Category: Current Affairs
Gourmet cupcakes are crashing
It’s about time, and it’s not just Bitcoin:
After trading at more than $13 a share in mid-2011, Crumbs has sunk to $1.70. It dropped 34% last Friday, in the wake of Crumbs saying that sales for the full year would be down by 22% from earlier projections, and the stock slipped further this week.
Crumbs in part blamed store closures from Hurricane Sandy, but others say the chain is suffering from a larger problem: gourmet-cupcake burnout.
“The novelty has worn off,” says Kevin Burke, managing partner of Trinity Capital LLC, a Los Angeles investment banking firm that often works in the restaurant industry.
The cupcake high water mark seems to have been June of 2011. Here is more, and I thank several MR readers for the pointer.
Companies won’t even look at the resumes of the long-term unemployed
Read this post by Brad Plumer, here is an excerpt:
Matthew O’Brien reports on a striking new paper by Rand Ghayad…The researchers sent out 4,800 fake résumés at random for 600 job openings. What they found is that employers would rather call back someone with no relevant experience who’s only been out of work for a few months than someone with lots of relevant experience who’s been out of work for longer than six months.
In other words, it doesn’t matter how much experience you have. It doesn’t matter why you lost your previous job — it could have been bad luck. If you’ve been out of work for more than six months, you’re essentially unemployable.
…This jibes with earlier research (pdf) by Ghayad and Dickens showing that the long-term unemployed are struggling to find work no matter how many job openings pop up. And it dovetails with anecdotes that workers and human resource managers have been recounting for years now. Many firms often post job notices that explicitly exclude the unemployed.
I think of this as further illustration of what I have called ZMP workers, a once maligned concept which now is rather obviously relevant and which has plenty of evidence on its side. It’s fine if you wish to label them “perceived by employers as ZMP workers but not really ZMP,” or “unjustly oppressed and only thus ZMP workers.” The basic idea remains and of course “stimulus” will reemploy them only by boosting the real economy, such as by raising output and productivity and reeducating, and not by recalibrating nominal variables per se. For these workers it is not about wage stickiness. Most by the way would not be ZMP if the U.S. economy were growing regularly at four percent in real terms, but of course that is not easy to achieve, not from where we stand today.
I’ve sometimes seen it hinted that calling them “ZMP workers” lacks compassion, but the compassionate thing to do is to try to identify the actual problem. A year or two ago I thought ZMP workers accounted for about 1% of potential U.S. workers (hardly all of the unemployment problem, I would stress), but if anything I am moving that estimate upwards.
Im neuen Spiegel (Poor Germany!)
The culture that is Washington
The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency.
The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates.
The House was expected to pass a similar bill on Friday.
Here is the FT article, here are other sources. Some officials suggested that transparency “could threaten national security,” more detail on that here. Here are some further interesting details.
Robert Samuelson and Jeffrey Sachs on the budget
…government is slowly growing larger while — in many basic functions — it’s being strangled. This paradox, it seems, will be Obama’s questionable legacy.
President Barack Obama’s budget this week makes clear the real political equilibrium in the US. The federal government is shrinking. Discretionary spending in the new Obama budget would shrink to 4.9 per cent of gross domestic product in 2023, compared with 7.9 per cent of GDP in 2008. Both parties have signed on to this shrinkage. Neither will try to stop it.
Both over-personalize the result in the figure of President Obama. For reasons of mood affiliation, one calls it government growth and the other calls it government shrinkage, drawing on the same numbers. And both are basically correct.
Addendum: David Brooks weighs in on the same topic.
Another way of thinking about the European economic collapse
Let’s start with a few claims that (most) people agree with:
2. The U.S. has higher income inequality than most of Europe and our high earners have done quite well for some time.
3. Many events happen in the U.S. first.
4. The U.S. is more flexible than most European economies, though not obviously more flexible than say Germany or Sweden.
OK, let’s tie those pieces together, but please keep in mind that I consider the following to be speculative.
IT and China, taken together, seem to imply a big whack to median income. This whack should be higher for the less flexible polities, and furthermore the wealthy and the well-educated in the U.S. get back a big chunk of that money through tech innovation and IP rights. Plus we’ve had some good luck with fossil fuels and even the composition of our agriculture. If you had a country without those high earners in the tech sector, and an inflexible labor market, those economies will have to contract and I don’t just mean in a short-term cycle. Equilibrium implies negative growth for those economies, at least for a while.
