Results for “age of em”
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The new paper, like others of its genre, basically requires belief in a big coincidence: that a short-term catastrophe happened to coincide with the intensification of long-term trends — that the economy crashed at the moment that it was already beginning a gradual descent.

I view this somewhat differently. Very often trends accumulate, often without much notice, and then a cyclical event causes that trend to explode into full view. Such a coincidence of cycle and trend is very often no accident and in fact the two are closely related.

Let’s say, as seems to be the case, that wages stagnated, labor market mobility slowed down, and non-outsourcing productivity was slow during 2000-2007 (or maybe longer). Those are all long-term economic trends and they are all bad news.

During 2000-2007 most Americans acted as if were are on a good trend line when in fact they were on a less favorable trend line. This influenced spending decisions, borrowing decisions, real estate decisions, and so on. People overextended themselves and they also created unsustainable bubbles. Sooner or later the debt cannot be rolled over, the bubbles pop, the crash ensues, AD falls, and so on. This often takes the form of a discrete cyclical event, as indeed it did in 2008.

One point — still neglected in much of today’s macroeconomic discourse — is that the mis-estimated trend was a major factor behind the cyclical event. But there is yet more to say about this interrelationship between cycle and trend.

The arrival of the cyclical event, in due time, makes the negative underlying trend more visible. At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.

The cyclical event itself places greater stress on labor markets, on firm liquidity and thus on R&D, on perceived stocks of wealth, and so on. As individuals observe the reaction of the economy to this added stress, they start seeing just how wide-ranging and deep the previously existing structural problems have been.

Those observations, and the accompanying economic responses, make the problems worse. Forecasts become more pessimistic, investment declines, firms will be less keen to commit to workers who are less than the “sure thing,” and so on. Sometimes this is moving along curves, other times there are shifts in multiple equilibria (“is Greece a European country or a Balkans country?”), toss in some herd behavior too. In any case these changes are ill-served by the terminology of cyclical vs. structural. They are cyclical and structural in an intertwined fashion. And of course this all leads aggregate demand to fall all the more.

I am reminded of the literature in finance that shows how apparently small shifts in information can lead to big movements in market prices. The initial small shift illuminates the reaction functions of other market traders, which illuminates depth of sentiment, which in turn causes a revision of expectations and thus prices. For instance the market as a whole may learn from a small shift in orders that core traders were never so optimistic in the first place.

It’s also worth visiting the literature on how sand piles can collapse rather suddenly (“self-organized criticality” is one term used in the economics literature). That too is a cyclical event yet based on underlying structural problems.

If you hear someone say “if this were structural unemployment, wages would be rising a lot right now,” that is a sign they have not thought through this issue deeply enough.

If you hear someone argue or rebut “so what, did everyone get lazy or stupid in 2009?”, that too is a sign only one dimension of the problem is being considered.

In macroeconomic debate, most one-line zingers are not very good.

My favorite things Bolivia

by Tyler Cowen August 24, 2014 at 3:46 am in

Travel

Yes, violinist Jaime Laredo is from Cochabamba, but that does not sum up what is special about Bolivia. I’ve been to maybe ninety countries, and often I think Bolivia is the most exotic and wild of them all. For a simple contrast, so many aspects of Yemen have fed into streams we are familiar with, and Yemeni food is instantly recognizable, even if you have never been to the Arabian peninsula.

The main strands of Bolivian indigenous life — which I estimate to represent sixty percent of the country or more — have barely touched America or Europe. It is all strange. It is (mostly) deeply beautiful, like visiting another planet. The sky is intense, and the potatoes and corn taste much stronger than what we we Americans are used to. “I went there to eat a purple potato” is a coherent and indeed a wise sentence. Llama jerky is a major dish.

There is a three-toed sloth in the Santa Cruz park. Pink flamingos and lithium on the other side of the country. La Paz is set in a bowl of sorts where you can look either up or down and see homes carved into mountains. The altitude (in some parts of the country) never ceases to feel like a strain, and the Andes are the world’s largest mountain range. Some of the indigenous politicians have run against the Western Enlightenment. On the Altiplano I encountered some of the most miserable-looking people. The beautiful women have an intensity and a heartiness. The bowler hat remains in style.

Most of the hotels aren’t very good. The country has been landlocked for some time, and has lost territory in three different wars. There are over thirty official languages and it is the number four country in the world for number of butterfly species. You will not find a higher percentage of expressionless, stone-faced petty merchants.

