Month: November 2013
1. Gendered Average is Over (nice photos, recommended). Where have all the other men gone? Off to pick the flowers?
From Greg Toppo:
It’d be easy to conclude that school has never been a more dangerous place, but for the USA’s 55 million K-12 students and 3.7 million teachers, statistics tell another story: Despite two decades of high-profile shootings, school increasingly has become a safer place.
…By nearly every measure, safety has improved and violence has dropped for students and teachers, according to recent findings issued jointly by the Justice Department and Education Department.
The data do not include post-2011, but still the overall trends, as outlined in the longer article, seem pretty clear.
Here is a long and very interesting post by Paul Krugman, also referencing a recent talk by Larry Summers. There is also this older Krugman post, and here is Gavyn Davies, and also Ryan Avent. And Scott Sumner. Do read and listen to these, there is much in there to ponder. I do very much agree with the claim that lower rates of return make recovery more difficult and for the longer haul as well. And I am happy to welcome these thinkers, or in the case of Krugman re-welcome, to stagnationist ideas.
I cannot, however, agree with the central arguments about negative real interest rates, and the necessity for negative natural rates of interest (there are a variety of interlocking claims here, so do read them for yourself. I am not sure any brief summary can quite reproduce the arguments, which are also not fully clear).
As I frame the data, we have had negative real rates on government securities, but positive rates on many other investments in the U.S. The difference reflects a very high real risk premium, which of course we would like to lower, and the differences also reflect some degree of investment segmentation. The positive rates on these other investments are evidenced by recent broad stock market gains, observed rates of productivity growth (low but clearly positive), high internal corporate hurdle rates, and so on. The “average vs. marginal” distinction is an important one, but still I don’t see how it can be used to push us away from seeing relevant real rates of return as positive. Nor do I think monopoly is widespread enough for that assumption to be a game-changer. Even Apple competes with Samsung and others in its major product lines.
Given the multiplicity of real rates in the American economy, I get nervous when I read about the real rate or the natural rate. (Don’t forget Sraffa  and also Arnold Kling discusses the different issue of varying rates across people. Interfluidity questions whether the idea of a natural rate makes sense at all.) I also get nervous when I do not see serious talk about the embedded risk premium in the observed structure of market rates. I grow more nervous yet when the average vs. marginal question is not spelled out more explicitly.
In my view very negative real rates of return would not be a “natural rate” giving rise to full employment through a better equilibration of planned savings and investment. Given a pretty flat employment to population ratio, very negative real rates of return across the economy as a whole would have to mean negative economic growth and other attendant difficulties.
And no, I don’t think that output shrinkage associated with the persistently negative real interest rate would be expansionary through liquidity trap mechanisms; for one thing the negative wealth effect and the higher risk premium likely would offset the positive velocity effect on currency balances. The velocity effect on currency balances, from inflation, just isn’t that strong. At persistent negative rates of return we are much more likely to see an interdependence of AS and AD and some kind of cascading collapse of both. Or maybe it is simply better to say the framework has broken down than to try to squeeze one’s own predictions out of that set up.
Furthermore if you think destruction will help you ought then think that capital obsolescence will pull us out of Hansen’s long-term stagnation within five to ten years. On top of all that, I worry about the apparent “out of equilibrium” assumptions embedded in a model that has both a) negative real rates of return on investment and b) those investments being made in the first place, given that storage costs don’t seem to be enormously high.
I don’t mean this in a rude or polemic way, but the arguments we have been reading do not yet make sense.
Here is a claim I do find possible, although it is not one I am pushing. That would be a neo-Wicksellian argument that rates of return on capital are positive but low, and investors need low and indeed very negative borrowing rates to reflate the economy, given how high the risk premium is. I don’t read Krugman as promoting that view (note his citation of Samuelson’s OLG model for instance), although I think that is what the argument will have to boil down to. Otherwise it ends up being a call for output destruction, which, while I do understand how in some models at some margins that can help, I don’t think at current margins is going to be anything other than an unmitigated disaster. Literally.
I see it this way. If you are postulating a stagnation across the longer run, ultimately it will have to boil down to supply side deficiencies. The simple way to explain the mediocre recovery is to tack on slow growth assumptions to the underlying demand deficiencies. But that would constitute a big concession to real business cycle theory and it would put Thiel-Mandel-Gordon-Cowen stagnationist views in the driver’s seat, all the more so over time. The look back to Alvin Hansen is an effort to work in some (very much needed) stagnationist ideas, while at the same time doubling down on a demand-side perspective.
That just isn’t going to work.
Some past deregulatory successes came in “big bang” changes, like the airline deregulation of the 1970s, which shut down the Civil Aeronautics Board. What we need today is the selective pruning of bad regulations. Cost-benefit studies are a good idea, but they tend to be done when we have the worst possible information about the effects of regulations — namely, before the regulations are passed. Furthermore, cost-benefit studies may look only at some of the largest regulations, and not the general problem of regulatory accretion over time.