By how much? If the relatively flexible U.S. lost 8% of median income, perhaps Italy and Spain and Greece have to lose 15%, but with no offsetting major gains on the upper end of the income distribution. (How flexible is Ireland or for that matter France is an interesting question and so far the answer is not obvious.)
In sum, the less flexible European economies will lose at least 15% of their gdps, due to trade and technology.
There is then the question of what the path downwards will look like and feel like. Being in the eurozone makes adjustment much harder, and brings the doom more quickly, for reasons which are by now well-discussed.
The initial path looks like this. The real sectors of those economies start to appear weaker, and this sets off some deposit flight and also a credit contraction. AD and AS fall together and set off some further negative interactions. In the case of Greece the expectation of the country being “a European economy” gets replaced with the expectation of the country being “a Balkan economy,” to the detriment of investment of course. Along the way, the true nature of the EU political equilibrium is revealed, expectations of EU cooperation decline, and that sets off further AD and AS downward spirals.
Trying “austerity” will hasten the fall, but at the same time it is hard to see how an economy contracting by 15% could in the longer run keep its previous level of government spending, or for that matter find a “good” time to do fiscal consolidation. It will appear that “austerity” is more causally important than it really is.
All sorts of particular stories will get told along the way, including the austerity story. Those stories may look true, but ultimately they are more about timing and trajectory than about fundamental causes. What I call “time compression” will very often appear to be causality.
A lot of the problems caused by fiscal consolidation are in fact “sectoral shift” problems. For instance cuts in government spending lay off workers and the Mediterranean private sector — in the midst of a significant contraction and somewhat inflexible to begin with — is unlikely to rehire those workers. The fiscal policy advocates actually have an argument against their “let monetary policy do all the work” critics, although their obsession with AD prevents them from emphasizing the sectoral shift aspects of the fiscal story, which are in fact the paramount aspects.
How much has the Greek economy contracted already? (Hard to say with black markets and bad numbers but I think at least 20%). It is predicted that the Cyprus economy will collapse by 20% over the next three years. Think of their banking sector as unsustainable in the first place, but its decline being hastened rather suddenly by the curious structure of the euro and bank runs (again, time compression). It is not crazy to expect a ten percent permanent contraction for Italy and a very slow recovery for Spain after what is already a major contraction.
By the way, UK employment is now at an all-time high, as jobs have been reshuffled to lower-value service sector activities, and out of oil and finance. Does that fit the Keynesian story? Sorry people, but I have to say “no way.” Maybe the UK economy — which is flexible but not well-geared to export and to compete internationally — is on a path to lose five or ten percent of its gdp, with or without “austerity.”
Empirically, how would one distinguish this story from a more traditional Keynesian account?
1. Both imply that “austerity” appears causally correlated with bad outcomes. (By the way, ngdp targeting is still the way to go, although the lack of such a policy is a secondary or residual problem rather than the primary problem.)
2. Given the massively high unemployment we have seen, the Keynesian account would lead us to expect corresponding rates of price deflation comparable to those of the Great Depression, such as negative ten percent. We’re seeing rates of inflation between zero and two percent, with prices often continuing to move up. Inertia in sticky wages won’t get prices moving up like that, not if AD is supposedly collapsing to an extreme degree and as a driving force. This is pretty close to a “one fact” refutation of the simple Keynesian account. Study economic history all you want, 0-2% inflation may be suboptimal but the associated AD implications simply aren’t that bad, nor will adjusting for a few VAT hikes make it so. What we get is a series of blog posts measuring AD collapse by invoking surrealistic standards, and obscure concepts from modal logic, and failing to notice that price level behavior simply does not fit the story.
3. The Keynesian account implies a fairly quick bounce back for the plagued countries which (eventually) reject “austerity” and goose up AD. The theory here implies a quick bounce back for flexible economies, economies with IP and resources, but no rapid bounce back for the euro periphery, no matter what their policies, at least short of an extremely radical and probably impossible set of structural reforms, such as making Italy into Sweden. In any case, this test has not yet been run as those countries are still on the downswing.
In this account, AD economics, including its Keynesian and neo-monetarist forms, is correct, but it is also far from the entire story.
Will Cyprus end up with free banking and a parallel currency (for a while)?
