Category: Economics
*Risk Shocks*
Here is a new paper by Lawrence Christiano, Roberto Motto, and Massimo Rostagno, reporting from the frontiers of actual business cycle theory:
We augment a standard monetary DSGE model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate over time. We refer to this measure of volatility as ‘risk’. We find that fluctuations in risk are the most important shock driving the business cycle.
That is the NBER version, does anyone know of an ungated version? (It is here.) Here are the very useful overheads.
The future that is America
A large and growing share of American workers are tapping their retirement savings accounts for non-retirement needs, new data show.
The withdrawals, cash-outs and loans are draining nearly a quarter of the $293 billion that workers and employers deposit into their 401(k) and other savings accounts each year, undermining already shaky retirement security for millions of Americans.
Is this because standards of living have been going up so much (free Facebook), or because some individuals, rightly or wrongly, feel compelled to make up for stagnant or declining job market prospects? You tell me, here is more on that one. I call it the tyranny of consumption smoothing, an underreported theme in welfare economics. And there is this:
Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.
The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10 percent federal tax penalty but also pay capital gains taxes.
And from the NYT, this article considers how the feeling of scarcity drives the desire to borrow. These points are related to income inequality, and here you will find my colleague Garett Jones on whether individuals with low time preference will inherit the earth (pdf).
Development Economics – Final Exam
We have posted the last section of our course on Development Economics to MRU and the final exam is now open. Have fun!
New courses coming soon!
Facts about cities
The average tract density of all these (U.S.) cities taken together declined in every decade since 1910, from 69.6 persons per hectare in 1910 to 14.6 persons per hectare in 2000, almost a fivefold decline. Fitting an exponential curve to this average density in every decade from 1910 to 2000, we found that the average annual rate of decline for the entire period, assuming a constant rate, was 1.92 percent. Declines in average tract density between any two consecutive censuses were registered in 124 of the 153 observations, or 81 percent of the time.
That is from the new and quite interesting Planet of Cities, by Shlomo Angel. My takeaway is that the Avent-Yglesias push for greater urban density, which I sympathize with, is unlikely to happen on a significant scale. If you are looking for hopeful signs, there is this:
…between 1990 and 2000, six cities in this group registered an increase in average tract density: New York, Washington, Los Angeles, St. Paul, Syracuse, and Nashville. Hence, while average densities in U.S. cities have been in general decline for almost a century, they may now be reaching a plateau and even gradually increasing.
I definitely recommend this book to all those with an interest in urban issues.
Ryan Avent is correct about Draghi and the eurozone
I find it shocking how readily we all seem to be accepting the European Central Bank’s inaction on euro-zone economic weakness. Some perspective is in order. Real euro-area output is at roughly the level of the end of 2006 and it is declining. The euro-area economy hasn’t grown since the third quarter of 2011. Total employment is below the level first attained in the second quarter of 2006 and it is declining. The unemployment rate is of course at a record high 11.8%. And inflation—both core and headline—was virtually nil in the second half of 2012.
I would stress that it is even worse than Ryan is suggesting. Countries such as Greece, Portugal, and Spain have consumed remarkable amounts of political capital. Britain is considering leaving the EU. Credit channels are still either in tatters or on life support, relying on ECB guarantees. More countries are seeing zero or negative growth. Eurogeddon is here, as a variety of countries have situations worse, in relative terms, than the Great Depression of the 1930s. It seems the bailout funds, especially the ESM, have given up on the notion of detaching sovereign and bank liabilities from each other. The so-called banking union is at best a common supervisor rather than real risk-sharing for deposit liabilities. The fact that we don’t have daily bond market crises, filling up my Twitter feed, is certainly welcome but constitutes a remarkable lowering of the bar for what success means. Just how would one, these days, articulate why the eurozone should be considered a success and worth preserving going forward? Is this case no better than the (possibly correct) claim that dissolution would bring economic anarchy? In my rather (currently) unfashionable view, the eurozone crisis is still getting worse, not better.
Adam Posen on Japanese fiscal stimulus
The case for continued deficit spending in Japan ended by mid-2003.
…The additional stimulus in Japan is counterproductive because it adds to the long-term costs without addressing Japan’s real problem: a return to deflation and an overvalued exchange rate. The BoJ pursuing a higher inflation target through large-scale purchases of a wide range of assets, as Mr Abe and his economic adviser Koichi Hamada rightly advocate, would be sufficient and appropriate.
Here is much more (FT). You will note that Posen is in general famous for being an advocate of stimulus for the UK and he is no enemy of Keynesianism or aggregate demand analysis.
