Category: Economics

The wisdom of Arnold Kling (a Kamala Harris parable)

Here is the opener of my Bloomberg column:

One of the worst tendencies in American politics is to restrict supply and subsidize demand. (The phrase is from the economist Arnold Kling.) The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices.

That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. There is still room for course corrections as she campaigns for president, but too much of what is being bandied about seems designed to annoy Arnold Kling.

Do read the whole thing.

Facts that contradict the standard housing bubble story

Here I am doing a mix of quoting and paraphrasing the excellent Kevin Erdmann:

1. “Housing construction has been constricted in our most prosperous cities.”

2. “Home prices in many developed countries rose at least as sharply as inthe US.”

3. “…rent inflation has been persistently high for 20 years.”

4. “Growth in real rent expenditures generally had been declining throughout the supposed boom period.”

5. “During the boom, the relative income of the typical homebuyer did not decline.”

6. During the boom, homeowners were not “buying up.”

7. Homeownership rates, even at their peak levels in 2004, among age groups under 65 years old, were no higher than homeownership rates had been in the late 1970s and early 1980s.”

8. “…when taking into account all types of housing, the number of new housing units never even rose very far above the long-term average.”

Those are all from Kevin’s new and very important book Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy.  The simple “housing bubble” story is not in fact as true as it might seem, as Kevin shows, and furthermore just look at how many parts of America now have home prices at or above their “bubbly peaks.”  I hope this work gets the attention it deserves.

Short-term lending in response to the government shutdown

Gridlock in Washington over President Donald Trump’s plans to build a wall on the border with Mexico has deprived hundreds of thousands of government employees and contractors of their wages. As a result, some have turned to specialist consumer-finance companies to bridge gaps between earnings and outgoings. Shares in World Acceptance, a South Carolina-based short-term lender, are up 22 per cent since the shutdown took effect about a month ago. EZ Corp, a pawnshop operator based in Austin, Texas, is 20 per cent higher over that period. In both cases, the rises are much more than benchmarks, suggesting investors could be betting on a surge in demand to cover unexpected expenses.

…Chad Prashad, chief executive of World Acceptance, said his company was seeing demand in Texas and the south-east of the US where there were big airports employing government workers. In response to the shutdown, World Acceptance is offering cash-strapped government employees deferrals on their loans without interest or fee penalties. New customers can get up to $1,250 in a 10-month loan with 0 per cent interest and no fees.

Here is the full FT article by Nicole Bullock.

Shout it from the rooftops

Many top earners during the high-rate era, such as politicians Dwight Eisenhower and Ronald Reagan, entertainer Jack Benny and librettist Alan Jay Lerner, didn’t pay the top rates. In 1952, for example, when the top rate was 92%, the highest-earning 1% of taxpayers had an average rate of 32%, according to Elliot Brownlee, a tax historian and emeritus professor at the University of California, Santa Barbara.

“When top tax rates were high, there was always a large gap between the stated rates and what the highest earners actually paid as a percentage of their income,” says Joel Slemrod, an economics professor at the University of Michigan.

This one would not work today:

Gen. Dwight Eisenhower also successfully argued that $635,000 he earned from his 1948 memoir, “Crusade in Europe,” should be treated as a capital gain, saving him as much as $400,000 of tax, says Joseph Thorndike, a historian with Tax Notes magazine.

Here is the Laura Saunders WSJ piece.

In India Everyone Gets Affirmative Action

India has long affirmative-action-like programs for members of scheduled castes, scheduled tribes and other backward classes (yes, that is the official name). The programs typically reserve a certain number of political seats, government jobs, and educational placements for members of historically disadvantaged and discriminated against groups, hence the the term reservations. Over time, the number of reservations has been increased and the category expanded to more and more groups. In fact, under a new reservation program just announced, virtually everyone will be covered by one reservation or another!

The new program will cover household income of less than 8 lakhs which is $11,000, far above India’s GDP per capita! The new program is meant to benefit middle and upper castes who have chafed under reservations for the historically discriminated against. The fact that the program is open to so many people, however, means that it’s really not much of a benefit at all.

Moreover, ultimately reservations mean very little if there aren’t private-sector, wealth-creating jobs which is India’s primary challenge.

I don’t actually favor the “citizen dividend” side of a carbon tax

The carbon tax idea makes perfect sense to me, and I have endorsed the proposal for some time, but why return the revenue to citizens in the form of dividends?  It strikes me as economists thinking they know what makes good politics, something which economists are rarely good at.  Arguably it makes the policy seem less important, and mainly about the dividend, in a slightly cynical, Chavez-like sort of way.  Furthermore, it tries to make a carbon tax a free lunch, which it is not, no matter how great the longer-term gains.  I don’t believe in economists tricking people, even though I will admit tricking people can be useful.  The tricking is somebody else’s job!  Finally, if the carbon tax is revenue-neutral, just sending money to everyone (in what proportions?) doesn’t give them anything in return as measured by real resources.  Maybe it would give Jay Powell a slight headache, however, since he and others at the Fed would have to decide whether and how to do an offset, or not.

