Economic DeBLOGraphy

2011Q4 GDP advance estimate

2012-01-27T10:58:00.000-08:00

A newspaper headline today reads "fastest growth in 18 months." Here's a graphic showing quarterly log real GDP (red line with circles) and CBO's estimate of potential real GDP (blue). The economy "went south" and hasn't exactly come back, has it! By these measures, we're looking at an output gap of about –7%.

Economic Geography

2012-01-27T10:40:00.000-08:00

Today Paul Krugman's column presents a view of the recent Times piece on Apple and outsourced jobs consistent with his earlier work on economic geography that helped win him the Nobel prize. I'd summarize the argument as having to do with physical capital: in addition to quantity and quality, the location of plants and infrastructure can also be important. Less clear to me (but maybe it's in his work somewhere) is what role human capital plays in all of this. Harvard's Ed Glaeser has written extensively about that sort of thing, but I think his emphasis is less on manufacturing than on the idea economy.

Homeownership and neighborhood externalities

2012-01-24T10:55:00.000-08:00

When I read Greg Mankiw's op-ed on the tax code, I started thinking about the tax preference for homeownership through the mortgage interest deduction. Not too long ago I tweeted about how a windy night on a Brooklyn street full of rental units resulted in a veritable cyclone of trash. My point being that when everyone's renting, nobody hauls their trash to the curbs themselves, and nobody does anything about it when the workers who do didn't do a good job. A classic tragedy of the commons.

Needless to say, just because somebody is a homeowner wouldn't guarantee they wouldn't free-ride on their neighbors and let their own trash fly free as a bird.

But here's another perspective I found today, in which litter and other indicators of neighborhood risk causes low homeownership rather than the reverse, which is probably the more traditional perspective. It raised the obvious question in my mind of where the litter comes from in the first place, but it could be proximity to commercial strips or commuting hubs, I suppose.

Summers on evolving higher ed

2012-01-22T11:13:00.000-08:00

In the Times, Larry Summers opines about the structure of college learning and future trends, with plenty of provocative perspectives. It's hard to disagree with the notion that teaching collaborative analysis rather than individual demonstration of knowledge would probably be a better fit of the needs and the technology. But under conditions of large student-to-instructor ratios, the free-rider problem would be made a lot worse by such endeavors. I wouldn't suggest that the current passive-learning model really gets this particularly right either, but it's hard to see how assigning credit based solely on group projects could ever get the incentives right for students without a lot of monitoring.

More evidence of flat obesity trends(?)

2012-01-18T09:47:00.000-08:00

The release of the NHANES data is an biennial event, and I wrote about it in 2010 too. This year, the same picture has emerged, as summarized by NPR, of obesity rates based on BMI that are not statistically distinguishable from recent earlier rates.

Here's a time series plot of the obesity rates, meaning a BMI ≥ 30, and (in recent years) their 95% confidence intervals. The sources are Flegal et al. (JAMA 2002, 2010, 2012), Ogden et al. (JAMA 2006). For the 2005-2006 data, I averaged male and female data from Tables 4 and 5 in Flegal et al. (JAMA 2010).

Does this picture make it appear that obesity prevalence is slowing down?

DHS Survey on Afghanistan

2012-01-18T08:50:00.000-08:00

This NPR article reports on the controversies surrounding the November 2011 release of the 2010 Demographic and Health Survey of Afghanistan. The 2010 period life tables appear on page 114 of the final report and reveal the shocker: life expectancy at birth (e0) is estimated at 64.2 for females and 63.6 for males, up about 20 years from the previous "measure" from around 2002.

Myths in "The Myths of Japan's Failure"

2012-01-08T14:54:00.000-08:00

After reading Eamonn Fingleton's op-ed piece on Japan published today in the Times, I remembered why I decided to study economics, which also led to studying demography. Fingleton turns down into up and left into right when discussing Japan's recent economic and demographic challenges, which is why his writings are more at home outside academic circles. He cites faster growth in GDP per capita in the U.S. and then suggests the measure is biased because of methodological advances because somebody said so. He doesn't mention persistent deflation.

On the population side, his single focus is on the Japanese lead in life expectancy (or mortality), which is indeed impressive. But combined with ultra-low fertility, which has already resulted in a shrinking labor force, declining mortality in Japan is a gift that presents significant macroeconomic and microeconomic challenges. Unemployment in Japan is and has always been much lower than elsewhere, except for a brief window around 2000, but participation rates at older ages are no higher. Like its macroeconomic performance, Japan's demographic profile does not inspire optimism.

Unemployment by degree

2012-01-04T07:11:00.000-08:00

Today the Post reports on a study showing unemployment by undergraduate degree in the 2009 and 2010 waves of the American Community Survey. The graphic shows unemployment rates among recent college graduates aged 22-26 ranging from 13.9% for architecture majors to 5.4% for education or for health majors. I'm not exactly sure what a "heath" major is, but apparently they exist!

Economics winds up lumped in with all the other social sciences, for whom just-graduated unemployment was about 9%, near the national average for all workers. Business majors experienced more like 7.5%.

Care for a closer look? Try the 2009 and 2010 ACS samples in the IPUMS.

