Month: December 2013

Is the United States saving rate too low?

Evan Soltas reports:

The conventional story is that the U.S. has undersaved and overconsumed for decades…

Why is that story wrong? It ignores the fact that households and institutions make up only about a third of U.S. gross saving.

Domestic businesses, which do the other two thirds of U.S. saving and are not reflected in that personal savings rate, have been saving far more than they have in the past. That has offset the decline in personal saving. We can see that in a graph of gross private saving over gross domestic income below.

The U.S. saves about one fifth of gross domestic income — it saved a little more than that in the 1970s and over the last few years, a little less than that in the 1950s and the 1990s. The apocalyptic trend towards zero savings is simply not there. What appears to be a long-term decline in the savings rate is in fact a hand-off between households and businesses in who does the saving.

There are useful graphs at the link and basically it means you should have bought those extra Christmas presents.  I would add the cautionary note — for Americans but not for the world — that business savings may be more mobile internationally than are household savings.  You also can view these numbers as a harbinger of greater wealth inequality in our future.

Might this be another “doubly stupid” economic policy?

The first part is this:

Thousands of disgruntled horse and pony riders rode through the French capital to complain about tax increases they say will put many of them out of business and send 80,000 animals to the abattoir.

The “cavaliers” blocked roads from the symbolic Paris squares, Place d’Italie, Place de la Bastille and Place de la Nation, in protest at government plans to almost treble VAT on equestrian centres.

The response of the government is this:

France has about 700,000 horse-riding instructors and 2.3 million people who ride, 82% of them women. It is the third most popular sport in France.

The government has promised subsidies to prevent riding schools from going under…

The article is here, and I thank Phil Steinmeyer for the pointer.  Here is a previous example of a multiply stupid policy, strange how they both involve horses…

From the comments, on seasonal business cycles

ohwilleke reports:

While “Christmas” is new, the notion of a consumption splurge after the fall harvest, followed by a lean late winter-early spring season (Lent/Ramadan) before the spring harvest is deeply rooted in pre-modern agricultural reality. When you have an abundance of perishable goods it makes sense to consume them before they go bad, and then to string out the more limited supply of durable foodstuffs when fresh foodstuffs are scarce. In the same way, summer vacation is rooted in the need to free up children for agricultural labor at times of peak demand. As noted above, spring weddings supply a consumption boost after the Spring Harvest and also are timed to minimize the likelihood of critical parts of a first pregnancy taking place during the lean late winter-early spring (although these days it has more to do with the end of the school year).

Only with cheap and fast trans-hemispheric shipping (together with a lack of significant piracy for most of that trade), and advances in food preservation and refrigeration in the last half century or so, have those agricultural considerations become irrelevant (although, of course, excess and lean times should fall at different parts of the year in the Southern hemisphere and in places like Southern India, the Sahel, and the tropics of Asia, African and South America that have different seasons).

Japan and China use end of year bonuses (often as 6-12% of annual compensation) as a significant part of annual compensation as a way to share rather than leveraging macroeconomic risk for firms and the economy as a whole. In good years, when there is more supply, lots of people get big bonuses; in bad years, scarcity is widespread. The main virtue of this approach is that it makes firms more robust and puts them under less pressure to engage in cyclic layoffs but making labor costs look more like equity and less like debt. This too was well suited to an agricultural tradition rooted in sharecropping or the equivalent that was once widespread in all feudal economies as well as in neo-feudal economies in places like the American South. This isn’t a strategy limited to the orient. It is also the quintessential Wall Street economy model utilized by major financial firms like investment banks and the large law firms that serve them.

The pressure from the “real economy” – both the goods and services supply side and the labor demand side – to have punctuated consumption is much weaker now than it once was, particularly in economies or sectors of economies without the strong annual bonus tradition. The largest sectors of the modern economy that are both strongly cyclic in terms of business cycles and very seasonal within each year, are construction and real estate – and these cycles also drive a fair amount of durable goods consumption. Both construction and real estate are weakest in the winter. Agriculture’s share of the economy is now much more stable from a consumer’s perspective and much smaller as a percentage of the total economy. Real estate handles cyclic shifts by being largely commission based. Construction relies on highly fragmented project specific team building through networks of general contractors and subcontractors rather than integrated firms (a pattern also common in the film industry and theater industry).