We economists are in any case not in charge, so let’s push for what is actually best.  I would suggest using the revenue to either help solve the problem at hand (climate change, or whatever connected problems might be relevant), or simply to pay down the debt.

A simple test for whether or not you understand an organization

Can you identify the implicit leverage in that organization?

Most (not all) organizations have forms of leverage which are built in and which do not show up as debt on the balance sheet.  Banks may have off-balance sheet risk through derivatives, companies may sell off their valuable assets, and NBA teams may tank their ability to keep draft picks and free agents in their future.

Or a university may have ambitious plans, or payroll commitments, which require an ongoing stream of tuition increases or admissions boosts, usually from out-of-state students.

None of this has to be a bad thing — many growing organizations should have leverage.  Nonetheless leverage it is.

So take your favorite organization.  Do you know where the hidden leverage is?

If not, you probably don’t understand it very well.

Who again has the power to end the government shutdown?

That is the topic of my latest Bloomberg column, here is one excerpt:

The real power here is held by government employees, especially those in critical jobs. Let’s say that more TSA screeners decided to walk off the job. It’s already the case that the TSA absentee rate has gone up to 7.6 percent, from 3.2 percent a year ago. It is possible to imagine screeners staying home in much greater numbers, thus crippling the entire nation. That could either force President Donald Trump’s hand or lead to a congressional override of a potential presidential veto.

Yet:

As a rationale for showing up to work, “I’m helping both the TSA and my colleagues” can work for a while, because of both cooperative norms and peer pressure. But I don’t think it can hold things together for more than a few months. They may not have the right to strike, but federal employees can still gum up the works with high absenteeism and poor performance.

I really don’t expect anything good to come of this entire episode.

Declining Labor Force Growth Explains Declining Dynamism

The best paper I have read in a long time is Hopenhayn, Neira and Singhania’s From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share. HNS do a great job at combining empirics and theory to explain an important fact about the world in an innovative and surprising way. The question the paper addresses is, Why is dynamism declining? As you may recall, my paper with Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship?, somewhat surprisingly answered that the decline in dynamism was too widespread across too many industries to be explained by regulation. HNS point to a factor which is widespread across the entire economy, declining labor force growth.

Figure Two of the paper (at right) looks complicated but it tells a consistent and significant story. The top row of the figure shows three measures of declining dynamism: the rise in concentration which is measured as the share of employment accounted for by large (250+) firms, the increase in average firm size, and the declining exit rate. The bottom row of the figure shows the same measures but this time conditional on firm age. What we see in the bottom figure is two things. First, most of the lines jump around a bit but are generally flat or not increasing. In other words, once we control for firm age we do not see, for example, increasing concentration. Peering closer at the bottom row the second thing it shows is that older firms account for a larger share of employment, are bigger and have lower exit rates. Putting these two facts together suggests that we might be able to explain all the trends in the top row by one fact, aging firms.

So what explains aging firms? Changes in labor force growth have a big influence on the age distribution of firms. Assume, for example, that labor force growth increases. An increase in labor force growth means we need more firms. Current firms cannot absorb all new workers because of diminishing returns to scale. Thus, new workers lead to new firms. New firms are small and young. In contrast, declining labor force growth means fewer new firms. Thus, the average firm is bigger and older.

HNS then embed this insight into a dynamic model in which firms enter and exit and grow and shrink over time according to random productivity shocks (a modified version of Hopenhayn (1992)). We need a dynamic model because suppose the labor force grows today, this causes more young and small firms to enter the market today. Young and small firms, however, have high exit rates so today’s high entry rate will generate a high exit rate tomorrow and also a high entry rate tomorrow as replacements arrive. Thus, a shock to labor force growth today will influence the dynamics of the system many periods into the future.

So what happens when we feed the actual decline in labor force growth into the HNS dynamic model (calibrated to 1978.) Surprisingly, we can explain a lot about declining dynamism. At right, for example, is the startup rate. Note that it jumps up with rising labor force growth in the 1950s and 1960s and declines after the 1970s.

The paper also shows that the model predictions for firm age and concentration also fit the data reasonably well.

Most surprisingly, HNS argue that essentially all of the decline in the labor share of national income can be explained by the simple fact that larger firms use fewer non-production workers per unit of output. That is very surprising. I’m not sure I believe it.