Public/private compensation and credentials

2012-01-02T07:12:00.000-08:00

This Room-for-Debate installment from the Times examines whether public school teachers are overpaid in terms of both earnings and deferred compensation like retirement and health-care benefits. A recent AEI/Heritage study counts up the data in the National Longitudinal Survey of Youth and argues that public school teachers are overpaid compared to their private sector counterparts with similar scores on the Armed Forces Qualification Test (AFQT). One of the roundtable contributors argues that controlling for the AFQT alone isn't enough, and once you control for years of education, public school teachers appear to earn less than they should.

Wouldn't it be nice to be able to just drop a covariate whose presence generates a result that doesn't fit with the story?

Acemoglu on inequality, institutions, and growth

2011-12-16T13:27:00.000-08:00

Thanks to a post on Greg Mankiw's blog, I found this great interview article with Daron Acemoglu on inequality, institutions, and economic growth. As you might imagine, he tells the story that institutions like property rights, majority rule and minority rights, etc. are central to the story of growth, more central in his view than geography, health, religion, and so on. But he's very neatly fit it all into a convincing narrative about recent (since 1980) trends in income inequality.

I particularly liked his insight about high marginal tax rates on high earners being a disincentive to engage in (legal and reported) rent-seeking behavior that doesn't really add value. I hadn't heard it before and it makes some amount of sense. Is there a case for marginal tax rates that rise at first, then fall for middle and upper-class earners, and then rise again strongly at the very top? Where exactly in the income distribution would such rent-seeking be most likely?

Reconstruction and immigration in New Orleans

2011-12-12T11:07:00.000-08:00

NPR reports on the experiences of migrant (re)construction workers in New Orleans, who have greatly increased the state's Hispanic population. The only element missing from this case study in reconstruction and immigration is any mention of upward pressure on prices or wages.

More on North Dakota

2011-12-02T13:59:00.000-08:00

A look at the upsides and downsides of the oil boom (associated with the technique called "fracking") from NPR. A doubling of the local population, a sharp turnaround from the long secular decline reported just a few years ago in National Geographic.

Developments in China

2011-12-02T13:49:00.000-08:00

Here is the latest from NPR on growth and prices in China, probably written in response to the recent action by the People's Bank of China to reduce the required reserves ratio. The Penn World Table agrees that consumption spending is only maybe 30-40 percent of Chinese GDP, with investment spending at about the same share.

Michael Lewis on NPR, on Europe, literally on everyone

2011-11-18T16:34:00.001-08:00

I think Michael Lewis also rakes the U.S. over the coals a little, but in this NPR story on Morning Edition that I shared with my QC undergrads, he focuses on Greece. There's a lot more to say about the euro crisis, but I liked how he described in accessible terms one reason why Greece is at the center of it. In an earlier NPR interview he discusses cultural flaws in an array of countries affected by financial crises, and I think he doesn't spare anyone.

Trends in demand and supply of babies

2011-11-18T08:39:00.001-08:00

NPR reports on declining foreign adoptions in the U.S. and increased restrictions recently imposed by sending countries. Foreign adoptions are well measured because State/ICE gets involved with naturalizations. But although the State Department offers an online database, I can't find data before 1999. Had international adoptions been trending upward monotonically prior to recent times? Or had they fluctuated with the economy?

Another tell-all from a financial advisor

2011-11-11T07:32:00.001-08:00

Several years ago the Times featured a economics columnist's tell-all about his own struggles with overextension during the housing crisis, and I blogged about it here. And now here is another such story from a financial advisor. For me, the highlight was the discussion of his feelings of moral obligation to pay his debts, contrasted against an friend's point that his moral obligation was to his family, while his debts were a contractual obligation. The author also cites some perspectives of professor of law Brent White, who is said to have advocated that consumers approach debt more like how corporations do.

This just in: Wily kids find sugar

2011-11-08T10:40:00.000-08:00

An article reports that narrow prohibitions on sugary sodas in schools, rather than on all sugar-sweetened beverages (SSBs) tend not to change purchases of SSBs by adolescents, although broad prohibitions do. But the study also reports that consumption of SSBs tends not to respond to any prohibitions at all.

Super-size my self worth!

2011-11-04T14:09:00.000-07:00

NPR reports on a study that associates meal portion choices with feelings of control and social status. It doesn't look like the researchers randomly applied a treatment of reduced control or social status to individuals, so it naturally raises the question of what's causing what.

A different perspective

2011-10-26T07:15:00.000-07:00

Rutgers history professor James Livingston argues for more consumer spending and less business investment as a "key to economic recovery" that is also "necessary for balanced growth in the future." In a broad sense, he's absolutely right that consumption is important for growth. It's about two-thirds of income, after all, so by definition it is important.

But the supporting facts he cites are either wrong or misleading. He chooses to compare growth in gross domestic product to shares of net business investment in GDP. In fact, the share of gross business investment in GDP has averaged a fairly constant 15% in the postwar period, expanding during booms and falling during recessions.

It's also misleading to say that "in 2000, most investment was either from government spending (out of tax revenues) or 'residential investment,' which means consumer spending on housing, rather than business expenditure on plants, equipment and labor." In that year, residential investment was about 5% of GDP, while private nonresidential (business) investment was more than twice that share, at 12%. By comparison, in 1997, the closest year with available data in the NIPA, government fixed investment was about 3% of GDP.