A separate vote for the debt ceiling is a bad idea
A rather obvious statement that 84% of polled economists agree with:
That is from Brad DeLong.
Japan fact of the day
The unemployment rate is 4.1 percent.
In recent discussions of Japanese fiscal stimulus, this point could use a little more…emphasis.
Here is one source for the data.
Uncovering Union Violence
Union violence against non-unionized workers and their employers is an under-reported story. Everyone knows it happens but they look the other way. It’s hard to look the other way, however, when the violence and vandalism is videotaped and put on the web–that’s what two Philadelphia developers did and the result is making waves far beyond the workplace.
Since the first videos went up in spring, the tide of public sentiment has turned, and the Pestronks won a court order restricting the picketers’ behavior. But in coming years, the Goldtex battle and the techniques employed there may be seen in grander, historical terms: as the moment that started the unraveling of Building Trades’ vast economic and political power, and perhaps of Philadelphia’s entire power structure.
The above-market wages, featherbedding and absurd work rules make low-cost development difficult:
…According to Gillen, the economics of our Trades unions hinder middle-income developments and force developers toward high-end luxury residences. Yet Building Trades flaunts its power with labyrinthine work rules and outrageous demands. Most famously, the Comcast tower was equipped with two sets of pipes—one “green” and functional, the other old-fashioned and disconnected—to feed the union beast. But the Trades are an everyday drag on the local economy. Union plumbers must call in the electricians if a single wire needs to be moved.
As is usual, in these situations, the rents do not go the workers alone but instead are partially distributed to inside developers who accede because they get monopoly power:
…The Pestronks say they’ve been told by people within the development community that certain established builders get better labor rates than they were offered. Multiple sources inside Philadelphia’s development community say that information is correct. “It isn’t like the unions ever work for market rate,” says one developer, who requested anonymity for fear of retribution from the Trades. “But instead of coming in 40 or even 50 percent over market, they’ll come in at 20 percent. Maybe throw in some government subsidy, and it’s just enough to get the deal done.”
The arrangement has dark ramifications for the city’s economy. “The issue,” says one elected official, who also asked for anonymity, “is that a younger developer or an out-of-town developer gets a vastly different price than someone who has a relationship with the unions. There is a kind of old-boy network involved. And there is an element of protectionism to it. The established developers complain about the unions. But they cut deals with them and enjoy the fact that the unions reduce any competition they might face.”
The politicians also get their share of the cut:
..Inquirer reporter Bob Warner has published a series of stories quantifying the amount of money Johnny “Doc” Dougherty donates to local politicians. Dougherty, the boss of Local 98, annually funnels $2 million into state and city races, circumventing campaign contribution limits by funding political action committees that lavish his favored candidates with cash. The Trades have it in their power to acquire huge stakes in any city politician. A review of 2011 political campaign filings shows City Council representatives Bill Green, Mark Squilla and Bobby Henon each received roughly 20 to 25 percent of their funding from Trades-related sources.
Read the whole excellent piece. Hat tip to EconJeff who notes that the article is flawed only by a bit of lazy history suggesting that the 40 hour work week and good working conditions are primarily due to unions (there is also a bit of weak economics in a suggestion that the wages of builders and city rents should be closely related). Still it’s a very astute article that connects the dots in the iron triangle.
How to protect workers against robots
Noah Smith has an excellent proposal:
First of all, it should be easier for the common people to own their own capital – their own private army of robots. That will mean making “small business owner” a much more common occupation than it is today (some would argue that with the rise of freelancing, this is already happening). Small businesses should be very easy to start, and regulation should continue to favor them. It’s a bit odd to think of small businesses as a tool of wealth redistribution, but strange times require strange measures.
Read the whole thing.
Points I made about charter cities and free cities
I do favor experimentation in these directions, but often at Liberty Fund conferences, and indeed more generally, I play the role of contrarian. I am not supposed to report the comments of others, but here are a few of the points I made in the discussions over the weekend:
1. It is striking that charter cities — a partial unpacking of nation-states — are proposed for a region, namely Central America, where Central American unification has been an ongoing proposal for hundreds of years. Could it be that Central American nation-states were not optimally carved up in the first place? Are cross-national unification and charter “unpacking” really polar opposites as proposals, or do they have more in common than it might at first appear?
2. Under what conditions would, in equilibrium, landowners capture most of the value created by a charter or free city? Well-governed land would seem to be very scarce.
