Month: May 2011

*The Great Stagnation* (Retrogression)

June 9 it is coming out in a physical edition, hard cover.  Amazon pre-order is here.  Barnes&Noble pre-order is here.  The text is exactly the same as the eBook edition, although I made a minor addition to one footnote.  If you’ve read Borges’s Pierre Menard, you’ll know why I regard the electronic edition as “the real book” and this volume as a kind of postmodern satire.  Still, many people demanded a physical edition, sometimes for classroom use, and so now there is one.

“Google plays the yield curve”

Here is Greg Mankiw’s very interesting post, but with an open comments section:

I was fascinated a story in today’s Wall Street Journal.  Apparently, Google is sitting on $37 billion in cash, but nonetheless decided to sell $3 billion worth of bonds.  Why?  To take advantage of low interest rates.

It is like reverse maturity transformation.  The banking system borrows short and lends long.  Google is borrowing long and lending short.  (Or maybe I should call it reverse quantitative easing, as Google is also doing exactly the opposite of what the Fed has been doing.)

Does this make sense for Google?  I have no idea, and I am ready to concede that those guys are a lot smarter (and financially successful) than I am.  But there is reason to be skeptical.

The chart above shows the spread between the ten-year Treasury bond and the three-month Treasury bill.  The yield spread is now high by historical standards.  The empirical literature on the expectations theory of the term structure (in which I have sometimes played) suggests that this is a good time to borrow short and lend long–the opposite of what Google is doing.

Maybe this time is different, and past empirical regularities will not hold going forward.  But ponder this question: If you had a friend with a paid-up house, would you suggest that he now take out a long-term mortgage in order to deposit the proceeds in a money-market fund?  If not, does it make sense for Google to be doing much the same thing?

The usual explanation for this kind of apparently strange financial behavior is that shareholders wish to force the managers into accepting the scrutiny of outside capital markets; see Easterbrook 1984.  That seems less plausible in the case of Google, where concentrated delegated monitoring by major shareholders remains strong.  An alternative explanation is that Google has a very high option value for the cash, which more or less implies they see a lot of acquisition and investment opportunities in their not so distant future.  A lot.

Assorted links

1. One way of measuring structural shifts.

2. The culture that is German, they sold condoms in the Bundestag (in German), though now no more.

3. Debt ceiling games throughout the ages.

4. Coverage from Guinea (in French); the maid is described as a nice person.  And “His most recent book, Left in Dark Times: A Stand Against the New Barbarism, discusses political and cultural affairs as an ongoing battle against the inhumane.” The Germans give the most detail.

5. The inefficiency of urban sorting?

6. Lengthy 2005 interview with Milton Friedman at 93 (Charlie Rose).  Fascinating.

The offshore bias in U.S. manufacturing

In the newest Journal of Economic Perspectives, Susan Houseman, Christopher Kurz, Paul Lengermann and Benjamin Mandel report:

In this paper, we show that the substitution of imported for domestically produced goods and services—often known as offshoring—can lead to overestimates of U.S. productivity growth and value added. We explore how the measurement of productivity and value added in manufacturing has been affected by the dramatic rise in imports of manufactured goods, which more than doubled from 1997 to 2007. We argue that, analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index, the price declines associated with the shift to low-cost foreign suppliers are generally not captured in existing price indexes. Just as the CPI fails to capture fully the lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. As a result, the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in multifactor productivity and real value added in the manufacturing sector have been overstated. We estimate that average annual multifactor productivity growth in manufacturing was overstated by 0.1 to 0.2 percentage points and real value added growth by 0.2 to 0.5 percentage points from 1997 to 2007. Moreover, this bias may have accounted for a fifth to a half of the growth in real value added in manufacturing output excluding the computer and electronics industry.

In other words, Michael Mandel was right.  An ungated version is here.  In terms of income distribution, think of these rents as going to those individuals and institutions which are good at managing international supply chains.  That’s a relatively small number of people.  A lot of the offshoring is enabled by an innovation — the internet — which really does boost productivity but not in a way which much helps the median U.S. wage.