A basic tenet we teach undergraduates and Ph.D. students alike is that saving is important for long-term growth, whether it takes the form of fixed capital formation or replacement or investment in human capital or innovation. Consumption is the end these means facilitate.

Q's and A's on U.S. war costs

2011-10-04T13:59:00.000-07:00

I've been talking to journalists a lot recently about U.S. war costs in Iraq and Afghanistan, but I'm not sure how much has ended up in print, or if it has, exactly how! Here are some Q's and A's from two different reporters and me.

1. The US is in the middle of an economic crisis. To what extent have the wars undertaken after 9/11 2001 contributed to create such a situation?

By "crisis" do you mean the recession that began in December 2007 and ended in June 2009 and its aftermath, including continued high unemployment, low inflation, and continuing difficulties with household debt? If yes, then my opinion is that the wars in Iraq and Afghanistan have not played any role in creating that crisis.

If by "crisis" you instead mean the lowering of the U.S.'s sovereign credit rating in August and the political gridlock in Washington over the debt limit and fiscal policy, then the wars in Iraq and Afghanistan have contributed about one fourth (25%) of the problem. I derive that by measuring the total increase in debt held by the public since 2001 and attributing portions of it to war spending and associated interest costs.

The rest of the fiscal problem is due to other trends in taxes and spending since 2001 including the recession of 2007-2009, the policy response, and earlier policies such as the Medicare prescription drug expansion and the Bush-era tax cuts.

2. Could the cuts to public spending have been avoided if there had been no war?

If there were no war, we would have experienced only about 75% of the run-up in debt held by the public. You might say that we'd then require only 75% of the policy response to increased debt that we will see.

3. Who pays for the wars?

In the short run, holders of U.S. government obligations. These are private citizens, governments, and pension funds in the U.S. and abroad. In the long run, present and future (unborn) U.S. taxpayers must pay for them eventually because they are the providers of U.S. government revenues that ultimately pay debts.

4. The money used on wars does not disappear in thin air. Who has been making money on the wars?

The specifics are unclear to me because it isn't entirely obvious who supplies the goods and services purchased by the Defense Department (and others). They include U.S. corporations and workers, including private contractors, and foreign corporations and workers. The split between domestic and foreign suppliers is unknown to me.

That said, my estimates suggest that if past trends are relevant for current experience (which may or may not be true), then it is likely that the U.S. economy is "making money on the wars" because U.S. national income tends to rise when defense spending increases. U.S. firms and workers earn more because they are producing more goods and services purchased by the U.S. government to fight the wars.

5. Some years ago, Joseph Stiglitz and Linda Bilmes estimated the costs on war in Iraq on 3 trillion U-$. In the foreword of his book "The true cost of the Iraq war", he says that the sum is huge, but would not harm US-American state budget in an extreme way. Today, US-budget debt is more than 14 trillion US-$. Did Stiglitz underestimate the impact of war on US debt?

No, but it is true that three trillion is if anything a conservative estimate. Public finances are strained primarily because of the large recession and unprecedented fiscal policy response. Politics aside, I would not say that the country's current fiscal state is unsustainable. Rather, it will become unsustainable with the aging of the baby boom generation due to entitlement spending. Or if another massive recession hits before fiscal sustainability can be reattained.

6. How has the war in Iraq, Afghanistan and Pakistan been financed so far? (I mean, are there differences in financing by the Bush or the Obama administration)?

No differences. All of it has been borrowed because the budget has been in deficit all along.

7. Which negative impacts of the costs of war can the US-citizen feel right now and/or will feel in the future? (I mean: Will the next generation have to pay for the war in Iraq and Afghanistan and how much?)

Economists believe and studies have shown that increased government debt raises interest rates and crowds out productive capital. Future generations will inherit a smaller capital stock and thus lower productivity and wages, in addition to increased tax burdens to pay the larger debt. Higher interest rates se counterintuitive currently given the Fed's actions, but evidence suggests long-term interest rates rise with government debt. These include mortgage rates and rates on corporate borrowing, which may be temporarily low now due to monetary policy but will likely rise in the future.

8. The US has been harshly critiziced by other states for the wars in Iraq, Afghanistan and Pakistan. Did the reputation of US-economy suffer from the wars since 9/11?

I'm not sure what connection there may be between government war policy, reputation or public perception, and economic transactions.

9. Maybe a little bit to far-fetched - but are there any effects of the wars on the economy of Europe?

I don't know.

10. On the website "costs of war", the military spending in the period 2001-2011 is said to be 1,3 trillion US-$. Is this only for the wages of the soldiers or for the equipment/weapons of the soldiers, too?

Both, and other costs related to deployments, reconstruction, and aid.

11. One Million US-$ in military spending creates 8,3 jobs, in public education 15,5 jobs. Is it realistic to say that without the war in Iraq and Afghanistan, USA would suffer from less unemployment than now (9,1 %)?

It depends what one thinks would have happened without the wars. If war spending had somehow been spent on other equally productive projects, then there may have been no net effect on income or unemployment.