Bottom line: The finance oriented macroeconomic models obsessed with interest rates, inflation, GDP growth rates, unemployment rates and size of the public finance sector are ill suited to analyzing optimal seasonal business cycle patterns. A more fruitful analysis looks at the roots of current seasonal patterns in economic history and at the way that the “real economy” has changed with technology to see if those patterns still make sense, perhaps for new reasons.

You will find ohwilleke’s blog here.

The loyal Kalashnikov

Later in life, he disapproved of anyone who he thought had hastened the Soviet Union’s downfall, or who had been unable to control the political and economic turbulence that followed. In memoirs and interviews, he was harshly critical of Mikhail S. Gorbachev and Boris N. Yeltsin.

To the end he remained loyal to what he called Socialist ideals and the leaders who gave them shape, and seemed untroubled by the hardships endured by his family during the early years of Soviet rule. His family’s land and home had been seized during collectivization, and when he was a child the family was deported into the Siberian wilderness. His father died during their first Siberian winter, and one of his brothers labored for seven years as a prisoner digging the White Sea canal.

Still, General Kalashnikov spoke of his great respect for Lenin and Stalin alike. “I never knew him personally,” he said of Stalin, “and I regret this.”

There is more here.  I think of him as one of the last tinkerer-inventors from the mechanical tradition, which stretched through the twentieth century but is becoming increasingly obsolete.  Precisely because he was from this tradition, his famed rifle was relatively easy to fix, clean, and maintain, easy to equip with interchangeable spare parts, and thus it was easy to use for killing people in poorer countries with lower levels of the division of labor.  There is a good Wikipedia page on the rifle here.  He will go down in history as a good example of what was wrong with much of the twentieth century

Assorted links

Is Christmas efficient?

As you all probably know, the demand for retail goods and services goes up a lot after Thanksgiving, giving rise to the seasonal business cycle.  Most large economies have a major gift-giving holiday in or near December.  The result is that fourth quarter output and employment expand significantly, and the first quarter of the year brings an inevitable contraction.  Usually we seasonally adjust the data, but seasonal business cycles are not small relative to regular business cycles, for more information see here.

But are these seasonal cycles efficient?  Let’s say that the Grinch really were to steal Christmas, would that be a Kaldor-Hicks potential Pareto improvement?

I can think of a few reasons why seasonal business cycles might be inefficient:

1. Retail workers would prefer to smooth their labor supply, having more relaxed hours in mid-December and no layoffs in January.

2. A lot of Christmas gifts are bought under duress and by definition there is third party payment.  The economy might be losing information about “real consumer demands,” just to “show that we all care,” etc.

3. Too many products are bunched for October-November market introduction, with the goal of rent-seeking to capture part of the big Christmas spending boost.  For instance I would rather have more “must read” books come out in January and fewer in October.  A similar point can be made about movies and various other forms of entertainment, including new toys.

4. Since many retail products either “catch on” in the fourth quarter or not, the seasonal clustering of demand may increase income inequality to the detriment of social risk-sharing.

These are a few reasons why such a strong seasonal component to demand might be efficient:

1. The strong cyclicality of demand might help introduce some new products to market which might otherwise be stifled by fixed costs (Shleifer’s “implementation cycles” point).

2. The strong cyclicality of demand may help pull some workers out of long-term unemployment, because Best Buy simply has to hire some retail help this time of year.  Once these workers get used to having a job again, and have something new on their resume, their future labor market trajectory improves.  These gains may exceed the losses from having a less efficient smoothing of labor across the quarters.  (By the way, if you don’t think the seasonal business cycles is picking up many of these workers, why would most other forms of stimulus?)

3. The institution of presents helps break an economy out of status quo bias when it comes to consumer purchases and that encourages innovation, even though a lot of the money spent is wasted.

4. Clustering a lot of the buying and marketing at the same time may lead to a better matching of purchases and products, a bit like “speed dating.”

