Category: Current Affairs

Why did Texas create so many jobs?

by  Tyler Cowen in

Advance warning: this is not a post about Rick Perry!

Matt Yglesias writes:

My view is that Texas’ robust job growth is a consequence of its robust population growth…

This is consistent with Paul Krugman’s column yesterday, and also consistent with Matt’s earlier writings praising Texas for not overdoing the zoning.  I agree, but I wonder who should be reassured by this answer.

I’ve read a lot of blog posts lately painting Texas as a low benefit, low Medicaid, not so great system of public education kind of state.  Let’s take this picture and run with it.  People are moving into the state, in fairly large numbers, and that suggests the state is doing something right (again, I’m not suggesting Perry has anything to do with this.)  By the way, Dallas-Fort Worth recently had 35 straight days of 100+ weather and that wasn’t even a record for the region.

I see four options:

1. Hispanics track other Hispanics to some extent, so if Hispanic population is going up, so is the population of Texas.  For sure, but this is by no means the entire population phenomenon.  Nor is New Mexico experiencing a comparably positive mobility effect.

2. Texas gets some policies right, some say low taxes, there is lots of debate here.  Sometimes conservative commentators argue that “being tough on the poor” is in fact good for the poor themselves, given “poor on poor” local externalities.

3. Texas gets right a lower-zoning policy, which leads to cheap rents.

4. People are moving to Texas because fossil fuel prices have been rising.  There’s something to that, but still those prices do not seem to predict employment in Texas, at least not in recent times.

Let’s treat #1 and #4 as exogenous to policy, for the sake of argument dismiss #2 altogether, and thus focus only on #3.  Is this a result progressives should feel happy about?

I am not sure.  There is no chance of Texas’s looser zoning being applied to Fairfax County; for one reason the “Mantua moms” (don’t ask) wouldn’t stand for it.  It’s not even an issue and it doesn’t matter which party is in power.  Those are the same Mantua moms who oversee and enforce one of the nation’s best public school systems.  Now, as a general matter, should the influence of the Mantua moms be stronger or weaker?

Well, we’ve decided to live with the Mantua moms, for better or worse.  The neighborhood is splendid, but boring, and the neighbors do not support good food.  Texas, it seems, doesn’t give nearly as much political power to its equivalent of the Mantua moms, for whatever reason (can anyone tell us why?).  That leads to cheaper land, cheaper housing, and inferior public school systems, not to mention better and cheaper food.  And poor people are voting with their feet to choose it.

I am well aware that marginal migrants do not necessarily reflect the preferences of the infra-marginals.  Still, I am not sure many of us should find this a comforting scenario.

I’m not sure that “don’t choose policies, choose interest groups” counts as a final truth, but it’s an interesting thought experiment to upset the usual ideological applecarts.

Richard Clarida, FOMC nominee

by  Tyler Cowen in

Here is his Wikipedia page.  Here is some bio.  Here is his 1999 survey on monetary policy.  Here is Google Scholar.  He is a very wise and very accomplished economist.  Here is his piece on what we’ve learned about monetary policy in the last decade, with special reference to the liquidity trap and zero bound.  Excerpt:

According to monetary theory, central banks have at least two powerful – and complementary – tools to reflate a depressed economy: printing money and supporting the nominal price of public and private debt. As Bernanke (2002) himself argues, a determined central bank can deploy both tools for as long as it wants regardless of 1) how credible its commitment is and 2) how expectations are formed or 3) how term or default premia are determined. There are two fundamental questions. First, can these tools, aggressively deployed, eventually generate sufficient expectations of inflation so that they lower real interest rates? Forward looking models generally predict that the answer is yes. However, the interplay between monetary policy and the yield curve can become complex when central banks are at the zero lower bound (Bhansali et. al. 2009) and central banks seek to provide a “deflation put.”