The fact is that government spending on defense is most likely to have a positive effect on aggregate demand and thus income and jobs. This is because in other activities, the government is competing with private suppliers who could get crowded out. That said, it is not clear to me whether defense is as labor-heavy as other industries, so there could be bigger employment effects associated with other types of spending, even if GDP may nit rise as much as with defense.

I think you are referring to another paper in the COW Project, and my reading of it is that the author feels differently about the counterfactual than I.

12. Iraq is an oil-rich country. Are there estimates/figures about the impact of the wars in Iraq, Afghanistan and Pakistan on the oilprice and the world economy?

My reading of the literature is that there was no evidence of any impact of the wars on market supply and prices. The same was not true of Gulf War 1 nor other events, perhaps including the disruptions in Libya.

13. Were there also short-termed POSITIVE effects of the war on the economy of USA?

Yes. Defense spending raises GDP in the short run.

14. The "war on terror" in Iraq, Afghanistan and Pakistan cannot be called successful and as your report shows, has an enormous price for the US. What could have been the alternative reaction after 9/11 in your eyes?

I'm not sure I agree that the wars have been unsuccessful. They have been very costly. But I think the removals of Saddam and Osama are positive outcomes, and there are others.

I have little else to say other than I think history has already judged the invasion of Iraq to have been an unfortunate distraction from chasing down the true enemy, al Qaeda.

NTA Project: Old Folks are Doing OK Worldwide

2011-10-04T13:43:00.000-07:00

A new book by the folks behind the National Transfer Account Project has a bunch of findings, but one in particular that stood out was mentioned by Ron Lee and Andy Mason at the book's launching in Manhattan last month. Contrary to what they thought they'd find, average consumption does not seem to fall appreciably in old age even in developing countries.

The challenges of sustaining those levels of consumption in an era of population aging are what the report and the project are all about.

Bitcoin and monetary policy

2011-10-04T08:11:00.000-07:00

It's behind a paywall, but the 10/10/11 issue of the New Yorker, "The Money Issue," includes a fascinating article by Joshua Davis on Bitcoin, the electronic currency without a central bank. Paul Krugman recently weighed in about Bitcoin and its tilt toward inspiring deflation, hoarding, and a credit crunch. Bloggers responded with some disdain. A Times article earlier this summer described some "speed bumps" in the plan.

Bitcoin seems to fit in well with the Occupy Wall St. flavored dissatisfaction with government and central banks in particular. But after reading Davis's piece, it's hard to believe that Bitcoin is a great idea. The 21st Century Bitcoin prospector profiled in the piece isn't panning for gold, he's investing in computer hardware that fills a room to "mine" Bitcoins. That doesn't seem like a very productive use of time.

Rogoff on financial transactions tax

2011-10-03T14:31:00.000-07:00

He's not in favor of it. A related room-for-debate from January 2010 includes a perspective from Simon Johnson, who suggests trying to tax excessive profits (the reasoning being they should reflect excessive risk) at the bank level and large individual bonuses at the personal level. More recently, Johnson weighs in on capital requirements.

Here is
another article from NPR.

Scaring seniors with ... living too long?

2011-09-29T08:38:00.000-07:00

I enjoyed reading this NPR article discussing retirement saving for some insights into how individuals and their advisors view and plan for spending needs in retirement. The president of EBRI, Dallas Salisbury, describes his "Rule of 33," which is to have assets (including Social Security) equal to 33 times your annual spending before retiring. That sounds adequate for roughly 33 years of additional life. But if average asset returns are perhaps 3% in real terms and if typical consumption growth is 2%, a quick calculation reveals that 33-fold buffer to be good for more like 40 additional years of life.

Needless to say, there's plenty that can cost a bunch in old age, namely out-of-pocket medical or nursing care. But I think the factor of 33 may be a little on the high side. For the average American male born in 1950, average years remaining at age 65 (in 2015) are 17.6, according to Social Security cohort forecasts, while they are 20.3 for women. The median remaining years are about 20 and 21, which is another way of saying that such individuals have a 50% chance of living to 85 and 86.

To be sure, education, income, genetics, smoking, and many other things can either increase or decrease one's survivorship probabilities. But I was really shocked to see what must have been a flat-out error in Mr. Salisbury's quote about his own parents' survivorship:

"They were in their mid-80s, as old as they ever expected to live. But he pulled out his computer to show they had a 50 percent chance of living until age 99."

This seems exaggerated to me. In the figure below, I've plotted survivorship probabilities for men and women in the 1920 and 1930 birth cohorts, and in the 2000 period life table. All are from the SSA data, and I grant that there are subgroups that will live longer and shorter than those shown here. There are some differences between these groups, but you can see the rapid reduction in survival starting at age 85. The median age at death for these groups is around 91, and only about 10% live to age 99. I'm not sure what Mr. Salisbury had on his computer, but I can't imagine that any life table would predict such a huge difference in survivorship probabilities --- something like 40 extra percentage points --- for even the most healthy seniors at these ages.

UPDATE: Dallas Salisbury clarifies --- he meant that starting from age 65, the probability of at least one spouse surviving to age 92 is 50% in actuarial life tables he had obtained from an insurance company. Surprising, right? Perhaps that estimate is a little optimistic (or pessimistic, depending on your point of view); compared to Social Security forecasts it is. But it's a sobering look at the very real risks of living too long. There is wide variance in length of life.