The lack of internal convertibility of euro notes (through the limitations on cash withdrawals and on electronic payments) will, if they persist for more than a few weeks, likely lead to a search for alternative media of exchange for internal transactions. IOUs of large, respected enterprises could for example be countersigned and start to circulate more widely as media of exchange and means of payment. This was the case, for instance, during the 1970 bank strike in Ireland, uncleared cheques were made negotiable (like bills of exchange) and pubs and shops served as credit verifiers. These could later develop into more full-fledged parallel currencies, if internal euro liquidity in Cyprus remains very scarce.
Psychic Harm, Repugnant Conclusions and Presumed Consent
Steven Landsburg’s post on psychic harm has created a firestorm of controversy. Many people don’t understand thought experiments and that is part of the problem but it was also a bad idea to combine hypotheticals with a real case involving a real victim. Nevertheless, Landsburg’s post raised important questions about how pure psychic harm (“I don’t like the thought of other people having gay sex.”) differs from a physical transgression without physical harm (rape of someone who is unconscious and which leaves no trace). The point is not about rape but about whether and why (some?) psychic harms should count in the moral calculus. As David Friedman argues, how we answer this question has deep implications.
Moreover, Landsburg’s stark hypothetical is closer to a real policy question than many might imagine. Consider the issue of presumed consent for organ donation, the policy used by many European countries where someone who dies is presumed to have agreed to be an organ donor barring evidence that they opted out. There are good (not necessarily definitive) arguments for presumed consent, namely that it would save some lives at low cost. After all, what harm can be said to occur from taking organs from a dead person? The latter point is obvious to me but it’s only obvious because I think the dead can’t be harmed. Other people, think differently Many religions consider cadaveric organ donation to be a kind of desecration. In fact, some people liken presumed consent to rape of the unconscious. Professor Hugh V McLachlan for example writes:
if someone had sex with an unconscious woman and tried to justify his action by saying that, when she was conscious, she did not indicate that she did not want to have sex, we would not accept this as a reasonable argument. The notion of presumed consent to the use of our organs after our deaths is no more reasonable.
and another commentator on presumed consent in Britain says
The difference between voluntary consent and presumed consent is at least the difference between consensual sex and rape of a drunk person.
Evidently for some people being dead is similar to being unconscious. Thus in both cases physical harms without physical consequence can be wrong because they generate psychic harm, either in expectation or in the afterlife. Clearly, distinguishing which psychic harms are to be counted and which not quickly becomes a question of metaphysics.
My own view is that as far as possible psychic harms should not be counted at all. Instead I would let ethics dictate the assignment of property rights and economics dictate the allocation. In particular, I would assign body ownership to the individual on strong libertarian and autonomy grounds but I would let individuals sell a kidney (or sex).
One of the virtues of markets is that markets make people pay for their preferences, if only in terms of opportunity cost. My suspicion is that the psychic harm from the thought that after death one’s organs might be used by someone else would quickly dissipate once some cash was on the table. Indeed, it’s often the case that the least cost way to avoid a psychic harm is to change one’s mind and, to paraphrase Upton Sinclair, it’s easier to get a man to change his mind when his salary depends upon him changing his mind.
Some thoughts on recent Japanese monetary policy
I would add a few points to the other discussions:
1. If I understand the announcements correctly, this is still only a two percent inflation target, so it’s not going to end in hyperinflation. The arguments against this new policy simply aren’t that strong and there is a chance it helps.
2. Most of all, we sorely lack a better understanding of how money matters when it does matter. Are we actually to believe that after decades of slow growth, nominal wages remain too high, even though most individuals have retired, changed jobs, died, changed job descriptions, and so on? Wages do eventually get reset, even in sticky wage models. The conditions of jobs change even when the nominal wage doesn’t. So why should the notion of sticky wages be very relevant here?
2b. The rate of unemployment in Japan, last I checked, was 4.1%. Yes, they calculate it differently than we do, and yes in their heyday they had an even lower rate of unemployment. But still, ask yourself: just how labor market slack is there going to be?
3. An alternative is that money will boost real economic activity through a Lucas supply curve combined with a fair degree of money illusion, which is what you would expect from a longstanding deflationary environment. Businesses will confuse nominal changes with real changes, raise output, and eventually figure out the confusion and restrict output again. The economy does get to keep a one-time gain (probably there are positive social externalities to higher output in this setting), but it doesn’t drive an enduring recovery.
4. I should be seeing at least a dozen blog posts with titles like: “Japanese monetary policy: sticky wages or Lucas supply curve?” and the like. I’m not.
