longer presented with the confounding puzzle of why unemployment rose so much with such a modest decrease in GDP–it’s because the decrease in GDP was not so modest.  (see a piece here on Okun’s Law, which links GDP changes with unemployment changes).

His redone figures, by the way, are based on the assumption that intermediate inputs are growing and shrinking roughly at the rate of final product (Mandel believes we are mismeasuring these intermediate inputs and thus finding illusory productivity gains over that period.)  Think of his alternative numbers as illustrative rather than necessarily his best estimate.  The implications of his analysis include:

1. Productivity statistics aren’t well set up to cover outsourcing.

2. Beware of measured productivity gains, reaped over short periods of time, based on supposed drastic declines in intermediate inputs.  We’re probably mismeasuring those inputs.  Mike’s examples on these points are pretty convincing, walk through what he does for instance take a look at his numbers on mining: “Mining, for example, combines a 10% drop in real gross output with an apparent 46% drop in real intermediate inputs,  leading to a reported 23% gain in real value-added and a 26% gain in productivity.  It’s very hard to understand how intermediate inputs decline four times as fast as output!”

3. During the crisis, output fell more than we thought and thus our recovery isn’t going as well as we think.  (By the way, this is the most effective critique of the ZMP hypothesis, since the implied decline in true output now comes much closer to matching the measured decline of employment.)

4. Issues of “international competitiveness” are much more important than either economists or the Obama administration have been thinking.  Excerpt:

…the mismeasurement problem obscures the growing globalization of the  U.S. economy, which may in fact be the key trend over the past ten years. Policymakers look at strong productivity growth, and think they are seeing a positive indicator about the domestic economy.  In fact, the mismeasurement problem means that the reported strong productivity growth includes some combination of domestic productivity growth, productivity growth at foreign suppliers, and productivity growth ”in the supply chain’.  That is, if U.S. companies were able to intensify the efficiency of their offshoring during the crisis,  that would show up as a gain in domestic productivity.

5. Read #4 directly above, think about who captures those gains, and you can see that the Mandel productivity hypothesis is broadly consistent with some of the data on income inequality.

6. There really is a structural unemployment problem and it stems from ongoing low productivity growth.

7. At the risk of sounding self-congratulatory, if you combine Mike’s estimates with the new Spence paper, and the reestimation for male median wages (down 28 percent since 1969), in my view the TGS thesis is looking stronger than it did even two months ago when the book was published.

Fragments of truth

This time, not even an entire sentence is required:

…the Republican position appears to be: “How do we preserve current tax rates and most current spending while getting Democrats to accept deep cuts to the small fraction of the budget called non-defense discretionary spending?”

(Could you improve that fragment by subbing in “is” for “appears to be”?)  Ezra Klein’s associated prediction is that a government shutdown is on its way.

Dennis is Not More Likely to be a Dentist

Pelham, Mirenberg and Jones (2002) found that the names Jerry, Dennis and Walter were the 39th, 40th, and 41st most frequent male names in the 1990 census (moreover the absolute frequency of (Jerry+Walter)/2 was almost identical to that of Dennis). But in a nationwide search they found 482 dentists named Dennis but just 257 named Walter, and 270 named Jerry, a highly statistical significant difference. Hence the meme was born, “Dennis is more like to be a Dentist.”

The expected number of dentists named Dennis, however, depends not on the frequency of Dennis in the 1990 Census but on the entire stock of people named Dennis over the past ~70 years and similarly for Walter and Jerry. If, for example, no one was ever named Jerry prior to 1989 but in 1990 the name skyrocketed to prominence following the appearance of Seinfeld then there would be no dentists named Jerry despite Jerry being a popular name in the 1990 census.

Following this logic, Uri Simonsohn proposes that instead of comparing the number of dentists named Dennis  to those named Jerry or Walter we compare the number of dentists named Dennis to the number of lawyers named Dennis. Making this comparison, Simonsohn finds that Dennis’s are just as overrepresented among lawyers as among dentists, thus the Dennis is a dentist finding is most likely due to a spurious cohort effect.

In addition, to testing the name-profession link Simonsohn reexamines many of the classics of the implicit egoism literature and finds many of them (not all and he does not challenge the experimental results) wanting. Virginia is not more likely to move to Virginia, for example. The Simonsohn paper is impressive and a great resource for anyone wanting to teach the difficulties of doing causal statistical research.

Hat tip to Andrew Gelman who comments here and here.