A little medicine

2011-09-28T07:19:00.000-07:00

Mauren Dowd writes about Jerome Groopman and Pamela Hartzband, two Harvard/Boston clinicians and well-spoken advocates of quality care choices. I heard NPR's Terry Gross talk with them recently on Fresh Air. One of the more striking things they mentioned on Fresh Air was how best practices guidelines tend not to stay best practices for long. They found a half-life approaching as little as five years. But Groopman and Hartzband still advocate the use guidelines, just in concert with patient-specific insights.

In the New Yorker, Atul Gawande writes about "coaches" for doctors, teachers, vocalists, you name it. NPR discussed it on Talk of the Nation. I couldn't help but think about coaches for college professors. In a way, we already have them, although the sports analogy usefully parses the distinction between "referee" and "coach" --- the latter is on your side, the former not more often than half the time (or less in a multi-person game!). But coaches for instruction would be another matter entirely. I was astonished at the level of care taken by the middle school teacher in her approach to instruction according to Gawande's piece. But the article also reveals that she had been losing gusto for the job, and the coaching reinvigorated her by enhancing the quality of her teaching.

Journal referees often seem like they're doing anything but enhancing the quality of research, but that's probably because of the natural of double or single-blind reviewing. If they communicated by speaking, I bet it'd be clearer that they're trying to improve the quality of your output.

Cochrane in National Affairs

2011-09-26T11:12:00.000-07:00

John Cochrane writes about monetary policy, debt, and inflation in the fall issue of National Affairs. He appears to pinpoint future entitlement spending associated with the retirement of the Baby Boom as the primary fiscal issue that may trigger a debt crisis. I think he and many others are absolutely right to emphasize the importance of this issue, but it's by no means new knowledge, nor is the problem expected to become appreciably worse than it was years ago. Drawing sharp distinctions between Keynesians, monetarists, and so on may be useful in understanding monetary policy and fiscal stimulus proposals, but it doesn't seem relevant to the debate over long-term fiscal policy, where I think there is far less fundamental disagreement about causes and consequences. The disagreements are over which benefits to choose at what costs.

Krugman, current account, crisis

2011-09-23T07:24:00.000-07:00

Paul Krugman posts an interesting take on the Euro crisis, with some data on average current account balances and average fiscal imbalances.

I like the table, but check out the relationship between the fiscal balance and the current account balance. A scatterplot reveals an upward sloping relationship with a slope of 1.4 (t of 2.7) and an R2 of 0.4. Surely not ironclad but suggestive that the story we tell college students about the U.S., that public dissaving produces a trade deficit, other things equal, might also be relevant here. Even if ultimately it's the current account that actually produces a crisis, the budget deficit might be a pretty important cause.

Volcker on inflation

2011-09-19T07:43:00.000-07:00

Today in the NY Times, former chairman of the Fed and Obama's Economic Recovery Advisory Board argues forcefully against higher inflation as a potential tool for rebalancing the economy. Elsewhere, folks like Ken Rogoff and others have suggested that a period of higher inflation might be the most direct path to recovery from a position of overleverage. An article in Bloomberg from 2009 presents a discussion, including the strategy of price-level rather than inflation targeting.

Volcker's got to be the preeminent authority on cleaning up the aftermath of inflationary policies, and his point is plain: expectations of higher inflation are extremely hard to wring out of the economy, so it's not worth going there.

Courtesy of Greg Mankiw's blog, here's another perspective on related issues, courtesy of John Taylor.

Cheney on fiscal policy

2011-09-16T20:38:00.001-07:00

I can't help but feel like I'm picking on an easy target, but Dick Cheney's view of fiscal policy in a recent PBS interview just makes me shake my head in sadness. The challenge posed by entitlements spending is real, but it was as real in 2000 as it is today. Demographic trends have been known at least since the Social Security reform of the 1980s.

What a disingenuous thing to call for austerity now, after eight years of utter fiscal profligacy under the supervision of Bush and Cheney. Planning for population aging should have been the strategy all along, Mr. Cheney, you utter political hack.

Now let me apologize for dog-piling. I hope that when I'm in my twilight people are more forgiving of the ridiculous things I may say.

Cassidy looks at income trends

2011-09-15T12:33:00.000-07:00

The New Yorker's John Cassidy discusses long-term trends in earnings and income in an interesting blog post.Cassidy is right that trends in the statistics on median earnings and income are alarming, but there are a few more nuanced parts of the story that seem to be missing from this short piece. But perhaps they're in his larger work.

Average earnings and income have been increasing rather steadily. That there's a difference between trends in the median and in the average speaks to rising earnings and income inequality. Clearly a reason not to be optimistic for those in the left tail if they're stuck there, but a little more nuanced than pessimism-for-all.

Second, if one looks at total compensation or unit labor costs, one also sees a different picture, and it's because of the rapid rise in benefits, namely subsidies for health insurance premia. Trends in the average are strongly upward, and I imagine the same would hold true for the median, which I don't think the BLS or Census publishes (these are establishment, not survey data). Rapidly rising health care costs are painful, and we pay more than do those in other countries for what we get out of it, but let's not forget that Americans also living longer on average than earlier generations. (And yes, there is an inequality story here too.)

