Month: January 2012

Non-neutral and wealth effects, once again

Construction makes up less than 5 percent of employment but accounts for more than 40 percent of the large swings in the job-filling rate during and after the Great Recession. Leisure & Hospitality accounts for nearly a quarter of the large drop in recruiting intensity during the Great Recession.

That is from Davis, Faberman, and Haltiwanger, here is more.

In Praise of Private Equity

Excellent piece by Reihan Salam on private equity and how Bain fit into the larger picture of a dynamic economy.

The difficult truth that virtually no politician is prepared to acknowledge is that the road to job creation runs through job destruction.

…Chad Syverson, an economist at the University of Chicago’s Booth School of Business, found that what separates top firms from bottom firms is, typically, a large difference in productivity, with the top ones producing almost twice as much with the same measured input. This creates an almost irresistible temptation for investors. If Firm X, languishing at the 10th percentile in terms of productivity, could somehow be overhauled to match the productivity levels achieved by Firm A, at the 90th percentile, the potential for profit would be huge. Note, however, that halving “measured input” in order to double productivity will often mean shedding the weakest performers and giving those who remain the tools they need to do their jobs better and faster. Private equity does exactly this.

What Mitt Romney discovered was that American corporations sometimes had to be dragged, wailing and whining, into a state of efficiency. As a management consultant at Bain & Company, Romney had studied successful firms and then told other firms how to replicate their strategies. But those firms had come of age in the fat years of American corporate dominance, when many believed that the Japanese could do little more than manufacture cheap toys and textiles, and many were reluctant to accept his newfangled advice. It eventually became clear that if Romney and his cohort were going to remake American business, they’d have to raise money to make their own investments. Spurred by the senior partners at Bain & Company, Romney and his merry band of consultants established Bain Capital.

I wish Romney were as eloquent in his defense as is Salam.

A simple theory of why so many smart young people go into finance, law, and consulting

The age structure of achievement is being ratcheted upward, due to specialization and the growth of knowledge.  Mathematicians used to prove theorems at age 20, now it happens at age 30, because there is so much to learn along the way.  If you are a smart 22-year-old, just out of Harvard, you probably cannot walk into a widget factory and quickly design a better machine.  (Note that in “immature” economic sectors, such as social networks circa 2006, young people can and do make immediate significant contributions and indeed they dominated the sector.)  Yet you and your parents expect you to earn a high income — now — and to affiliate with other smart, highly educated people, maybe even marry one of them.  It won’t work to move to Dayton and spend four years studying widget machines.

You will seek out jobs which reward a high “G factor,” or high general intelligence.  That means finance, law, and consulting.  You are productive fairly quickly, you make good contacts with other smart people, and you can demonstrate that you are smart, for future employment prospects.

The rest of the world is increasingly specialized, so the returns to your general intelligence, as a complementary factor, are growing too, in spite of your lack of widget knowledge.  “Hey you, think about what you are doing!  Are you sure?  How about this?” often sounds bogus to outsiders but every now and then it pays off and generates a high expected marginal product.

Both supply and demand sustain this Smithian equilibrium.

There are other factors of relevance, as explained over a very good session last night; the people there comprised about half of my Twitter feed.

David Brooks on the new Charles Murray book

Roughly 7 percent of the white kids in the upper tribe are born out of wedlock, compared with roughly 45 percent of the kids in the lower tribe. In the upper tribe, nearly every man aged 30 to 49 is in the labor force. In the lower tribe, men in their prime working ages have been steadily dropping out of the labor force, in good times and bad.

People in the lower tribe are much less likely to get married, less likely to go to church, less likely to be active in their communities, more likely to watch TV excessively, more likely to be obese…

It’s wrong to describe an America in which the salt of the earth common people are preyed upon by this or that nefarious elite. It’s wrong to tell the familiar underdog morality tale in which the problems of the masses are caused by the elites.

The truth is, members of the upper tribe have made themselves phenomenally productive. They may mimic bohemian manners, but they have returned to 1950s traditionalist values and practices. They have low divorce rates, arduous work ethics and strict codes to regulate their kids.

Members of the lower tribe work hard and dream big, but are more removed from traditional bourgeois norms. They live in disorganized, postmodern neighborhoods in which it is much harder to be self-disciplined and productive.

Remember when “rage” used to mean “Radical Alternatives to Government Enterprise”?  Murray’s book will bring rage of a different kind, because it strikes rather directly at how political views are based on emotional feelings about the deserved status of various social groups (RH: “Politics isn’t about policy.”)  Here is more.  If you are wondering, my copy of the book arrives today.  Perhaps my review will consider whether economic forces are driving the social ones, or vice versa.

Sherlock Holmes v. Sherlock

Sherlock Holmes: A Game of Shadows is ok so long as you are expecting a comic book adventure along the lines of Captain America or Iron Man (natch) and not a detective-mystery ala Sherlock Holmes. A smart character requires smart writers and in this movie the producers saved the money for special effects.

In contrast, the British TV series Sherlock is a must see. Sherlock reboots Holmes into our world. Yet despite advancing in time some 130 years when Sherlock first meets Watson he says, exactly as in the original, “You have been in Afghanistan, I perceive.” A shiver ran down my spine.

Sherlock is fast-paced but clever. It’s written by two Doctor Who vets who invest Holmes with wit, originality and intellect, rather than the quasi-magical powers found in the aforementioned movie. The chemistry between Holmes and Watson is  clear – one understands in this version what is lacking in many others, these two need each other.

The first season has only 3, 90 minute, episodes but a second season just ran in Britain and I expect it will soon be available in the U.S.