A few thoughts on the debt ceiling

This topic is so laden with “us vs. them” thinking that I am loathe to approach it.  Still, here are a few thoughts:

1. There is plenty in the federal budget which can be cut and should be cut, starting with farm subsidies but extending considerably further.

2. In blackmailing President Obama (and arguably the Senate too), the House Republicans are cowards.  They want him to take the heat for the spending cuts.

3. In considering the blackmail to be blackmail, the Obama administration has its share of cowards.  “You are forcing us to propose something we believe in” is not that serious a negative charge, even if the motives of the forcers are ignoble.  That said, the Obama administration is probably not going to propose something it believes in, which makes them ignoble too.

4. “Blackmail” is also known as “checks and balances” and it does not, normatively speaking, require an electoral mandate.  That said, arguably the House Republicans do have an electoral mandate for the idea of “doing something about the crummy budget,” but do not have a mandate for particular cuts which might be prompted.  Which of these is the “fact of the matter” is a moot point.

5. In my view the consequences of “funny debt ceiling outcomes” could be very, very bad.  Various crude causal theories, or underspecified bargaining theory axioms, will be used to apportion this blame to one side or the other.  The naive causal perspective would seem to apportion most of the blame for the chance of catastrophe to the Republicans.

6. By refusing to raise income tax rates on the non-wealthy, or to propose some comparably unpopular reforms, the Obama administration is somewhat undoing the normative relevance of the naive causal perspective here.  The Obama administration is also stonewalling on (required) further fiscal reforms to Medicare, to better use the issue against the Republicans.

7. Do we take market prices seriously?  Since Treasury rates are still low, low, low, arguably we can infer that the market does not think the Republican stance is so catastrophic.  Paul Krugman does not take a consistent position on the relevance of low rates.  They are allowed to indicate that the U.S. government should spend more, but not allowed to indicate that we should diminish the blame to be leveled at Republicans.  One cannot have it both ways.

Addendum: Megan McArdle comments.

Hemp for Victory

During World War II hemp made a brief comeback as an American crop due to shortages of rope-making stock from other countries. Hemp for Victory is a 1942 US Department of Agriculture film that encourages farmers to grow hemp. It opens with a discussion of the ancient history of hemp (canvas derives from cannabis) and then moves into how it is being farmed in Kentucky and other US states to help in the war effort.

The film has an interesting history. For decades the USDA and the Library of Congress denied that such a thing had ever been made but in 1976 Rastafarians delivered a copy to a reporter in Florida.

http://www.youtube.com/watch?v=W0xHCkOnn-A

Facts about health care coverage

Among workers who provide hands-on care to nursing home residents, one in four has no health insurance. Among those who provide care to people living at home, one in three is uninsured.

But here is the clincher:

The new health care law is supposed to fix the problem by guaranteeing access to affordable coverage for all. But many nursing homes and home care agencies, alarmed at the cost of providing health insurance to hundreds of thousands of health care workers, have started a lobbying effort seeking some kind of exemption or special treatment.

This is not a good sign for the future of the mandate.  The full story is here.

Three (unrelated?) points about stagnation

I’ve been wondering about a few questions.

Internalizing externalities is a common theme in economics,and it’s also called capturing the value you create.  Don’t economists believe this happens — and happens increasingly — all the time?  Karl Smith writes (and you can find his caveat here):

TFP growth depends on the returns to innovation not being captured by the innovator. Otherwise it becomes a return to the factor of production rather than total factor productivity.

Does TFP tend to fall once it has been high for a while?  Is falling TFP, following a technological breakthrough, a sign of the market’s ability to capture value and internalize externalities?  And is this another reason why we might prefer imperfectly defined intellectual property rights?

