It’s not just aggregate demand

by  Tyler Cowen in

David Wessel reports:

Over the past 10 years:

• The U.S. economy’s output of goods and services has expanded 19%.

• Nonfinancial corporate profits have risen 85%.

• The labor force has grown by 10.1 million.

• But the number of private-sector jobs has fallen by nearly two million.

• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

What’s wrong with the American job engine? As United Technologies Corp. Chief Financial Officer Greg Hayes put it recently: “Sales have come back, but people have not.”

You might hear the argument that if demand were higher, employment would be higher too.  That’s true, but consider a comparable claim.  Let’s say you were a 6’2″ basketball player with a so-so outside shot.  If you were seven feet tall, that problem wouldn’t matter so much because you could just dunk the ball.  In the meantime you could say “It’s not my shot that’s the problem, it’s my height.  If I were taller, they would all go in.”

At the end of the day, this player still has a problem with his shot, no matter how true his counterfactual.  In the macroeconomics of 2011, it is important that we understand our problems as existing along multiple margins.

On the messiness of economic understanding, here is David Leonhardt’s column from today, his last in his current role.

Update on the credit rating agency vigilantes

by  Tyler Cowen in

It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade.

…what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.
Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

The full story is here.  These vigilantes are real, but they are being scorned, dismissed, and moralized about rather than heeded.

The bottom line is that the nation’s long-run fiscal outlook matters now, even though you’ve had many top economists telling you for years that it does not.  I know all about the stability of Japanese bond rates following their credit downgrade.  In the American case, the mechanisms by which the long run matters can be as simple as Presidents seeking reelection and stubborn, irresponsible Republicans, not to mention spooked global markets latching on to scary focal points.

I see two lessons:

1. Moralizing about Presidents seeking reelection and stubborn, irresponsible Republicans does not remove their analytic impact.

2. The nation’s long-run fiscal outlook matters now.

Every time you see moralizing about #1, don’t let yourself be distracted from the truth of #2.  In fact, the more moralizing you hear about #1, the greater the import of #2.  Lots of moralizing about #1 is a sign that the overall political outlook, from the moralizer, is not robust to the truth and existence of #1.  Read the moralizing, but track the truth.

I agree completely with Krugman here

by  Tyler Cowen in

There’s actually a simple way to resolve the debt ceiling crisis: non-crazy Republican leaders could support something like the Reid plan — which is, let’s be clear, a huge victory for the right and defeat for progressives — and pass it with limited GOP support and overwhelming Democratic support. Situation resolved.

This would, however, probably be the end of these Republicans’ political careers. And the answer is, so?

If you believe that default will quite possibly be a catastrophe — and leading Republicans probably do believe that — their unwillingness to take the action I’ve just described means that they are risking America’s future rather than pay a price in their personal political careers. That’s cowardice on an epic scale, even if it’s the kind of behavior we take for granted nowadays.

I might tone down the word “huge,” however.  There is nothing more at the link.  (Note that I’ll be disagreeing with Krugman again soon, very soon.)  I also agree very much with Angus.

Will Norway get a do-over?

by  Tyler Cowen in

In large countries, single events are not usually taken as defining that country.  So if the police in America botch a response to a mass murderer, soon enough another mass murderer will come along.  There is almost always a do-over, usually many of them.  If need be, we Americans can start a new war to create a do-over.

Norway doesn’t work this way.  The country won’t soon have an event which generates comparable international or national publicity to the recent murders.  That makes those murders, and the lack of an effective police response, sting all the more.  There is no do-over on the horizon.

It turns out for instance that the helicopter crew of the Oslo police force was on vacation.  In expected value terms, maybe that wasn’t a mistake but it sure didn’t turn out well.  Here is an article on Norway not very much arming its police force.

The Norwegian resistance movement from WWII has a heroic reputation, but now there’s been a do-over of Norwegian response capability, so to speak, or at least a perceived do-over.

Americans have a hard time understanding the concept of not getting many do-overs.