Finally, let's not forget that the story for women has been starkly different, whether measured by mean or median earnings. Surely the increase in female earnings, while perhaps not always directly good for men in some hyper-selfish version of the world with no partnerships, is an optimistic rather than pessimistic trend.

Go Doug!

2011-09-14T08:19:00.000-07:00

Yesterday NPR reported on some Congressional testimony by CBO director Doug Elmendorf. He laid out the cold, hard facts about fiscal sustainability sprinkled with some common sense about when during the business cycle to tighten, when to loosen, and how to plan ahead. Speaking clearly and firmly about economic policy in a diverse setting is a great skill.

Room-for-debate on lowering college tuition

2011-09-06T05:40:00.000-07:00

The Times offers twelve viewpoints on reducing college tuition, specifically in response to Gov. Rick Perry's call for a $10,000 college degree. There is quite a diversity of perspectives, and there are a bunch of interesting ideas, many of which seem focused on squeezing more output (student-taught-hours) from faculty. But the prize goes to the president emeritus of GWU, who offers these gems (emphasis mine):

"We can reinvent what we call the college experience. Will it be the same? No it won’t. Will it be better or worse? Yes it will. I hope the governor does not have plans for a $10,000 medical degree."

That last nugget sums it up well! Presumably reductions in marginal cost will reflect reductions in marginal benefits and outcomes, unless we're talking about greater taxpayer subsidies.

Reinhardt on growth statistics

2011-09-02T11:35:00.000-07:00

Princeton health economist Uwe Reinhardt discusses growth and inequality in the Times, and cites a nice article in J Econ Lit by Atkinson, Piketty, and Saez that reveals, among other things, what happens to cross-country patterns in average income statistics if you remove the top 1 percent.

Survivorship probabilities

2011-08-23T17:50:00.000-07:00

Is that low or high? Some time ago, a family friend attended a 50th high school reunion and remarked to me that a little over 100 or 10% of the graduating class of 1,000 had passed away. In formal demography terms, that's a survivorship probability ratio for that cohort of ℓ(72) /ℓ(22) = 1 - 0.1 = 0.9 or so. What do you think, low or high?

Being well versed in dissembling, I said I thought that sounded about right. I think the family friend thought it was too low, that the Grim Reaper had claimed more than the usual number of victims in this cohort.

There are a number of elements that certainly matter here: the sex ratio, the racial and ethnic composition, and so on, all the covariates that we know affect mortality and tend to vary across geographic regions.

But a broad look can be retrieved from cohort life tables published by Social Security. There, these survivorship ratios for the 1940 and 1950 male and female birth cohorts are 0.73 (1940 men) and 0.83 (1940 women), and 0.76 (1950 men) and 0.84 (1950 women).

So the survivorship ratio was pretty high for that birth cohort. Part of it is surely the protective effect of the high school degree, but one can also infer something about the socioeconomic status and racial/ethnic composition of this cohort.

Those fancy macroeconomists!

2011-08-20T11:25:00.000-07:00

For a fun read with insight into the challenges confronting policymakers (and the economics profession), here's the latest from the WSJ's Stephen Moore. My favorite part was the pseudo Cain and Abel story about his lazy and hardworking sons!

Another NYC accents article

2011-08-11T20:31:00.001-07:00

This one from the Wall St. Journal, whose reporter managed to locate a (self-described) childhood friend of De Niro and Scorsese.

Wolfers on the Fed's two-year promise

2011-08-11T16:48:00.000-07:00

Justin Wolfers provides a very helpful interpretation of the Fed's announcement of a two-year commitment to a near-zero federal funds rate. It's a nice, teachable application of the term structure of interest rates, a common topic in introductory money and banking and probably finance courses. If the Fed wants long-term rates to fall, it can commit to keeping short-term rates low for a while, since the former depend on the latter (and on other things).

There's plenty of other helpful commentary on the Fed's move. This NPR article quotes Alan Blinder as stating that the average car loan has a maturity of 3 years, or only 50% longer than the Fed's commitment to low interest rates. I did a double-take, wondering whether I was an outlier in having a 5-year auto loan. But according to Fed survey data, the average maturity is actually above 60 months and has been fairly continuously since early in the new millennium.

Credit rating transparency

2011-08-10T16:22:00.001-07:00

It's a shame when a credit rating agency's actions, which in theory are meant to increase transparency between borrowers and lenders, seem to reduce transparency about its own methodologies. The U.S. Treasury details the $2 trillion error in S&P's penultimate statistical analysis of the U.S. debt position and states that in response, S&P simply changed its principal rationale for the downgrade. The case for S&P's primary, or only, rationale the whole time being the political stalemate the whole time seems rather convincing in this light, if one believes that an additional $2 trillion in committed deficit reduction would have avoided the downgrade, as was widely reported. It would be nice if S&P made clear the rationales for its judgments rather than listing one that seems kind of bogus.

Hispanic wealth off a cliff

2011-08-05T14:07:00.001-07:00

Princeton's Doug Massey opines about the reasons underlying the 66% decline in Hispanic households' wealth (as measured in the SIPP), compared with 53% for blacks and 16% for whites reported by the Pew Hispanic Center in The Toll of the Great Recession.