Due to hydrocarbons, the country is growing at over six percent a year. My favorite movie set in Bolivia is Even the Rain, a Spanish production I believe.

I strongly recommend a visit to Bolivia.

But as for Santa Cruz, well…that is something altogether different.

Which economies are most likely to be shrinking?

by Tyler Cowen August 23, 2014 at 8:27 am in

Not just an economic slowdown, but actual, ongoing consistent negative economic growth. In my latest NYT column at The Upshot, I argue for some economies it may happen that living standards fall over the course of a few decades:

In 1750, India accounted for one-quarter of the world’s manufacturing output, but by 1900 that was down to 2 percent. The West became more productive as a result of the Industrial Revolution, and India lost much of its leading export sector, textiles. While the data is fragmentary, the best estimates show that India’s living standards declined through the middle of the 19th century and that its economy retrogressed, even as it borrowed some technological improvements from the West. India just didn’t do enough to move toward production on a larger scale or with better machines.

This story of India’s loss to foreign competition is documented in “Deindustrialization in 18th and 19th Century India,” a paper by David Clingingsmith, an economics professor at Case Western Reserve University, and Jeffrey G. Williamson, an emeritus professor of economics at Harvard.

Economists are accustomed to emphasizing the benefits of international trade, and these arguments are largely correct. But in India, internal regulations and underdevelopment, combined with British colonial depredations, prevented Indian resources from being redeployed productively. The lesson is that a sufficiently large international trade shock can lead to decades of economic decline in a major economy, especially if that economy isn’t geared to mounting a flexible response.

As I explain in the piece, the most likely economies to undergo sustained negative growth today are Italy, France, Croatia, Greece, Portugal, and possibly Taiwan. We should be more optimistic about the United States, but still a similar logic is applying to some parts of our middle class.

Here is my concluding paragraph:

India’s economy started to reindustrialize in the late 19th century, but growth remained subpar until the 1990s — a truly long recovery lag. This may sound strange to say, but when it comes to some parts of the Western world, the Great Depression may offer the cheerier analogy.

Read the whole thing.

China blackmail markets in everything

by Tyler Cowen August 23, 2014 at 2:05 am in

In Beijing, I met Benjamin Liebman, a professor at Columbia Law School, who has published a study on “malpractice mobs” in China. He told me that protests consistently extract more money from hospitals than legal proceedings do. Family members can even hire professional protesters. One report in Shenzhen mentioned an average price of fifty yuan a day for the service of a protester. The radiologist in Shanghai told me, “If your mother dies in the hospital, there will be an agency that comes to you and says, ‘We can help you. We can have twenty guys who can come to the hospital, blackmail them, and share fifty per cent of the profits.’ They’re very professional.”

The article, by Christopher Beam in The New Yorker, is interesting throughout.

Assorted links

by Tyler Cowen August 22, 2014 at 11:30 am

1. Exit interview with Eric Crampton.

2. How to be polite (good piece)

3. Reihan Salam interviews Lane Kenworthy.

4. Are American housing problems structural?

5. SWAT teams have their own lobbying organization.

6. Moose sex corridor expands with land donation.

How much does poverty drive crime?

by Tyler Cowen August 22, 2014 at 7:25 am in

Maybe less than you thought, at least after adjusting for other variables. The Economist reports:

In Sweden the age of criminal responsibility is 15, so Mr Sariaslan tracked his subjects from the dates of their 15th birthdays onwards, for an average of three-and-a-half years. He found, to no one’s surprise, that teenagers who had grown up in families whose earnings were among the bottom fifth were seven times more likely to be convicted of violent crimes, and twice as likely to be convicted of drug offences, as those whose family incomes were in the top fifth.

What did surprise him was that when he looked at families which had started poor and got richer, the younger children—those born into relative affluence—were just as likely to misbehave when they were teenagers as their elder siblings had been. Family income was not, per se, the determining factor.

That suggests two, not mutually exclusive, possibilities. One is that a family’s culture, once established, is “sticky”—that you can, to put it crudely, take the kid out of the neighbourhood, but not the neighbourhood out of the kid. Given, for example, children’s propensity to emulate elder siblings whom they admire, that sounds perfectly plausible. The other possibility is that genes which predispose to criminal behaviour (several studies suggest such genes exist) are more common at the bottom of society than at the top, perhaps because the lack of impulse-control they engender also tends to reduce someone’s earning capacity.

The original research, by Amir Sariaslan, Henrik Larsson, Brian D’Onofrio, Niklas Långström and Paul Lichtenstein is here, here is how the authors report the conclusion:

There were no associations between childhood family income and subsequent violent criminality and substance misuse once we had adjusted for unobserved familial risk factors.