Also, as discussed above, given the prominent role that inflation expectations play in inflation dynamics, inflation inertia is the enemy of reflation once deflation sets in. A second question relates to the monetary transmission mechanism itself. In a neoclassical world that abstracts from financial frictions, a sufficiently low, potentially negative real interest rate can trigger a large enough inter-temporal shift in consumption and investment to close even a large output gap. But in a world where financial intermediation is essential, an impairment in intermediation – a credit crunch – can dilute or even negate the impact of real interest rates on aggregate demand. In the limiting case of a true liquidity trap, no level of the real interest rate is sufficient in and of itself to close the output gap and reflate the economy. Credit markets in the U.S. appear at this writing to be bifurcated.

There is more to say about Clarida but I have to run to dinner and the theater!

Basically I see it as that Obama and Bernanke have chosen two academics — two guys who think monetary policy really works, or at least can really work.  Odds are, they are Ben’s guys, and in my view that is good news.  By the way, Clarida I believe is a Republican.

Addendum: Dylan Matthews has good remarks.

Jeremy Stein, a new FOMC nominee

by  Tyler Cowen in

Stein is one of the most creative contemporary economists, with some truly interesting and first-rate papers in the early to mid 1990s.  He has kept up his quality and creativity since then.  Most of the early papers are in mid-brow theory, industrial organization, and signaling.  Here is one of his very recent papers on macroprudential regulation; it stresses the importance of dynamic bank recapitalization. He is a very smart and still underrated economist; he’s one of the few where I will more or less automatically start reading his papers when I run across them.  I have no idea how he would do in the all-important political side of the job.  From the paper, an excerpt:

If significant increases in capital ratios have only small consequences for the rates that banks charge their customers, why do banks generally feel compelled to operate in such a highly-leveraged fashion, in spite of the obvious risks this poses? And why do they deploy armies of lobbyists to fight against increases in their capital requirements? By way of contrast, it should be noted that non-financial firms tend to operate with much less leverage than financial firms, and indeed often appear willing to forego the tax (or other) benefits of debt finance altogether. In Kashyap, Stein and Hanson (2010) we argue that the resolution of this puzzle has to do with the unique nature of competition in financial services. Unlike in many other industries, the most important (and in some cases, essentially the only) competitive advantage that banks bring to bear for many types of transactions is the ability to fund themselves cheaply. Thus if Bank A is forced to adopt a capital structure that raises its cost of funding relative to other intermediaries by only 20 basis points, it may lose most of its business. Contrast this with, say the auto industry, where cheap financing is only one of many possible sources of advantage: a strong brand, quality engineering and customer service, and control over labor and other input costs may all be vastly more important than a 20 basis-point difference in the cost of capital.

Here he argues for a very gradual phase-in of tough capital requirements.  In this paper he argues for a credit-based channel of monetary transmission, and here.  This puts him in an alliance with early Bernanke.  Here is his paper on the cyclical effects of Basel capital standards; he has done a lot of work with Anil Kashyap in that area.  Here is his overly optimistic paper on the eurozone.  In this paper he lays out his generally positive view of the efficacy of monetary policy, with a nod to Hyman Minsky on the debt issue.

QE3: The long and the short of it

by  Alex Tabarrok in

Long term rates and short-term rates are linked through arbitrage so a credible commitment to keep short-term rates low for an extended period of time can also generate a movement in long-term rates, as Justin Wolfers points out. According to Macroeconomic Advisors the effect can be quite large:

In principle, FOMC communications can be very powerful. If the FOMC could encourage the market to shift out its expectation of the time of the first rate hike by six months, the impact on the ten-year Treasury yield would be comparable to that of $760 billion of QE! Our analysis suggests that a six-month shift in the expected time of the first rate hike would have a significant impact on the yield curve.

Daron Acemoglu on what to do

by  Tyler Cowen in

In a piece entitled “The Real Solution is Growth,” he makes many good points, here is one:

Foster the commercialization of innovation. Much more can be done to facilitate this process. The Bayh-Dole Act of 1980 was only a small step toward encouraging commercialization of academic research. Even as the U.S. government is trying to cut spending, commercialization of new research would be one area deserving of new funding, particularly to ensure that this process does not undermine the greatest virtue of academic research, its openness.