Massey argues that stepped-up enforcement of immigration laws probably kept a sizable number of undocumented Hispanic immigrants from leaving the U.S. and caught in a underworld with reduced options for legal recourse. Hispanic homeowners may have been particularly susceptible to predatory lending if they were undocumented. He also mentions that many Hispanics had construction jobs, which have taken a huge hit during the recession.

I'm a little skeptical whether legal status really explains that much of the statistic. If all 12 million undocumented immigrants were Hispanic, they'd represent about one quarter of the roughly 50 million Hispanics in the U.S. Assuming the SIPP captures undocumented immigrants (researchers seem to think they're underrepresented in the panel but still there), I think the experiences of legal Hispanics must be responsible for a substantial amount of the reported results.

It's very plausible that tendencies to hold wealth in the form of housing rather than financial investments might be cultural; it's also possible that the lower average socioeconomic status of Hispanics might explain some. And lower SES surely correlates with employment in heavily hit industries such as construction.

Viewed this way, I'm not sure the Toll of the Great Recession is a good argument for immigration reform, but I think there are others.

Rogoff on crisis policy

2011-08-04T18:49:00.000-07:00

Thanks to Greg Mankiw for posting a link to Ken Rogoff's piece on proper financial crisis macro policy. Rogoff makes the case for targeting debt and overleveraged borrowers rather than traditional aggregate demand stimulus.

More on plagiarism in China

2011-08-03T15:55:00.001-07:00

The latest from NPR on plagiarism in Chinese academic circles. I think awareness may be an issue in a developing country, especially one where imitation isn't only flattery but perhaps a route to an "A." But it occurs to me that the result of plagiarism detection software run on many U.S. academic journals might reveal some uncomfortable patterns too.

Mankiw on Bernanke and price-level targeting

2011-08-01T13:14:00.000-07:00

In an op-ed with a great title, Greg Mankiw reviews the Bernanke years at the helm of the Fed thus far. He mentions the Fed's focus on the core rate of consumer inflation, excluding food and energy, which might be one of the more inscrutable tenets of central banks.

Here's a look at some recent inflation history, with the top chart showing the levels of the core Consumer Price Index (CPI) alongside the energy and food indexes, and the bottom chart showing a 12-month moving average of the monthly inflation rate in each. Energy prices really steal the show, but food prices are also a bit more volatile than the core rate. Inflation in food and in energy prices both peaked in the summer of 2008 and turned around rather sharply, leading to disinflation and even (slight) deflation in both while trends in the core rate were much more subdued.

Seven billion

2011-07-30T12:55:00.000-07:00

NPR reports on global population trends, which will bring us to seven billion strong in October or November. Several nice quotes by the eminently quotable David Bloom of Harvard are included.

I'm refereeing a paper on population momentum right now, which is responsible for a large part of the continuing increases in population levels. Even though fertility rates have fallen in many parts of the globe, age structures favoring the young mean that crude birth rates remain quite high and will continue for some time.

The sex ratio and the real exchange rate

2011-07-29T11:38:00.000-07:00

Thanks to EconBrowser for finding this paper on sex ratios and exchange rates and on China in particular. The authors argue that an unbalanced sex ratio favoring men tends to depreciate a country's real exchange rate by raising saving rates and by increasing labor supply, if nontradables are more labor intensive. I think the argument for both those channels hinges on men's needs to accumulate more resources to compete for scarcer women.

Stuck in 1980

2011-07-17T16:27:00.000-07:00

The Times Economix blog reports on a study of grade inflation since 1960 by Rojstaczer and Healy, and even shows a nifty graph of grading densities over time. Wow!

My own record at Queens College, a public institution? Since 2006, 25% A's, 40% B's, 24% C's, 5% D's, and 6% F's. According to the graph, I'm pretty much lined up with the "1980 Public" density.

NPR on the Mediterranean diet

2011-07-14T16:36:00.000-07:00

NPR's Morning Edition reports on changes in diet and obesity in Mediterranean countries, complete with this zinger:

For the first time in history, today's children are predicted to live shorter lives than their parents. And the Italian Ministry of Health is worried. Health officials say the obesity is reaching epidemic proportions, and the TV campaigns "make it easier to make healthy choices."

I'm not sure I believe the first sentence, but I would agree that the effect of rising obesity on longevity is a point of great interest. The article points out how the price of the Mediterranean diet is higher than it was, but I think what is meant by that is probably (a) the price relative to the alternative, and (b) the price including a source of protein like fish, rather than more vegetables and grains as the diet probably was heavier in.

Dangerous misconceptions about Social Security's assets

2011-07-13T16:56:00.000-07:00

This afternoon, in a press conference on the topic of raising the debt ceiling, Rep. Louis Gohmert said that "there is such a thing called the Social Security Trust Fund, and the Social Security Trust Fund will be able to pay seniors their checks for many months to come even if Congress does nothing.”

I'm not sure what is more lamentable here: this misconception itself, which sounds like an honest mistake, or the fact that Gohmert implied that the President would understand it if "he'll do his homework."

Interestingly, the end of the video includes some more remarks of Gohmert's that were not transcribed, in which he refers to a Joint Economic Committee report that he claims supports this view.