Better bureaucratic incentives are needed. Agencies are now motivated to generate regulation after regulation, because those are the formal assignments set before them. One possible step forward would be to require agencies to submit plans for retiring some fraction of their regulations over the next few years, and to reward these agencies for seeing this process through.
For a while I toyed with the idea of automatically sunsetting some subset of regulations, but I couldn’t quite bring myself to endorse it. I like the basic idea, but I worry about the ongoing uncertainty imposed on businesses. It makes it harder for businesses to make “once and for all” adjustments and may impose an even greater cost on the allocation of attention from top management. Businesses like certain regulation, partly for good reasons (easier to deal with), and partly for bad (it may hurt smaller competitors even more and keep them out of the market). Still, to the extent you understand the burden of regulation as about dealing with the regulations, rather than the regulatory mandates per se, the case for sunsetting is not a slam dunk.
Addendum: Some readers have asked me about a reference on the discussion of asthma treatments and medications, try this Cass Sunstein column.
The author is Walter A. Friedman and the Amazon link is here. It is a good and readable look at a neglected corner of the history of economic thought, covering Roger Babson, Irving Fisher, John Moody, Warren Persons, Wesley Mitchell, and others. Here is one bit:
At Yale, [Irving] Fisher conducted dietary experiments with student athletes in ways that no university today would allow. These included one test that compared athletes who chewed their food thoroughly against those who did not and one that pitted the endurance of meat eaters against vegetarians. He gained enough authority as a nutrition expert for the makers of the cereal grape-Nuts to include his endorsement in a 1907 advertisement. It mentioned Fisher’s experiments on yale students “to determine the effects of the thorough mastication of food.” Fisher, the ad claimed, found that their endurance was increased 50 percent, although they took no more exercise than before and has reduce their consumption of “flesh foods” by five-sixths. Fisher also chaired a nationwide Committee of One Hundred on National Health that wrote reports and built a network of experts and public figures to agitate for “increased federal regulation of public health” — specifically, a cabinet-level department of health.
…Health, according to Fischer, deserved as much attention from economists as import and export totals.
This is a book that John P. Cullity would have enjoyed.
That is the topic of my latest New York Times column, which is entitled “More Freedom on the Airplane, if Nowhere Else.” It opens with this example:
It is sometimes the small events that reveal the really big problems lurking beneath the surface. That’s the case with the Federal Aviation Administration’s recent decision to grant airlines the liberty of allowing the use of electronic devices during takeoff and landing.
You still won’t be able to call on your cellphone during those times, but, if the airline allows it, you will be able to read on your Kindle or play Angry Birds throughout the flight.
That’s the good news. What’s the deeper problem? Our new Kindle freedoms, however minor they may seem, show how hard it is to clear away the old, unnecessary regulations that are impeding the economy.
After all, the previous restriction on electronics during flights was broadly unpopular in a way that cut across partisan lines. Yet, for many years, the public’s complaints did not bring concrete change, mostly because of regulatory inertia. (If you’re worried about safety, by the way, the airlines can still, at their discretion, demand that these devices be turned off when deemed necessary.)
Here is another bit from the piece:
Many regulations, when initially presented, can sound desirable. The problem is that, taken in their entirety, excess rules divert attention from pressing issues like the need for innovation and new jobs.
Michael Mandel, an economist at the Progressive Policy Institute, compares many regulations to “pebbles in a stream.” Individually, they may not have a big impact. But if there are too many pebbles, a river’s flow can be thwarted. Similarly, too many regulations can limit business activity. When the number of rules mounts, it can become hard for a business to know whether it is operating within the law’s confines. The issue is all the more problematic when federal, state and local constraints all apply.
Our public sector is overregulated, too. For instance, the tangle known as government procurement has exacerbated problems with the Affordable Care Act’s health insurance exchanges. The required formal processes made it difficult to hire the best possible talent, led to nightmare organizational charts and resulted in blurred lines of accountability. It’s hard to turn on a dime and fix such problems overnight, no matter how pressing the need.
Read the whole thing.
2. There is talk of a new Borjas paper criticizing immigrant complementarity. I cannot myself click through to the actual paper. Note: new George Borjas piece on the wage effects of immigration actually is here.
4. Robert Pippin reviews Žižek on Hegel: “…one of the most curious things about Hegel’s basic position is that it can be fairly summarized by saying that there is no independent, positive position. Rather it is the right understanding of the other logically possible positions.”
5. I wonder if they will smell (there is no great stagnation).
After six games, Carlsen leads by two points, with four draws added to the tally. Anand seems hell bent on founding a campaign to abolish the advantages of playing with the white pieces.
I find two aspects of the match notable so far. First, in the last two endgames Carlsen has been outplaying the computer programs (and Anand), sometimes for dozens of moves in a row. That isn’t easy, to say the least. And kudos to Alan Turing for realizing early on, in his 1953 paper, that chess-playing computer programs would face special difficulties in understanding some endgames. The sequences required to establish the importance (or not) of a measurable material advantage can stretch beyond the time horizon of the program, for instance, and the endgame tablebases take us only so far.