Paul Krugman tries to lure Scott Sumner out of retirement

Krugman writes:

But when you cut the price of everything — which is more or less what happens when wages fall across the board — there’s nothing else to substitute away from.

Yes, economics textbooks typically show a downward-sloping “aggregate demand curve”. But the reasons for that curve’s downward slope aren’t the same as for your ordinary demand curve. It’s a process that works like this: lower prices -> lower demand for money -> lower interest rates -> higher spending. And that process doesn’t operate when, as is currently the case, short-term interest rates (which are the ones that matter for money demand) are zero.

Here is more.

Yet a deflationary downward spiral is not the necessary or even the likely outcome.  Even if a liquidity trap prevents the Fed from credibly inflating to recovery, it is much harder to argue that the Fed is helpless to prevent a downward deflationary spiral.  The Fed can do that very credibly indeed.  The Fed is already doing that.  It’s credible and there is no undesired outcome, such as five or six percent inflation, which needs to be seen through ex post.

Another way to put this point is that the AD curve does not sufficiently embody the Fed’s reaction function (Larry Summers is fond of making a related observation), much less individual expectations based on that reaction function.  The model is incomplete and in this case the incompleteness really matters.

A few smaller points deserve mention:

1.Wages usually fall sequentially, not across the board and all at once, especially not in a large, decentralized, non-trade union-ruled economy such as the United States.  That creates a greater chance that an employment boost kicks in, in some sectors, before prices fall (prices are sticky too!) and thus the economy may enter a Clower-Leijonhufvud-Hutt upward spiral of employment and output.

2. Krugman’s third sentence (“It’s a process that works like this: lower prices -> lower demand for money -> lower interest rates -> higher spending.”) need not be the dominant causal mechanism when so many variables are changing.  Scott in particular might think that interest rates are not so important.

3. A different reason to be skeptical of wage cuts, as a mechanism for macroeconomic recovery, is simply that wage cuts are often small relative to threshold required rates of return for investors, especially when “wait and see” remains an option for those holding the cash.

How are Irish banks doing?

Depending how you do the count, at best the headline “ECB plans emergency €60bn scheme for Irish banks” is the seventh lead article on right now.  (It’s a much bigger story on  It’s right between “Jesuits pay $166m to abuse victims” and “Mammies prefer hugs to presents.”

Forthcoming stress tests this week will reveal that Irish banks need a good deal more capital to keep going.  You will recall that “silent runs” on Irish, Portuguese, and other banks are the main force which can require a rather sudden end to euro membership, by bringing capital controls and convertibility suspension (with completely hollowed out domestic banks as the alternative).

The first country which can, with no shame, credibly threaten to leave the eurozone or outright default can blackmail Brussels and Berlin into further aid, due to fear of contagion effects.  Some are arguing that Portugal is already assuming that strategic stance.

Assorted links

1. Can a failed spy succeed in Russian politics?

2. Does the finance premium penalize entrepreneurship?

3. “Daniel (jungleman12) Cates, a 21-year-old self-made multimillionaire, lapsed economics/computer-science major and one-day Bubble Trouble champion of the world, was mildly annoyed.” Link here.

4. Michael Spence narrates his life.

5. Reviews of Margaux Fragoso.

6. Why don’t more female economists blog?

7. Bryan Caplan, slouching toward consequentialism.

8. The growth in unpaid jobs.

The Spence and Hlatshwayo paper is now on-line

The Browser informs us (pdf behind that link), bravo to them, here is the abstract:

This paper examines the evolving structure of the American economy, specifically, the trends in employment, value added, and value added per employee from 1990 to 2008. These trends are closely connected with complementary trends in the size and structure of the global economy, particularly in the major emerging economies. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, U.S. industries are separated into internationally tradable and nontradable components, allowing for employment and value-added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the nontradable side. On the nontradable side, government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades. There are obvious questions about whether those trends can continue; without fast job creation in the nontradable sector, the United States would already have faced a major employment challenge. The trends in value added per employee are consistent with the adverse movements in the distribution of U.S. income over the past twenty years, particularly the subdued income growth in the middle of the income range. The tradable side of the economy is shifting up the value-added chain with lower and middle components of these chains moving abroad, especially to the rapidly growing emerging markets. The latter themselves are moving rapidly up the value-added chains, and higher-paying jobs may therefore leave the United States, following the migration pattern of lower-paying ones. The evolution of the U.S. economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States. A related set of challenges concerns the income distribution; almost all incremental employment has occurred in the nontradable sector, which has experienced much slower growth in value added per employee. Because that number is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce.