3. To what extent do charter cities require the active support or at least implicit support of a major hegemon? Great Britain and then the U.S. backed Hong Kong and Singapore. The U.S. took over Puerto Rico. Yet Portuguese Goa and French Pondicherry are no longer real entities in part because no powerful government stood behind them.
4. To what extent are landlocked charter cities viable, or will their rents get swallowed up by larger and adjacent neighbors, much as India gives Nepal somewhat of a raw deal on transport? Are successful charter and free cities more likely to be on the water?
5. Are the most likely countries to approve charter cities those which plan to use them as “special purpose vehicles” to keep offshore oil and gas revenues out of the hands of the legislature or other domestic “interest groups”?
6. More generally, what kind of selection process will rule which charter cities are approved and which wither on the vine? How much will this selection process make the original idea worse (or better)?
7. When it comes to local land rights and the like, to what extent can the new legal authority of a charter or free city operate independently of the original legal system? Or must the new legal authority defer to the documents, maps, and other decisions of the previous authority? How many of the new legal decisions can in fact be disembedded from the previous legal authority?
8. Are charter and free cities likely to work better or worse with free or restricted immigration? Which are they likely to evolve?
What made Buchanan special as an economist?
Matt asks this question. I am a bit on the run, so I will do this in link-less form, but all the sources should be easily googled. Here goes:
1. He developed the “theory of clubs,” which sets out the conditions under which private associations supply excludable public goods at optimum levels.
2. For his time he had the best and most rigorous analysis of the incidence of public debt.
3. With Gordon Tullock he pioneered the economic analysis of voting rules in terms of transactions costs and external costs imposed on others. Any current blogosphere discussion of say the filibuster will rely on this approach, though we now take it so for granted we don’t realize how impressive it was at the time.
4. He had pioneering economic analyses of bicameralism, logrolling, and other aspects of legislatures, again with Tullock.
5. Along with Harsanyi, he formulated aspects of the “original position” before Rawls did and he was a major influence on Rawls. By the way, I have seen Buchanan numerous times with top professional philosophers, and he has no problem holding his own or better.
6. He helped pin down, including on the technical side, the economic concept of externality.
7. He provided the most important revision to optimal tax theory since Ramsey, namely the point that supposedly efficient methods of taxation can be too easy to use. That was in The Power to Tax, with Brennan. His piece on static vs. dynamic versions of the Laffer curve, with Dwight Lee, is also significant.
8. He provided a public choice analysis of why Keynesian economics would not lead to the appropriate budget surpluses during good times and thus would contain dangerous ratchet effects toward excess deficits.
9. He thought through the conflict between subjective and objective notions of value in economics, and the importance of methodologically individualist postulates, more deeply than perhaps any other economist. Most economists hate this work, or refuse to understand it, either because it lowers their status or because it is genuinely difficult to follow or because it requires philosophy. Yet it stands among Buchanan’s greatest contributions even if a) I do not myself agree with his approach, and b) I do not think it is easily summarized or even well-explained. Buchanan took Knight and Shackle very seriously and he understood that the typical pragmatic dismissal of their caveats was not in fact well-founded.
10. His Hayekian work on “order defined only through the process of emergence” and “economics as a science of exchange and catallactics” is a very important take-down of the scientific pretensions of much of economics. It doubted whether the notion of efficiency could be independently conceptualized at all. Again, this work is disliked or ignored. Buchanan may be going too far, but it is a very important and neglected perspective.
11. He thought more consistently in terms of “rules of the games” than perhaps any other economist. This point remains underappreciated and underapplied. It makes technocracy out to be a fundamentally different endeavor.
12. He did important work in the history of economic thought, reviving interest in the Italian school of public finance and public choice.
13. His late papers with Yoon on the work ethic, increasing returns, and economic growth remain underappreciated. I also admire his work with Yoon on the anti-commons.
There is more, but that is a start. Try his article on why pollution should be taxed for Pigouvian reasons. I could add that Buchanan understood the importance of monetary rules, and favored a regime where the supply of money would be elastic in response to negative economic circumstances.
The Army of Economists
In a wide-ranging and interesting conversation Daniel Dennett reflects on hypocrisy and whether it may sometimes be optimal:
Suppose that we face some horrific, terrible enemy, another Hitler or something really, really bad, and here’s two different armies that we could use to defend ourselves. I’ll call them the Gold Army and the Silver Army; same numbers, same training, same weaponry. They’re all armored and armed as well as we can do. The difference is that the Gold Army has been convinced that God is on their side and this is the cause of righteousness, and it’s as simple as that. The Silver Army is entirely composed of economists. They’re all making side insurance bets and calculating the odds of everything.