He is also very good on patents, see this earlier Will Wilkinson blog post too.

Hat tip goes to ModeledBehavior on Twitter.

Non-Keynesian sentences to ponder

by  Tyler Cowen in

Unit labor costs, which are adjusted for efficiency gains, were projected to rise 2.4 percent, according to the survey median. Labor expenses in the first quarter were revised to 4.8 percent, the biggest gain since the fourth quarter of 2008, from a previously reported 0.7 percent advance.

Productivity, of course, is clocking in at lower than expected.

The economics of riots

by  Tyler Cowen in

Has anyone linked to the DiPasquale and Glaeser 1996 paper on riots yet?

We examine the causes of rioting using international data, evidence from the race riots in the 1960s in the U.S., and Census data from Los Angeles, 1990.  We find some support for the notions that the opportunity cost of time and the potential costs of punishment influence the incidence and intensity of riots.  Beyond these individual costs and benefits, community structure matters.  In our results, ethnic diversity seems a significant determinant of rioting, while we find little evidence that poverty in the community matters.

Here is a well-known political science paper on economic conditions and riots in India.  Here is an economics paper on riots in India, AER 2008.  Here is Alex’s piece on riots (gated).  In London, the riots are getting closer to the LSE.

Not ready for the rain, in northern Chile

by  Tyler Cowen in

The past weekend’s precipitation blocked highways, forced the cancellation of a top Chilean football match and damaged the homes of 1,800 people, said Vicente Nunez, chief of the Interior Ministry’s national emergency office.

A similarly wet stretch in early July dumped four years’ worth of rain in one day on coastal Antofogasta. That was just a quarter of an inch (more than 6.3 millimeters) but it was still enough to cause collapsed or leaking roofs in homes and businesses that usually have no reason to protect themselves against even minimal precipitation.

…Average annual rainfall in the northern city of Arica is so low that it would take 50 years to accumulate an inch. This July, the city was swamped twice by what would be considered mild showers almost anywhere else on the planet. So far this year, Arica has had 0.13 inch (3.4 millimeters) of rain, more than six times its yearly average during 30 years of record keeping.

Here is more, interesting throughout.  Of course it reminds me of David Friedman’s famous piece.

On the Debt Deal and the unBBA

by  Alex Tabarrok in

TIME has five economists react to the debt deal, Mohamed El-Erian, Douglas Holtz-Eakin, Simon Johnson, Stephen S. Roach and yours truly.

Holtz-Eakin really works his apocalyptic imagery:

The river of entitlement red ink courses through a broken budgetary landscape. America is borrowing $58,000 every second—more than the median income of its households—and the gross debt already exceeds the level (90% of gross domestic product) that has historically been seen as toying with danger. Even worse, the federal debt promises to explode in the next decade, which will surely result in a Greece-style debt crisis. Erskine Bowles, co-chair of the President’s fiscal reform commission has called it the “most predictable crisis in history.”

When the crisis inevitably arises, the painful memories of 2008—panic; no credit; monthly job losses in the hundreds of thousands; Main Street businesses shuttering their windows and closing their doors; highly-qualified college graduates despairing of ever finding real work—will seem quaint and mild by comparison.

Stephen S. Roach wonders what will happen as China rebalances.

For China, the fiscal crisis and Great Recession was a wake-up call — a signal to rebalance away from unsustainable external demand toward untapped internal consumption. Such efforts now appear to be underway. And that’s where it comes full circle. China, the world’s biggest surplus saver, gets it. It will now save less and consume more. Conversely, the United States, with world’s biggest savings deficit, doesn’t get it. At least, that’s the message to take from the disappointing outcome of the debt ceiling debate.

…Absent the Chinese buyer of Treasuries, who will step up and fill the void? And on what terms? That latter point is key. With increasingly skittish foreign lenders now likely to require concessions in the form of a weaker dollar and higher U.S. interest rates, there will be new pressures on U.S. inflation and growth.