More generally, you can debate whether the existence of Christmas increases the total amount of money spent, or simply sloshes demand around across the seasons.  I suspect the total amount spent goes up, and you can debate whether that is good or bad, depending on whether the savings rate should be higher or lower.  Note also that the strength of a seasonal business cycle in a country will influence the ex ante technological flexibility of business firms, which in turn will shape the volatility of non-seasonal business cycles.

What do you all think?  Thumbs up or down to the Grinch?  Or should we, as Matt Yglesias suggests, introduce another major gift-giving holiday in June, for the purposes of stimulating aggregate demand?

What will the ECB banking union look like?

Wolfgang Münchau has the scoop:

This banking union will produce the financial sector equivalent of austerity – a secular credit crunch.

To see this, one needs to understand how banking union is going to work. The European Central Bank, in its role as supervisor, has started a comprehensive assessment of the banking sector. As part of this exercise, it assesses financial risks, takes an in-depth look at balance sheets, and subjects banks to stress tests. This exercise is going to end with a demand that some banks raise their capital.

But without a common fiscal backstop, it lacks credibility. The ECB will be in no position to demand that banks raise capital if there is no backstop. It would risk financial instability if it exposed a bank as undercapitalised that has no access to outside capital. The resolution fund will not be able to help because it will not be fully mutualised for a decade. At the start all risks will remain within the member states.

Unlike the Federal Deposit and Insurance Corporation of the US, the eurozone’s resolution fund will have no credit line.

…Economically, this is 1990s Japan all over again, probably worse given the periphery’s dire economic state. The banking system in the eurozone will not be able to supply the economy with sufficient credit, except in creditor countries. The economic consequences of what finance ministers hailed as a “historic” decision will be substantially negative.

Assorted links

A Few Favorite Books from 2013

Tom Jackson asked me for a couple of best books for his year end column. I don’t read as many books as Tyler so consider these some favorite social science books that I read in 2013.

In The Undercover Economist Strikes Back, Tim Harford brings his genius for storytelling and the explanation of complex ideas to macroeconomics. Most of the popular economics books, like The Armchair Economist, Freakonomics, Predictably Irrational and Harford’s earlier book The Undercover Economist, focus on microeconomics; markets, incentives, consumer and firm choices and so forth. Strikes Back is that much rarer beast, a popular guide to understanding inflation, unemployment, growth and economic crises and it succeeds brilliantly. Mixing in wonderful stories of economists with exciting lives (yes, there have been a few!) with very clear explanations of theories and policies makes Strike Back both entertaining and enlightening.

Stuart Banner’s American Property is a book about property law, which sounds like an awfully dull topic. In the hands of Banner, however, it is a fascinating history of what we can own, how we can own it and why we can own it. Answers to these questions have changed as judges and lawmakers have grappled with new technologies and ways of life. Who owns fame? Was there a right to own one’s own image? Benjamin Franklin, whose face was used to hawk many products, would have scoffed at the idea but after the invention of photography and the onset of what would later be called the paparazzi thoughts began to change. In the early 1990s, Vanna White was awarded $403,000 because a robot pictured in a Samsung advertisement turning letters was reminiscent of her image on the Wheel of Fortune. American Property is a great read by a deep scholar who writes with flair and without jargon.

On June 3, 1980, shortly after the Soviet Union’s invasion of Afghanistan, the U.S. president’s national security adviser was woken at 2:30 am and told that Soviet submarines had launched 220 missiles at the United States. Shortly thereafter he was called again and told that 2,200 land missiles had also been launched. Bomber crews ran to their planes and started their engines, missile crews opened their safes, the Pacific airborne command post took off to coordinate a counter-attack. Only when radar failed to reveal an imminent attack was it realized that this was a false alarm. Astoundingly, the message NORAD used to test their systems was a warning of a missile attack with only the numbers of missiles set to zero. A faulty computer chip had inserted 2’s instead of zeroes. We were nearly brought to Armageddon by a glitch. If that were the only revelation in Eric Schlosser’s frightening Command and Control it would be of vital importance but in fact that story of near disaster occupies just one page of this 632 page book. The truth is that there have been hundreds of near disasters and nuclear war glitches. Indeed, there have been so many covered-up accidents that it’s clear that the US government has come much closer to detonating a nuclear weapon and killing US civilians than the Russians ever did. Thankfully, we have reduced our stockpile of nuclear weapons in recent years but, as in so many other areas, we are also more subject to computers and their vulnerabilities as we make decisions at a faster, sometimes superhuman, pace. Command and control, Schlosser warns us, is an illusion. We are one black swan from a great disaster and if this is true about the US handling of nuclear weapons how much more fearful should we be of the nuclear weapons held by North Korea, Pakistan or India?