When it comes to our debt-ceiling crisis, we are acting as if we will get a do-over for sure; I wonder if that’s justified.

The Winner’s Curse

by  Alex Tabarrok in

Tim DeChristopher has been sentenced to two years in a Federal prison. DeChristopher was an economics major at the University of Utah when he fraudulently bid on a number of oil and gas leases pushing up the prices on some leases and winning others.

The sentence appears to be out of proportion to the crime, even if you don’t accept DeChristopher’s environmental justifications as a mitigating factor. The other bidders did walk away with lower profits than they otherwise would have but their claims should have been made in civil court. The Federal government may even have made money on net because DeChristopher pushed prices up.  It is certain that they would have made money had they chosen to resell the rights that DeChristopher “bought.” But a judge later ruled that the Department of the Interior’s environmental impact statement was inadequate and most of the auctions were annulled.

DeChristopher’s big mistake appears to have been winning some auctions as it would have been difficult to prosecute him for simply pushing up bids.

Girls go geek

by  Tyler Cowen in

This I had not known:

In 1987, 42% of the software developers in America were women. And 34% of the systems analysts in America were women. Women had started to flock to computer science in the mid-1960s, during the early days of computing, when men were already dominating other technical professions but had yet to dominate the world of computing. For about two decades, the percentages of women who earned Computer Science degrees rose steadily, peaking at 37% in 1984.

The photos at the link are striking.  You can read about the Cosmo article from 1967: “According to none other than Grace Hopper, programming is just like “planning a dinner.””

Now, once again, female interest in computer science appears to be rising.

For the pointer I thank Chris F. Masse.

Observed low Treasury rates do not signal weak vigilantes

by  Tyler Cowen

Proof of point:

U.S. Treasuries prices rose on Tuesday as U.S. stock market declines renewed the safe-haven bid for bonds despite nagging worries over a possible U.S. default that could slam the value of government debt.

Fears the government will run out of cash by Aug. 2 if lawmakers do not reach agreement in debt talks actually bolstered Treasuries as investors still looked at U.S. government debt as one of the lowest-risk investments out there.

This is, in fact, a very Keynesian point.  Spanning doesn’t hold.  Markets aren’t complete.  Low rates on Treasury securities are signaling fear, not safety.  The price of gold, and Swiss francs, are very high right now.

USA fact of the day

by  Tyler Cowen in

Of the world’s share of AAA sovereign debt, we issue 59 percent of it.  (Next is Germany with ten percent and then France with nine percent of the total.)  You can read this a few ways:

1. Wow, we really abuse that AAA privilege.

2. Losing the AAA rating would spell disaster for repo markets and the like.

3. The world trusts us enormously, isn’t that wonderful?

4. All of the above.

Claims about happiness and vacations

by  Tyler Cowen in

Such studies you should take with a grain of salt.  Still, I found these results interesting:

Jeroen Nawijn of NHTV Breda University of Applied Sciences in the Netherlands found a holiday happiness curve: Our mood tends to be lowest through the first 10 percent of a holiday and quite high during the “core phase,” which spans about 70 percent of the vacation time. Our spirits soar on the day before going home.

…Philip Pearce of James Cook University in Australia studied tourists visiting tropical islands along the Great Barrier Reef and discovered that their moods were particularly negative on the second and third days of their holidays, the time during which they also seemed to develop the most health problems. These ailments included skin rashes, tiredness, allergies, ear infections and asthma.

Yet it is not just a new climate or cultural differences that can make you feel bad; it is also the free time itself. Ad Vingerhoets, a quality-of-life expert at Tilburg University in the Netherlands, calls this a “leisure sickness.” People with this condition develop symptoms of illness during weekends and vacations, even though they rarely feel bad at work, he says.

Raising the Medicare retirement age

by  Tyler Cowen in

This has never seemed like a good fiscal solution to me.  In part it simply shifts expenditures from the public books to private hands.  That may have useful “shadow value properties” (if the government budget constraint is more immediately binding), but it’s not a net real resource savings for the economy as a whole.