Second, Carlsen is demonstrating one of his most feared qualities, namely his “nettlesomeness,” to use a term coined for this purpose by Ken Regan. Using computer analysis, you can measure which players do the most to cause their opponents to make mistakes. Carlsen has the highest nettlesomeness score by this metric, because his creative moves pressure the other player and open up a lot of room for mistakes. In contrast, a player such as Kramnik plays a high percentage of very accurate moves, and of course he is very strong, but those moves are in some way calmer and they are less likely to induce mistakes in response.
Nettlesomeness is an underrated concept in our world, and kudos to Ken for bringing it to our attention. It should play a larger role in formal game theory than it does currently. It’s already playing a decisive role in the world of chess.
Addendum: Here are some of Ken’s metrics for “nettlesomeness.”
Every year I offer my picks for best books of that year, today we are doing fiction. I nominate:
1. Karl Knausgaard, My Struggle: Book Two: Man in Love.
2. Claire Messud, The Woman Upstairs. Great fun.
3. Amy Sackville, Orkney. Not every honeymoon works out the way you planned.
4. Mohsin Hamid, How to Get Filthy Rich in Rising Asia.
5. Kathryn Davis, Duplex: A Novel. Non-linear, not for all.
Since I think the Knausgaard is one of the greatest novels ever written, I suppose it also has to be my fiction book of the year. (Except, um…it’s not fiction.) But otherwise I found many books disappointing, perhaps because my own expectations were out of synch with contemporary writing.
Elizabeth Gilbert and Donna Tartt produced decent plane reads, but I wouldn’t call them favorites. The new Thomas Pynchon I could not stand more than a short sample of. I sampled many other novels but didn’t like or finish them. I read or reread a lot of Somerset Maugham, which was uniformly rewarding. The Painted Veil may not be the best one, but it is a good place to get hooked. I reread quite a bit of Edith Wharton and it rose further in my eyes. Ethan Frome and The Age of Innocence are my favorites, more intensely focused than the longer fiction. I loved discovering the Philip Pullman trilogy and vowed to give George Martin another try this coming year.
John Sides talks with Julio Suarez, who has been researching the topic:
Recently they don’t look much different at all. When you take the average member appointed by a Democratic president and the average member appointed by a Republican president, you observe what you expect: Since 1936, Democratic appointees are slightly more dovish than Republican appointees, although the difference is not statistically significant. The average score for a Democratic appointee is -0.22 vs. -0.08 for a Republican appointee.
There is more here, including a graph and a link to the underlying data.
Ross Douthat writes:
…it does seem like there is a semi-plausible policy response to the rate shock issue, which wouldn’t roll back the ongoing plan cancellations but might make cheaper plans available to buyers going forward: Obamacare’s regulations could be rewritten to allow insurers to sell less comprehensive plans on the exchanges. This wouldn’t require doing away with every new regulation, or rolling back the pre-existing condition guarantee, which is what liberals argue the Upton bill currently being considered in the House would do. But it could involve heeding the recent hint from the University of Chicago’s Harold Pollack, a card-carrying Obamacare advocate, that perhaps in the wake of the last month’s developments the government should ”revisit just how minimal the most minimal insurance packages should be,” which in turn could open the door to allowing many more people to buy the kind of high-deductible catastrophic plans that the law currently allows insurers to only sell to twentysomethings.
These moves would not let everyone keep their existing plans, as the Upton and Landrieu bills aspire to do — but there is really nothing that the White House can responsibly do, given the law’s underlying design, that would resolve that problem. What partial deregulation would accomplish, though, is to allow some of the lower-cost plans the law abolishes to be actually revived and made available on the exchanges as “bronze” options in 2014 and 2015, rather than just temporarily grandfathered for a year or so outside them.
The post has other points of interest as well.
4. The negative income tax experiments of New Jersey and Seattle. And related attempts from Canada.
This is from the obituary of economist Alexander L. Morton:
At 42, Mr. Morton was well on pace in the ascension of his chosen career ladder. He had a doctorate in economics from Harvard, had taught at the Harvard Business School and was finishing a four-year assignment as director the office of policy and analysis at the Interstate Commerce Commission.
He then quit.
He had made enough money in real estate deals and investments to guarantee an independent income for himself. For his remaining 28 years, he was almost constantly on the move, visiting dozens of countries and often going off the expected paths from Western travelers.
He rarely spoke about himself and never discussed in detail his reasons for retiring in mid-career as an economist to pursue a life of travel. But his sister said he was ready for a change, had the savings to and had done as much as he wished to in the field of transportation deregulation.
To continue along the same path, would have been a case of “been there, done that,” she said.
Here is Alex’s earlier post on traveling more. Maybe Alexander L. Morton had some really good lunch partners.