*Cato Papers on Public Policy*

It is a new journal, edited by Jeffrey Miron, summary:

This new publication is an annual volume of innovative, original articles on current and critical economic and public policy issues. Each article is written by a recognized national expert, most often a senior member of a prestigious university. The overarching goal of the publication is to provide in-depth, imaginative new research on key economic and public policy matters combined with a range of potential improvements and solutions.

The cloth version is $15, $6.99 for the eBook version.  At the link you will find the first table of contents, I have not yet read any of my copy.

Very good sentences

From Tim Harford, about the UK:

…as Mr Summers pointed out, even China seems to have been shedding manufacturing jobs over the last couple of decades. Perhaps the data deceive here, but the Chinese manufacturing boom seems to be more about increasing output per worker than employing more workers. If the Chinese can’t generate jobs through manufacturing I am not sure we should be expecting too much from that strategy.

Rewarding Virtue

In the Elizabethan period, business was sneered upon. In Shakespeare’s plays, the only major bourgeois character, Antonio, is a fool because of his affection for Bassanio. There is no need to dwell on how the other bourgeois character in “The Merchant of Venice,” Shylock, is characterized.

She contrasts this with attitudes 200 years later. When James Watt died in 1819, a statue of him was erected in Westminster Abbey and later moved to St. Paul’s cathedral. This would have been unthinkable two centuries earlier. In Ms. McCloskey’s view, this shift in perceptions was central to the economic take-off of the West.

From a profile of Deirdre McCloskey in the WSJ.

The boycott Elsevier movement

Many of you have asked me about this recent movement.  A few points:

1. I largely agree with the goals and views of the perpetrators.

2. If I never published again in an Elsevier journal, it would not hurt my career (I have been tenured for twenty-six years).  It would be a cheap endorsement for me personally.

3. In the past my career has benefited from publishing in Elsevier journals.  They have provided useful outlets for some of my pieces and for some of the pieces of my friends and colleagues.  Although I would prefer to move to a new and more open publishing model, I do count this past relationship for something.

4. In the future I likely will wish to help my students publish, including in Elsevier journals.

5. If I were to pick three boycotts to see through, would this be one of them?

My current conclusion is that I should not join this boycott in any formal sense, again while expressing support for the final vision.  I do contribute to the open science idea in a number of ways, including through this blog.

In my forthcoming An Economist Gets Lunch: New Rules for Everyday Foodies you will find a more extensive discussion of the economics and ethics of boycotts.

Addendum: Via Claire Morgan, here is an interesting discussion of metrics for on-line influence.

Hunting Endangered Species

Can hunting save an endangered species? Yes. In Africa hunting has been critical to the conservation of a number of species, despite the sometimes opposition of the United States which can prohibit US citizens from hunting even in foreign countries.

I was surprised to discover, however, that “some exotic animal species that are endangered in Africa are thriving on ranches in Texas, where a limited number are hunted for a high price.” Texas hunters have saved several endangered African species, unfortunately for the animals, the story does not end happily. Video from 60 Minutes below–some excellent material on incentives, ethics and conservation for classroom discussion.

Not your grandpa’s aggregate demand shortfall

Andrew Smithers, of the consultancy Smithers & Co, said in December that US profit margins were at a record level and had expanded in the past three years even as output fell.

“Margins have been as good as it gets,” says Graham Secker, European equity strategist at Morgan Stanley. He adds corporate profitability over the past 20 to 30 years has gained from factors such as technological advances, falling corporate tax rates, low funding costs and declining commodity prices.

Analysts at Citigroup say operating margins at S&P 500 companies are close to the highs of 2007, partly because of the fall in unit labour costs. “A reluctance to hire more employees as well as outsourcing to lower-cost alternatives have left management teams with lean and mean companies,” they say.

Some analysts remain optimistic about prospects for the US. Gerard Lane, equity strategist at Shore Capital, says: “Even though US margins are extended, they do not necessarily have to fall at the moment.

“As a long-term trend, these businesses are gaining more of their profits from overseas. It is only when unit labour costs at S&P companies start growing at more than 2 per cent a year that margins will start to fall.”

Here is more, from the FT.

What’s wrong with Britain?

Scott Sumner has the microphone:

I was curious to see just how tight British fiscal policy actually is, so I checked the “Economic and Financial indicators” section at the back of a recent issue of The Economist.They list indicators for 44 countries, including virtually all of the important economies in the world.  Here are the three biggest budget deficits of 2011:

1.  Egypt  10% of GDP

2.  Greece:  9.5% of GDP

3.  Britain:   8.8% of GDP

Egypt was thrown into turmoil by a revolution in early 2011.  Greece is, well, we all know about Greece.  And then there’s Great Britain, third biggest deficit in the world.

I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus.  If the deficit is third largest in the world, it should have been second largest, or first largest.

A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.)  But that shouldn’t cause a recession.  Think about the Keynesian model you studied in school.   If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession?  That’s not the model I studied.  Deficits were supposed to provide a temporary boost to get you out of a recession.  At worst, you’d expect a slowdown in growth.

To get a sense of just how expansionary UK fiscal policy really is, compare it to France (5.8% of GDP), Germany (1.0% of GDP), or Italy (4.0% of GDP).  Lots of people blame ECB policies for the recession, but Britain is not in the eurozone.  Outside the eurozone you have Denmark (3.9% of GDP), Sweden (zero), Switzerland (1% surplus).

Obviously there must be some problem in Britain that isn’t affecting some of its more prosperous northern European neighbors.

Most blogosphere writings on this topic do not demonstrate nearly enough sophistication, fact, or detail.  The rest of Scott’s post discusses ngdp for Britain.  I have a piece in the Sunday Times (of London) this weekend on these topics and TGS, though no link because the whole system is gated.  If you have a pdf, I would be appreciative if you could send it to me, for my private use only.