And in part I am suspicious of such a discrete “notch” in how we treat individuals.  Right before your birthday you’re in one program and the day after your birthday you’re in a totally different program?  Something has to be screwy, though you can debate whether that screwiness is ex ante or ex post.  I usually think more in terms of smoothly sliding schedules and, when needed, changes in their slopes, with only gentle bumps in the relevant notches.

If the choice is “cut all payments by ?? percent” or “raise the retirement age by two years” I would opt for the former.  If (and oh what a huge if) you had a Cowenian dictatorial technocrat in charge, you could even think about lowering the eligibility age.  That said, everyone would be “buying in” to the program at much less favorable rates than is the case today.  I do fully understand the public choice reasons why that wouldn’t stick, why it would survive only in a Cowenian dictatorial technocratic equilibrium, and why in real democracy it would quickly become a “goodie” to be handed out to poorly informed, short time horizon voters in a disastrous, budget-busting manner.

Put all that behind us but store it in memory.  When I see President Obama considering an increase in the Medicare retirement age, here is what I do not infer:

1. I do not infer he is a coward (didn’t he stake his whole political future on ACA?).

2. I do not infer that he is a worse bargainer than are the Republicans.

3. I do not infer that he is a very stupid man.

4. I do not infer White House cabal theories which have his mind in the hands of evil villains, hellbent on reelection and ready to throw all progressive principles to the winds.

Here is what I do infer:

1. I infer he understands that the Medicare Payment Advisory Board isn’t going to live up to the high hopes for it.  It may not even survive.

2. I infer he understands that most other plans for Medicare cuts won’t get through Congress, and that it will only get tougher to pass such plans each year.

3. I infer he understands that somewhat fewer Medicare recipients at any point in time will, possibly, make it easier to reform and indeed improve other aspects of the program.

4. I infer he understands that Medicare truly is the budget-buster of our time and that its future will not ever be ruled by technocratic principles.

Most of all, I infer that our President has had a very deep, very true, and indeed very depressing education in public choice economics.  And I infer that any path to a workable fiscal conservatism will be tougher and more painful and more distortionary than we had thought.

Personally, I still would opt for an alternative route, even if it were doomed to fail politically.  But that’s a luxury I have precisely because I am not…President of the United States.

Addendum: Ezra Klein comments.

Default in a liquidity trap

by  Tyler Cowen in

Here is a very interesting Krugman analysis of this problem.  It ends up with the Fed owning all T-bills, and, in Anil Kashyap’s opinion (and mine; there’s not enough cash to cover all the required collateral) the Repo market collapsing.  I do see an alternative path.  Krugman writes:

What we normally say in a liquidity trap is that the Fed is keeping short-term interest rates at zero, which is as low as they can go because below that cash dominates bonds. And the Fed achieves that zero rate by being willing to buy short-term government debt whenever the rate threatens to rise above zero.

That’s a fair description, but perhaps it is a description rather than a binding equilibrium response; the Fed doesn’t have to do that and why should they if it ends in ruin?  (There’s the further tricky question of whether Krugman’s assumption is holding expected fiscal policy constant.)

T-Bills are almost like money today, especially with low short rates.  Think of higher default risk as like a Gesellian stamp tax on T-Bills.  One equilibrium is that people spend more on durables as they shift out of liquidity, which has now been partially taxed.  Another equilibrium is that everyone rushes into the truly safe asset, namely cash, and the T-Bills do truly disappear.  Or heterogeneous agents may do a bit of both.

It would seem to boil down to the third derivative on the utility function.  Still, empirically cash does not soak up all the periodic shifts out of other risky assets (e.g., commercial paper), so why should it soak up all the shifts out of T-Bills?

More concretely, in a liquidity trap model (which I reject, by the way, but that’s another story) an increase in default risk could have some expansionary properties.

Addendum: Brad DeLong offers comment.