Which army do you want on the front lines? It’s very hard to say you want the economists, but think of what that means. What you’re saying is we’ll just have to hoodwink all these young people into some false beliefs for their own protection and for ours. It’s extremely hypocritical. It is a message that I recoil from, the idea that we should indoctrinate our soldiers. In the same way that we inoculate them against diseases, we should inoculate them against the economists’—or philosophers’—sort of thinking, since it might lead to them to think: am I so sure this cause is just? Am I really prepared to risk my life to protect? Do I have enough faith in my commanders that they’re doing the right thing? What if I’m clever enough and thoughtful enough to figure out a better battle plan, and I realize that this is futile? Am I still going to throw myself into the trenches? It’s a dilemma that I don’t know what to do about, although I think we should confront it at least.
It would be astounding if there were never a situation in which a lie was effective in producing a good result, i.e. a noble lie. But is a rule of noble lies effective? In a long sequence of calls to war, how many have been just and wise and how many have been driven by vainglorious leaders and foolish pride–so which army do you want? I prefer the silver.
Note also that Dennett mixes narrow self interest and rationality in his description of “economists.” But one can be fully rational without being narrowly self-interested. Dennett, for example, cheats a bit with his puzzle. The premise is some “horrific, terrible enemy” but then later the economists ask “am I so sure this cause is just”, to which the answer should be, given the premise, yes. In which case fighting is a rational response.
Hat tip: Brian Donohue.
A few James Buchanan reminiscences
Most of all I thought of him as a moralist and one of our best moralists. I don’t mean an ethical philosopher (though he did that too), but a personal moralist and a judge of all that was around him. His advocacy of a 100% inheritance tax is essential to understanding the man, as was his dislike of northeastern elites, a category to which he was never quite sure if I belonged. He was a dedicated romantic who, after an intellectually traumatic encounter with Frank Knight, was looking for new, non-religious foundations for some rather old-fashioned views, often of a regional nature (Buchanan was from Tennessee). He remains one of the least well understood and least accessible economics Nobel Laureates, and I don’t foresee that changing anytime soon.
Woe to the man caught shirking by Buchanan. He was up every day, working at 6 a.m., and expected not much less from others.
He was not always easy to have as a colleague. He created a world around himself, intellectually, socially, and otherwise, and he lived in no other world but his own.
Betty Tillman was an essential ingredient behind his success, and over the years I grew to understand her managerial and advisory talent for Jim and for the Public Choice Center more generally.
His Better than Plowing is one of the underrated autobiographies of economics.
He favored titles with alliteration, such as The Calculus of Consent, The Limits of Liberty, and The Reason of Rules, three of his best books.
Jim was a splendid manager of collaborations and brought out in the best in Gordon Tullock, Geoff Brennan, Dick Wagner, Yong Yoon, and others. Institution-building was another important part of his legacy. Not just the Center for Study of Public Choice, but also Mont Pelerin, Atlas, Liberty Fund, and the Institute for Humane Studies were all important to him, among other groups.
Some of his key phrases were:
“the relatively absolute absolutes” (don’t ask)
“Don’t get it right, get it written”
and, most of all:
“Onward and upward”
He made us all better and I will always miss him.
New evidence on the middle income trap
From Barry Eichengreen, Donghyun Park, and Kwanho Shin:
We analyze the incidence and correlates of growth slowdowns in fast-growing middle-income countries, extending the analysis of an earlier paper (Eichengreen, Park and Shin 2012). We continue to find dispersion in the per capita income at which slowdowns occur. But in contrast to our earlier analysis which pointed to the existence of a single mode at which slowdowns occur in the neighborhood of $15,000-$16,000 2005 purchasing power parity dollars, new data point to two modes, one in the $10,000-$11,000 range and another at $15,000-$16,0000. A number of countries appear to have experienced two slowdowns, consistent with the existence of multiple modes. We conclude that high growth in middle-income countries may decelerate in steps rather than at a single point in time. This implies that a larger group of countries is at risk of a growth slowdown and that middle-income countries may find themselves slowing down at lower income levels than implied by our earlier estimates. We also find that slowdowns are less likely in countries where the population has a relatively high level of secondary and tertiary education and where high-technology products account for a relatively large share of exports, consistent with our earlier emphasis of the importance of moving up the technology ladder in order to avoid the middle-income trap.
The NBER version is here, does anyone know of an ungated version?