The timing of Roach’s comments are odd since interest rates are falling madly. On the other hand, the Chinese credit rating agency did just downgrade US debt.

I discuss the virtues of an unbalanced budget amendment. I won’t repeat what I wrote earlier but here are a few added remarks:

The idea of an unbalanced budget amendment is not new. Sweden’s government has been required since 2000 to budget for a 1% surplus over the business cycle. Since implementing their unBBA, Sweden has successfully brought their budget into balance and created a surplus.

Even more ancient sources are supportive of an unBBA. In the Bible, Joseph doesn’t advise the Pharaoh to balance the budget instead he tells the Pharaoh, save during the seven fat years so you are prepared for the seven lean. An unbalanced budget amendment reflects this simple and ancient wisdom.

For more, Ed Dolan has a good post on Sweden’s fiscal rules. See also this IMF paper for an extensive look at fiscal rules around the world. A hat tip to Ennuigogo.

Is the future of the European periphery a bright one?

by  Tyler Cowen in

Hugo, a loyal MR reader, asks:

…based on this sentence: “I am pessimistic about the survival of the full eurozone, which is not the same as being pessimistic about Europe”

What’s the non-pessimistic, post-Eurozone scenario?

Wouldn’t that leave Greece and Portugal and maybe a couple of others as the Euro equivalent of the US Rust Belt, but with no federal support & much-reduced ability for people in those countries to migrate to areas where there is job growth?

Greece has made very good progress on cutting spending and limiting patronage (where is the Cato study?), although the whole package probably can’t work in such a deflationary environment, not to mention the riots in the streets.  They’ll probably have to give back at least a third of what they have done on the reform side, but a lot of inefficiency has been rooted out for good.  The country doesn’t have to have a miserable future, just look at recent Turkish growth.  Of course Greece needs to default (again, and less selectively) and that will require in the short run yet more spending austerity because the borrowing still is financing their current budget.

Portugal made significant economic gains before joining the eurozone.  Its manufacturing probably won’t come back but old people like the place and that will continue to help them as Europe ages.  They can sell real estate and vacations and produce services and a bit of agriculture.  Neither Greece nor Portugal faces much risk from Chinese or Asian competition; those “Rustbelt” problems lie largely in the past and have already hit them and been absorbed.

EU subsidies are not the path to wealth and in part they lock those economies into low-productivity growth ag. sectors; that’s a mixed blessing.  And who says a eurozone implosion would cause those subsidies to go away?  Northern Europe already has allocated that money and perhaps wishes to retain influence over their neighbors, maybe all the more in a volatile environment.

Portugal is not reaping major gains from the right of its citizens to migrate to Germany and besides maybe that won’t go away.  Schengen could fail and Germany still might prefer Portuguese immigrants to the relevant alternatives.

Currency depreciations of 40 percent or more won’t hurt Portugal or Greece!

By no means am I an extreme optimist about these countries, but I think they will do OK, at least once they get past the short run.  Why shouldn’t they?  Human capital levels are not superlative but they are entirely acceptable for mid-level European existence and the climate is superb in both places.  All they have to do is wave a magic wand and imagine themselves outside the eurozone, and outside their current fiscal shortfalls, just don’t ask me how they get there.

Sentences to ponder

by  Tyler Cowen in

Here is Nancy Youssef, via Kevin Drum:

Rather than cutting $400 billion in defense spending through 2023, as President Barack Obama had proposed in April, the current debt proposal trims $350 billion through 2024, effectively giving the Pentagon $50 billion more than it had been expecting over the next decade.

With the wars in Iraq and Afghanistan winding down, experts said, the overall change in defense spending practices could be minimal: Instead of cuts, the Pentagon merely could face slower growth.

….”This is a good deal for defense when you probe under the numbers,” said Lawrence Korb, a defense expert at the Center for American Progress, a left-leaning research center. “It’s better than what the Defense Department was expecting.”

Hey, maybe they’re not really cutting spending after all!