If HNS are correct it implies a very different perspective on the decline in labor share. In the HNS model for example non-competitive factors do not play a role so there’s no monopoly or markups . Moreover, if the decline in labor share is caused by larger firms using fewer non-production workers then this is surely a good thing. In their model, however, there is only one factor of production so declining labor share means increasing profit share which I find dubious. If production and non-production labor are distinguished it may also be that declining non-production share will redound to production labor so the labor share won’t fall as much. Nevertheless, the ideas here are intriguing and the results on dynamism, which are the heart of the paper, do not rely on the arguments about the labor share.

Government shutdown (price-capped) markets in everything

Dozens of air traffic controllers are keeping Austin-Bergstrom International Airport functioning smoothly through the longest government shutdown in US history — and all without a paycheck.

Friday was the first payday since the shutdown began and while hundreds of thousands of federal workers can expect to be paid for the work they put in during the shutdown, they are not receiving paychecks until it ends. Tuesday marks Day 25 of the shutdown.

Austin pilots want to do what they can to help their aviation fellows who are affected by the shutdown.

“Those controllers have always had my back, during the normal flights and the rare times that I’ve had a slight abnormal flight that caused me concern,” Ken VeArd said, a longtime pilot.

VeArd recently posted on social media asking his fellow pilots to help him give back to ABIA’s controllers.

“I just made a post saying this is what I am thinking about doing and before I knew it, it just got out of control,” he said. “Whether you need diapers, milk or eggs, or even if all you need is a six pack of beer,” VeArd hopes it’s the small things that will make a difference.

He’s been buying $20 gift cards from H-E-B for the controllers.

“My biggest concern with this thing is that we try to do something nice for our air traffic control friends and it turns out to be a problem, we don’t want to make problems any worse than it is,” VeArd said. “So we capped it at $20.”

Here is the full story, via Air Genius Gary Leff.

John Bogle, RIP

In 1974, Paul Samuelson wrote Challenge to judgement, a searing critique of money managers. Samuelson challenged the money managers to show that they could beat the market. He concluded that “a respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business.” Samuelson hoped for something new:

At the least, some large foundation should set up an in-house portfolio that tracks the S&P 500 Index — if only for the purpose of setting up a naive model against which their in-house gunslingers can measure their prowess.

Inspired by Samuelson, John Bogle created the first index fund in 1976 and it quickly…failed. In the initial underwriting the fund raised only $11.3 million, which wasn’t even enough to buy a minimum portfolio of all the stocks in the S&P 500! The street crowed about “Bogle’s folly” but Bogle persevered and in so doing he benefited millions of investors, saving them billions of dollars is fees. As Warren Buffet said today:

Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.

The creation of the index fund is a great example of how economic theory and measurement can improve practice. Our course on Money Skills at MRU is very much influenced by Bogle. Tyler and I recommend index funds and Vanguard in particular. In the videos and in our textbook we present data from Bogle’s book Common Sense on Mutual Funds. Here’s the first video in the series.

How to study history of economic thought

The Center for the History of Political Economy at Duke University will be hosting another Summer Institute on the History of Economics this summer from June 10-19, 2019. The program is designed for students in graduate programs in economics, though students in graduate school in other fields as well as newly minted PhDs will also be considered.

Students will be competitively selected and successful applicants will receive free housing and a booklet of readings. We are also able to provide limited travel support. The deadline for applying is March 1.

We are very excited about this year’s program, which will focus on giving participants the tools to set up and teach their own undergraduate course in the history of economic thought. There will also be sessions devoted to showing how concepts and ideas from the history of economics might be introduced into other classes. The sessions will be run by Duke faculty members Bruce Caldwell and Jason Brent, who will be joined by Steve Medema of the University of Colorado–Denver. More information on the Summer Institute is available at our website, http://hope.econ.duke.edu/

Subtitling>Dubbing

We study the influence of television translation techniques on the worldwide distribution of English-speaking skills. We identify a large positive effect for subtitled original version broadcasts, as opposed to dubbed television, on English proficiency scores. We analyze the historical circumstances under which countries opted for one of the translation modes and use it to account for the possible endogeneity of the subtitling indicator. We disaggregate the results by type of skills and find that television works especially well for listening comprehension. Our paper suggests that governments could promote subtitling as a means to improve foreign language proficiency.

That’s from TV or not TV? The impact of subtitling on english skills, a clever study with a useful finding.

I cannot help but note that our Principles of Microeconomics and Principles of Macroeconomics videos at MRU (and linked to in our textbook) are subtitled in English, Spanish, Hindi, Arabic and other languages so perhaps we can help teach languages as well as economics.

Noah Smith debates the 70 percent marginal tax rate with a bunch of us

Here is the Bloomberg link, here is a sentence from Noah on AOC:

Her proposal, which would make the tax structure similar to the one the U.S. had in 1921, is pretty much symbolic — a way of expressing disapproval of inequality, while kicking off a lively discussion of income taxes and redistribution.

We do not all agree.