Finland fact of the day

by Tyler Cowen August 21, 2014 at 2:19 pm in

Finnish students stay in college longer than in any other developed country save Austria, the Netherlands and Denmark, getting their first university degree on average at 29, according to a 2013 report by the Organization for Economic Cooperation and Development. That compares with 24 years for Britons, 26 for Germans and the OECD average of 27 years. Most Finns who graduate from college get a master’s degree.

There is more here. Of course that undoes a lot of the benefits from their excellent primary education system.

Department of Uh-Oh

by Tyler Cowen August 21, 2014 at 1:00 pm in

When it opened in 1990, the McDonald’s on Moscow’s Pushkin Square was a symbol of thawing relations with the U.S., attracting long lines and later becoming the fast-food chain’s most visited outlet world-wide.

On Wednesday evening, it stood empty, closed by Russia’s consumer-safety regulator amid the Kremlin’s most-serious confrontation with the West since the Cold War. The agency cited sanitary violations as it said that it had closed four McDonald’s Corp.’s restaurants in Moscow.

Analysts said the move was more likely the latest shot by Russia in response to U.S. and European sanctions over Moscow’s role in the armed conflict with its former Soviet neighbor, Ukraine.

Food inspectors “have been instruments of Russian foreign policy for years,” said Stephen Sestanovich, a senior fellow at the Council on Foreign Relations. He cited earlier bans on Moldovan wine and U.S. chicken.

There is more here, there is some context here.

Ferguson and the Modern Debtor’s Prison

by Alex Tabarrok August 21, 2014 at 7:22 am in

How does a stop for jaywalking turn into a homicide and how does that turn into an American town essentially coming under military control with snipers, tear gas, and a no-fly zone? We don’t yet know exactly what happened between the two individuals on the day in question but events like this don’t happen without a deeper context. Part of the context is the return of debtor’s prisons that I wrote about in 2012:

Debtor’s prisons are supposed to be illegal in the United States but today poor people who fail to pay even small criminal justice fees are routinely being imprisoned. The problem has gotten worse recently because strapped states have dramatically increased the number of criminal justice fees….Failure to pay criminal justice fees can result in revocation of an individual’s drivers license, arrest and imprisonment. Individuals with revoked licenses who drive (say to work to earn money to pay their fees) and are apprehended can be further fined and imprisoned. Unpaid criminal justice debt also results in damaged credit reports and reduced housing and employment prospects. Furthermore, failure to pay fees can mean a violation of probation and parole terms which makes an individual ineligible for Federal programs such as food stamps, Temporary Assistance to Needy Family funds and Social Security Income for the elderly and disabled.

Ferguson1 A new report from Arch City Defenders, a non-profit legal defense organization, shows that the Ferguson municipal courts are a stunning example of these problems:

Ferguson is a city located in northern St. Louis County with 21,203 residents living in 8,192 households. The majority (67%) of
residents are African-American…22% of residents live below the poverty level.

…Despite Ferguson’s relative poverty, fines and court fees comprise the second largest source of revenue for the city, a total of $2,635,400. In 2013, the Ferguson Municipal Court disposed of 24,532 warrants and 12,018 cases, or about 3 warrants and 1.5 cases per household.

You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”

If you have money, for example, you can easily get a speeding ticket converted to a non-moving violation. But if you don’t have money it’s often the start of a downward spiral that is hard to pull out of:

For a simple speeding ticket, an attorney is paid $50-$100,
the municipality is paid $150-$200 in fines and court costs, and the
defendant avoids points on his or her license as well as a possible
increase in insurance costs. For simple cases, neither the attorney nor
the defendant must appear in court.

However, if you do not have the ability to hire an attorney or pay
fines, you do not get the benefit of the amendment, you are assessed
points, your license risks suspension and you still owe the municipality
money you cannot afford….If you cannot pay the amount in full, you must appear in court on that night to explain why. If you miss court, a warrant will likely be
issued for your arrest.

People who are arrested on a warrant for failure to appear in court
to pay the fines frequently sit in jail for an extended period. None of the
municipalities has court on a daily basis and some courts meet only
once per month. If you are arrested on a warrant in one of these
jurisdictions and are unable to pay the bond, you may spend as much as
three weeks in jail waiting to see a judge.

Of course, if you are arrested and jailed you will probably lose your job and perhaps also your apartment–all because of a speeding ticket.