A few points:

1. p.10 offers interesting remarks about China, namely that China is approaching a “middle income range” where economic growth commonly slows.

2. This paper has some of the best disaggregated information for those who are not convinced by simpler calculations of median income growth slowdown.

3. pp.33-34 offer a good summary of results and also a good explanation of current structural unemployment which does not fall prey to the usual criticisms offered by the blogosphere Keynesians, who on this issue remain behind the curve.

4. p.37 has good, short remarks on Germany and (now switching to my words) why it is wrong to dismiss their recent successes.

5. The co-author, Sandile Hlatshwayo, is at the Stern School of Business, NYU.  He, she or a namesake is taking a honeymoon poll.

Overall, this is one of the most important papers of the year and perhaps the most important paper so far on “economic malaise” issues.  It is also a useful corrective to the political conspiracy theories of changes in the income distribution (if you are wondering, Spence at least would not count as a right-winger, I cannot speak to Hlatshwayo).

As for The Browser, it is better than I ever expected a web site to be.

Addendum: Arnold Kling comments.

Meta-ethics, realism, and intuitionism

Dan S. asks:

What are your meta-ethical views? I’ve heard you mention the importance of subjective value as well as “virtue,” so I imagine you are inclined toward a more “morality is subjective” view. What is your opinion of Bryan Caplan’s moral realism and intuitionism? Do you think it faces insurmountable metaphysical obstacles?

I am a moral realist and intuitionist, as is Bryan, but my view on applications is very different.

On torturing babies, I a) think it is objectively wrong, but b) I don’t think that a philosophical unpacking of “wrong” here gets one very far.  It’s wrong, and if you don’t understand why you won’t understand the philosophic explanation either.  There is nothing in the philosophical explanation that is more evident than the initial wrongness.  So far I’m on board with Caplan.

Yet I don’t wish to walk down this plank very far.  Bryan wants to “coin” a large number of (non-trivial) moral truths this way, such as his claim that taxation is morally wrong for violating the precepts of common sense morality (“don’t take things from other people”).  Last I looked, a lot of common sense people support taxation and the interpretation of common sense maxims depends very much on context.  Reasoning by analogy is far, far weaker than Bryan wishes to believe.

I’m agnostic on a lot of ethical issues, but not a relativist or a subjectivist per se.  I simply think that we don’t have very good facilities for detecting objective ethical truth, just as most of us are not very good at factoring large numbers in our heads.  Indeed, ethical philosophy hasn’t made a lot of progress in the last two thousand years.

I find that my combination of views is fairly rare.  People who believe that ethics is objective and intuitive are often quite keen to make a lot of detailed pronouncements about the content of those ethics.  The agnostics tend to be relativists or subjectivists.  It seems to me that people are first choosing a mood or attitude, and then finding the disparate views which match to that mood and, to themselves, justifying those views by the mood.  I call this the “fallacy of mood affiliation,” and it is one of the most underreported fallacies in human reasoning.  (In the context of economic growth debates, the underlying mood is often “optimism” or “pessimism” per se and then a bunch of ought-to-be-independent views fall out from the chosen mood.)

Here is an earlier post on ethical intuitionism.  Here is my conclusion:

…ethical intuitionism settles many fewer issues than most of its proponents like to think.  That said, there is often nowhere else to go.  We somehow need to come to terms with two propositions at the same time:

1. We need to think more rather than less ethically.

2. The content of ethical philosophy tells us less, in reliable terms, than most people would like to believe.

Scott Sumner is taking a break from blogging

He writes:

…I am complete burned out, and have been for months.  I’ve blogged an average of eight hours a day, seven days a week, for over two years.  I’ve only kept going in recent months out of a sense of obligation to keep pushing these issues.  But now that lots of other people are saying the exact same thing, it’s time for me to take a break.  So I’ll stop blogging for a few months, unless there is some huge news story like QE3, in which case I’ll add a couple posts.  Or if someone does a hit job on my marshmallow post, I may need to briefly respond.  Otherwise I’m done for now, and will return sometime this summer.

A few points:

1. Read or reread all of his archives.

2. Do not tempt him with mistake-ridden posts on topics such as “South Korean cinematic representations of nominal GDP targeting in the Great Depression.”

3. He will be back (and I’ll let you know when).  In the meantime we will all miss him.  Hail Scott Sumner!

p.s. Boo Hoo.