Is American politics ruled by gridlock?

My latest New York Times column is here, and here is one excerpt:

Consider the financial crisis of 2008 and 2009. Coordinated actions by the Federal Reserve, the Treasury and Congress geared up rapidly, were decisive by global standards and received a fair amount of bipartisan support. In contrast, the euro zone is still discussing how to manage its bailouts or whether to start a program of quantitative easing, which the Federal Reserve will begin to wind down in January. And Japan, after letting problems with bad banks fester for decades, is only now using monetary policy to fight deflationary pressures.

After that initial decisiveness in the financial crisis, America did indeed slow down in policy innovation. Bailouts and our activist central bank have become extremely contentious factors in the nation’s politics, and there has been bitter fighting over how to set into motion the Dodd-Frank financial reform law.

Lunging and lurching forward with big changes, then enduring periods of backlash, consolidation and frustration, is often a better description of our political system than is “gridlock,” which is too unidimensional a concept to capture the reality.

At other times, because political flexibility is a fundamental part of the American system, it doesn’t feel as though we are defeating gridlock as much as bypassing it. Fracking — hydraulic fracturing — is reshaping the American energy sector, in part because of previous federal support for research and development, and in part because of regulatory tolerance: Many of the relevant changes took place through agencies like the Energy Department. In contrast, much of Europe is refusing to proceed with fracking at all. The American breakthrough has generated economic headlines, but rarely is it cited as an example of political success.

Do read the whole column.  Two other examples are the building of the surveillance state and the shift toward ever-tougher forms of intellectual property protection, and the spread of that philosophy to other nations through the form of treaties.  Sometimes we could use more gridlock, although I recognize that many people prefer to rail against it.

If you would like to read a defense of the gridlock view, here is Ornstein and Mann, noting that they confuse polarization with gridlock and don’t consider most of the examples and comparisons I raise.  Their argument is closer to “we shouldn’t feel very good about how things have been running,” which I have no problem accepting.  Here is Summers, responding to their critique., though he is more optimistic about the consequences of periodic non-gridlock than I am.  Here is the original Summers Op-EdMany other contributions to the political science literature either predate the recent wave of rather considerable policy reform, focus on Congress, or focus on whether polarization is preventing us from addressing income inequality.   I don’t intend those points as criticisms, simply a note that many of those pieces and books do not bear so directly on my thesis.

What I’ve been reading

1. M. John Harrison, Light. I thought I was sick of cyberpunk but this held my attention from the first page through the end.  It falls in the category of “don’t worry if you don’t get everything that is going on, enjoy anyway.”

2. John Williams, Stoner.  This is not quite the great lost American novel, as some critics are making it out to be.  Nonetheless it is good, brisk, absorbing read about the horrible life of a stultified academic.  First published in 1965.

3. Gary J. Bass, The Blood Telegram: Nixon, Kissinger, and a Forgotten Genocide.  The story of the India-Pakistan-Bangladesh-USA relations in the earlier 1970s and the conflict of that time, a very good book.

4. Lane Kenworthy, Social Democratic America, I will quote my blurb: “If you wish to read the case for a big increase in social welfare spending, this is the very best place to go.”   Here is a related piece from the book.

5. Pete Earley, Comrade J: The Untold Secrets of Russia’s Master Spy in America After the End of the Cold War.  A fun look at the Russian spy world behind “The Americans” (TV show), also with a fascinating discussion of the KGB in Ottawa spying on the Canadians.

6. John Limbert, Negotiating with Iran: Wrestling the Ghosts of History.  Four detailed case studies of past failures and successes negotiating with Iran, from a scholar who knows his topic very well and can write clearly.

Assorted links