As a final outrage, consider this story which ties together Ferguson, the courts, and the arrest of parents, often minority parents, for leaving their kids to play in parks (just as my parents did).

According to local judge Frank Vatterott, 37% of the courts responding to his survey unconstitutionally closed the courts to non-defendants. Defendants are then faced with
the choice of leaving their kids on the parking lot or going into court. As Antonio Morgan described after being denied entry to the court with his children, the decision to leave his kids with a friend resulted in a charge of child endangerment.

Assorted links

by Tyler Cowen August 20, 2014 at 12:35 pm

1. Ferguson on Facebook vs. Ferguson on Twitter.

2. Brief survey of the literature on police brutality and use of excessive force.

3. Obamacare attacks are losing potency as a campaign weapon.

4. The advantages of dyslexia (very good).

5. “RegData is an innovative new way of measuring the size and scope of US federal regulation. It is currently in beta. We welcome your feedback.”

6. Excellent Francis Fukuyama piece on American political decay.

7. Brad DeLong identifies The Great Reset, although he does not name it. Falling AD and hysteresis are important, but we need more tools in the current toolbox.

Do readers absorb less from a Kindle than from paper?

by Tyler Cowen August 20, 2014 at 2:53 am in

From Alison Flood at The Guardian:

A new study which found that readers using a Kindle were “significantly” worse than paperback readers at recalling when events occurred in a mystery story is part of major new Europe-wide research looking at the impact of digitisation on the reading experience.

The study, presented in Italy at a conference last month and set to be published as a paper, gave 50 readers the same short story by Elizabeth George to read. Half read the 28-page story on a Kindle, and half in a paperback, with readers then tested on aspects of the story including objects, characters and settings.

Anne Mangen of Norway’s Stavanger University, a lead researcher on the study, thought academics might “find differences in the immersion facilitated by the device, in emotional responses” to the story. Her predictions were based on an earlier study comparing reading an upsetting short story on paper and on iPad. “In this study, we found that paper readers did report higher on measures having to do with empathy and transportation and immersion, and narrative coherence, than iPad readers,” said Mangen.

But instead, the performance was largely similar, except when it came to the timing of events in the story. “The Kindle readers performed significantly worse on the plot reconstruction measure, ie, when they were asked to place 14 events in the correct order.”

The researchers suggest that “the haptic and tactile feedback of a Kindle does not provide the same support for mental reconstruction of a story as a print pocket book does”.

That is speculative, but consistent with my own intuition, and my own tendency to (sometimes) organize information by remembering physically where it was in the book.

From the comments, on Bob Shiller and CAPE

by Tyler Cowen August 20, 2014 at 1:53 am in

For context, CAPE is the cyclically adjusted price-earnings ratio. On that topic, 3rdMoment writes:

While I have great respect for Shiller, I don’t understand his confidence that the CAPE is likely to return to it’s historical average of around 16. There are several reasons why we might expect the average CAPE going forward to be higher than in the past:

1. The average levels of CAPE in most of the last century appear, with hindsight, to have been puzzlingly low. This is the well-known “equity premium puzzle.”

2. There has been a large shift in corporate payout mix, from virtually all dividends in the past, to a roughly equal mix of dividends and share repurchases today. This by itself will add a couple of points to CAPE even if nothing else changes, (as shown in this post by the anonymous blogger who tweets as “Jesse Livermore”): http://www.philosophicaleconomics.com/2013/12/Shiller/

3. Some other accounting changes to the definition of profits might raise the CAPE as well, again see the linked blog post above.

4. Lower information and transaction costs and the rise of index investing have dramatically lowered the cost of maintaining a globally diversified portfolio. This decreases the raw rate of return for any given required rate of realized returns. For example if the costs of investing in equities fall by just 50 basis points, this would allow the required raw earnings yield to fall from 5% to 4.5%, corresponding to a rise in CAPE from 20 to 22, without changing realized returns for investors.

5. The real “risk free” return on treasuries seems to be very low by historic standards. Real returns on other forms of debt also appear low. This lowers the return stocks need to be attractive by comparison.

6. Large corporate cash balances, a “global savings glut,” lower rates of real economic growth, possible “secular stagnation,” all seem to point to the idea that real returns are somewhat harder to get than the past.

Some of these reasons are more certain than others, but taken together they seem to show that we have good reason to expect CAPE levels significantly above the historical average going forward.

Are there any countervailing reasons offsetting the list above, factors that would tend to make CAPE lower than in the past? I can’t really think of any. And I haven’t seen anybody else offering any.