5. The fact that the Japanese stock market has risen with the new announcements does not much impress me. First, there is a simple story in which the inflation redistributes wealth to exporters and away from consumers, without raising longer-term living standards. Second, stock markets will trade on many different kinds of “noise,” including surprise announcements from central banks.
6. I’ve never read a paper on the Fisher effect in Japan, but usually there is not a complete Fisher effect in most developed countries. This policy could thus redistribute wealth from the elderly to the young, and through that (non-traditional) channel also boost economic growth.
In short, the recent developments are good news, but you shouldn’t have a great deal of confidence about their efficacy.
Margaret Thatcher has passed away
Very sad news of course, it is hard to even know what to say, you can follow obituaries and comments on Twitter here.
On YouTube, here is Thatcher and Buckley. Here is a list of the 364 economists who signed a petition objecting to Thatcher’s macroeconomic policies. Here is a good Bartlett piece on Thatcher, who by the way raised taxes overall.
“Could this euro have been made out of ice?”
It is becoming increasingly clear that moves out of the euro will be done furtively, sometimes gradually, and most of all non-transparently. At some point we’ll start arguing over whether “the euro” is a “rigid designator.”
First Cyprus has capital controls and now Portugal may be making a different kind of plunge:
The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts…
Of course these “treasury bills” (is that a rigid designator?) will have a floating price with respect to the euro, with respect to the “euro trapped in a Portuguese bank” (eventually), and other Portuguese treasury securities for that matter. Which will be the real money of Portugal?
If indeed this happens (one government spokesperson has denied the report) and perhaps then continues, at what point do we conclude that the Portuguese have opted for a dual currency?
Would the new scrip currency push out the euro or vice versa or can they coexist? One central question is at what rate the government would accept the new scrip for payments and taxes or otherwise offer to redeem or convert it.
Another question is banking confidence. If the new scrip goes badly, that may lower confidence in the Portuguese banking system. If the new scrip goes well…that may also lower confidence in the Portuguese banking system. The government will issue more of it and it will come closer to a dual currency. Bank accounts denominated in euros may become less credible in terms of their underlying protection. Once a new alternative currency is up and running, Portugal can leave the euro much more easily, converting bank deposits into the new currency along the way to ease their fiscal crunch. After the Cyprus episode, they are probably counting less on help from others.
Ideally the Portuguese government would like to be in a position of promising that the new script will be retired/repurchased within a month or some other very short time frame.
That’s not usually how it ends up working.
Garett Jones offers related comment. Here are a few remarks on lecterns made of ice.
Why the U.S. helps defend South Korea and what can go wrong
It is not because we need to subsidize their defense per se, to cite one argument which some non-interventionist critics have attacked. It is so, when North Korea behaves in a ridiculous manner, the South can respond (not respond) with great restraint. What we are subsidizing is a) a feeling of security, and b) not building nuclear weapons in response. We do something broadly similar for Japan.
The potential problem is when the same U.S. acts which produce a feeling of security in South Koreans produce a feeling of insecurity in North Korean leaders. And the broader game we are playing, with numerous allies, means we might end up pushing some individual confrontations beyond an optimal point (e.g., how would Israel respond with Iran if we wavered on South Korea?) Might we have to overinvest in the South Korean feeling of security — from a strictly Korean peninsula point of view — to keep Japan, Israel, Taiwan, the Saudis, and others “in line”?
It would be good if the North Korean leadership would read this blog post, as they would then realize that what to their eyes appears to be American “overstepping” is done for the sake of other audiences. It is problematic for the American government to itself communicate this point. Imagine announcing “we don’t stand by South Korea as much as it appears, we are just doing this because Israel faces a signal extraction problem and we can somewhat sway their inference toward relaxing about their own security situation.”
It would be bad if the Saudi leadership would read this blog post (or understand this to begin with). The American government would then have to produce a feeling of security for South Korea all the more.
The culture of guns, the culture of alcohol
I receive many emails asking me what is my attitude toward guns and gun control. I would say I wish it worked better than it does (a key point), I don’t think it works very well, I am happy to make those changes which seem to work somewhat, but overall I see an America with lots of guns and a falling crime and murder rate, so let’s focus on what is working, whatever that may be.
I would be happier if advocates of stronger gun control would state up front what percentage of the variation in the murder rate they thought they would be controlling. I see them as likely to make some dent in the suicide rate, most of all.