The second question concerns the Industrial Revolution.  There is a large cottage industry about the origins of “the rise of the West,” and so on.  I am not disputing the particular causal claims made in this literature.  Still, I wonder what is being explained.  Arguably the potency of the technological platform of “powerful machines plus fossil fuels” was not well understood in advance.  Ex post, that it led to the “rise of the modern world” was somewhat of a technological accident.  In this sense, studies of the origins of the Industrial Revolution, analytically speaking, are explaining “the Industrial Revolution” (to some extent).  But the “sense-reference distinction” matters here.  These studies are not so much explaining “the rise of the modern world,” which is more of a technological accident than we might wish to think.

Third, there remains the issue of unmeasured gains in real wages.  Let’s try a simple thought experiment.  Say I’ve been at George Mason twenty years (much less since 1973) and my real wage had never gone up (not the case).  But my Dean were to say to me: “Tyler, U.S. health care has some new procedures, when you’re 73 you’ll have stents, and now can surf the internet and watch reruns of Battlestar Galactica.  We’ve treated you very well!”  Such a claim would not pass the laugh test and few people would accept it as applied to their own employment relation.  Yet many of those same people make this same argument in the aggregate.  I still think that if measured real wages for a group (or individual) have not gone up very much, over a long period of time, something is wrong.  Wrong with the Dean, wrong with me, whatever, but something is wrong.  Who would have predicted in 1972 that measured male median  wages were going to stagnate and even possibly fall?  You should be shocked by this result and indeed I am.

Who are the favorite economic thinkers, journals, and blogs?

The piece, by Daniel Klein, et.al., has this abstract:

A sample of 299 U.S. economics professors, presumably random, responded to our survey which asked favorites in the following areas: Economic thinkers (pre-twentieth century, twentieth century now deceased, living age 60 or older, living under age 60), economics journals, and economics blogs. First-place positions as favorite economist in their respective categories are Adam Smith (by far), John Maynard Keynes followed closely by Milton Friedman, Gary Becker, and Paul Krugman. For journals, the leaders are American Economic Review and Journal of Economic Perspectives. For blogs, the leaders are Greg Mankiw followed closely by Marginal Revolution (Tyler Cowen and Alex Tabarrok). The survey also asked party-voting and 17 policy-view questions, and we relate the political variables of respondents to their choice of favorites.

The favorite twentieth century economists are Keynes, Friedman, Samuelson, and Hayek, in that order.  Kenneth Arrow doesn’t do as well as he should, though he comes in second, after Gary Becker, in the category, favorite living economists, sixty years or older.

As for favorite living economists, under age sixty, Paul Krugman wins by a long mile, followed by Greg Mankiw, then Acemoglu, Levitt, and David Card.  I do not deserve my position at #16, but thanks if you voted for me!  Scroll to p.13 for that list.

On p.14 there is a fascinating chart about the political orientations of the voters for various favorite economists.  Krugman for instance is more popular among left-wing economists.

The votes for favorite journal are on p.16, no surprises there.  p.17 has the favorite blogs chart.  Krugman and DeLong are third and fourth, after Mankiw and MR.

It is a fascinating paper which says much about our profession.

That is all from the latest issue of Econ Journal Watch, the link to the whole issue is here.  Here is a good piece about the embarrassment of Richard T. Ely.

What makes you an economist?

Dominique Strauss-Kahn has been arrested, taken off a plane to Paris, and accused of a shocking crime.  When I hear of this kind of story, I always wonder how the “true economist” should react.  After all, DSK had a very strong incentive not to commit the crime, including his desire to run for further office in France, not to mention his high IMF salary and strong network of international connections.  So much to lose.

Should the “real economist” conclude that DSK is less likely to be guilty than others will think?  If you are following the social consensus estimate of p, does that make you less of an economist?  A lesser economist?  Is everyone else an economist anyway and thus you can agree with them?  How many economists seriously use the concept of incentives — more than non-economists do — to understand everyday events?  Is the notion that incentives predict individual behavior actually so central to economics?  Should it be?

So run my thoughts this evening.  I asked similar questions when legal charges were levied against Kobe Bryant.