I would gladly see a cultural shift toward the view that gun ownership is dangerous and undesirable, much as the cultural attitudes toward smoking have shifted since the 1960s.
I am, however, consistent. I also think we should have a cultural shift toward the view that alcohol — and yes I mean all alcohol — is at least as dangerous and undesirable. I favor a kind of voluntary prohibition on alcohol. It is obvious to me that alcohol is one of the great social evils and when I read the writings of the prohibitionists, while I don’t agree with their legal remedies, their arguments make sense to me. It remains one of the great undervalued social movements. For mostly cultural reasons, it is now a largely forgotten remnant of progressivism and it probably will stay that way, given that “the educated left” mostly joined with America’s shift to being “a wine nation” in the 1970s.
Guns, like alcohol, have many legitimate uses, and they are enjoyed by many people in a responsible manner. In both cases, there is an elite which has absolutely no problems handling the institution in question, but still there is the question of whether the nation really can have such bifurcated social norms, namely one set of standards for the elite and another set for everybody else.
In part our guns problem is an alcohol problem. According to Mark Kleiman, half the people in prison were drinking when they did whatever they did. (Admittedly the direction of causality is murky but theory points in some rather obvious directions.) Our car crash problem – which kills many thousands of Americans each year — is also in significant part an alcohol problem. There are connections between alcohol and wife-beating and numerous other social ills, including health issues of course.
It worries me when people focus on “guns” and do not accord an equivalent or indeed greater status to “alcohol” as a social problem. Many of those people drink lots of alcohol, and would not hesitate to do so in front of their children, although they might regard owning an AK-47, or showing a pistol to the kids, as repugnant. I believe they are a mix of hypocritical and unaware, even though many of these same individuals have very high IQs and are well schooled in the social sciences. Perhaps they do not want to see the parallels.
The people who get this right — it seems to me — are the Mormons. Compassion, most of all for the poor, means that we should raise the social status of Mormons on this issue.
I don’t see that happening anytime soon.
The nature of French austerity
Mr Hollande himself has acknowledged that the state has got too big. “Public spending has reached 57 per cent of national wealth. It was 52 per cent five years ago. Do we live better for it? No,” he said late last year.
Agnès Verdier-Molinié put it differently:
“The reason spending has exploded is the multitude of different benefits and all the layers of administration,” she says.
Of course the French economy is already a mess. Spending cuts may well be coming:
The government admits that it has run out of room to increase taxes, with the tax burden now equal to more than 46 per cent of GDP – one of the highest in the EU. This leaves Mr Hollande, who campaigned against austerity, having to persuade the country to accept a programme of public spending curbs of at least €60bn through 2017 from a total currently running at about €1.2tn a year.
I suppose you could argue that the current French slowdown is due to the expectation of future spending cuts, but most of us would find this difficult to swallow. I will also predict that — if and when the spending cuts come — they will be accompanied by a worsening of output and employment, if only because French labor markets are not very flexible. Still, it would be odd to suggest that “austerity” is the root cause of the French economic problems rather than a symptom of other, deeper issues.
The recent boost to Medicare
This was an under-reported story which I missed at first. Sarah Kliff reports:
…the Obama administration reversed a proposed 2.3 percent pay cut for private Medicare plans, replacing it with a 3.3 percent raise.
For health plans, this was a huge victory. As Citi analyst Carl McDonald put it in a Tuesday note to investors, this was “Armageddon averted.”
“The rate adjustment,” McDonald continues, “sends a pretty clear message that CMS has no interest in seeing major disruption in the Medicare Advantage program right now, quieting concerns about a post election desire to rein in enrollment and margins.”
Medicare Advantage plans will still get a tiny haircut due to other changes the federal government proposed. The 2.3 percent pay cut that became a 3.3 percent raise was one among a few cuts that the Obama administration had proposed for 2014.
Cuts to Medicare Advantage plans mandated in the Affordable Care Act, for example, will still go forward.
Overall though, the cuts are way smaller than what the Obama administration initially proposed. McDonald at Citi estimates that Medicare Advantage plans will see a 2 percent rate reduction, compared to 7 percent to 8 percent that analysts predicted with the initial rates.
Here is more. This is but a single data point, but I take it as further evidence that fiscal consolidation cannot easily be done on a dime. In fact it cannot easily be done at all, especially in the United States. Here is my earlier post “Why are budget issues urgent now?”. You will note that Medicare Advantage is a program considered especially irksome, and especially costly, by many commentators on the left.