The problem is that the Trust Fund holds nothing but U.S. government bonds. In order to pay beneficiaries with those assets, the Social Security Trustees would have to sell them on the open market. And as Fed chair Ben Bernanke and many others have warned, failing to raise the debt limit and defaulting is likely to lower the prices of outstanding debt considerably. Cashing out abruptly like that would probably not be a very efficient way to finance benefit payments.

It's also true that annual Social Security Trust Fund income will exceed costs until 2023, per the latest SSA Trustees report. If income consisted only of taxes, the government could simply earmark payroll taxes for benefits and pay them in full. But it turns out that net interest earned on those government bonds in the Trust Fund is about $100 billion of annual income now, or practically the entire amount of the Social Security surplus. If the government were to completely default on its debt, annual payroll taxes would be barely enough to cover annual benefits now, and they would not be enough very soon, as the Baby Boom continues to retire.

(An additional complication is that the tax relief package passed last December actually lowered the payroll tax rate for 2011 by 2 percentage points, for which the Treasury compensates the Trust Fund via borrowing. Presumably the tax rate will rise for 2012, but I interpret this to mean that if the Trust Fund were indeed to somehow "go it alone" without general revenue, it would come up short this year.)

World Bank data

2011-07-05T11:46:00.001-07:00

I gather it's not exactly a new development, contrary to the verb tense in the title of a recent NY Times article, but the World Bank has made much of its data public. Complete with nifty graphics on the front page!

Macroeconomic insights from Sweden

2011-06-24T15:19:00.000-07:00

Today an article in the Washington Post presents five economic lessons from Sweden, which has weathered the worldwide recession better than most. In no apparent order, they are:

1. Run a budget surplus beforehand in case deficit spending is required during a crisis

2. Rely more on "automatic stabilizers," fiscal policies that increase spending and reduce taxes automatically during a recession, without extra action by legislators

3. Use monetary policy aggressively

4. Keep a flexible exchange rate

5. Have chastened bankers who avoid reckless lending

The first two deal with fiscal policy and are clearly related, and 3 and 4 concern monetary policy; with a fixed exchange rate, there isn't much room (if any) for an independent monetary policy, as Greece now knows too well.

Bankers who avoid self-immolation are nice to have, but it's hard to draw distinct policy advice from the Swedish experience. Maybe the Riksbank engaged in more aggressive oversight (seems likely) or the structure of the banking industry was somehow different (less so), but otherwise the lesson seems to be that having smaller banking crises more frequently might help you avoid having a larger one. Not a very comforting thought, if that's the best we can do!

Mankiw on health insurance and fiscal balance

2011-06-24T13:08:00.000-07:00

I missed it when it came out last Sunday, but Greg Mankiw provides a concise look at the basic economics of some key fiscal issues the nation is confronting. A one sentence summary might be, "Taxes and subsidies are similar in their effects on incentives, and we should think about whom we incentivize and how on the road toward fiscal sustainability."

I liked his point about high implicit taxes on seniors as probably being especially bad for their labor supply, but I wonder how many such seniors there are. To be sure, Mankiw is talking about wealthy seniors who would get their benefits "means tested," and in theory their behavior should respond. But I think he'd agree one would want to some estimates of labor supply elasticity before making a judgment. This kind of thing is reminiscent of the back-and-forth blogging of Paul Krugman and Greg Mankiw and Paul Krugman about tax revenue during different business cycles or administrations.

I'm sure Krugman meant "stupid" only in the Black-Eyes Peas sense.

Optimism and facts about college

2011-06-20T10:21:00.001-07:00

I enjoyed reading this article on NPR the value of a college degree because it was an article about the long history of articles about the value of a college degree. It did a nice job placing them in context. I also enjoyed the closing anecdote about a graduate of the class of 1993 who "settled" on a secretarial job that led to great things later.

Fun for undergraduate econometrics

2011-06-17T11:35:00.000-07:00

On the Freakonomics blog, Justin Wolfers demonstrates how spurious correlation can arise, with some nifty graphs. His age is (also) tightly correlated with national obesity rates.

Geographic variation in U.S. life expectancy

2011-06-15T09:50:00.001-07:00

Here is the latest from Chris Murray's shop on geographic variation in average life expectancy across U.S. counties, discussed in a Post article here.

Neat post on fertility and development

2011-06-11T11:58:00.000-07:00

Justin Wolfers provides some neat graphs of total fertility rates against GDP in a recent Freakonomics blog post.

Menand on Academically Adrift and others

2011-06-03T11:27:00.000-07:00

Leading off with a delicious observation on the difference between Princeton and CUNY students, Louis Menand reviews Academically Adrift in the June 6, 2011 issue of the New Yorker. He cites a criticism of the book's statistics in the Chronicle of Higher Education.

The average effect of college is different than the effect of an elite college, but I still thought of recent work by Dale and Krueger revisiting the latter.

Gawande's HMS commencement speech

2011-05-31T06:39:00.000-07:00

Here is Atul Gawande's recent commencement address at Harvard Medical School, courtesy of the New Yorker.

My favorite part is somewhat of a red herring: Gawande writes, "I do not believe society should be forced to choose between whether our children get a great education or their teachers get great medical care." But that choice, while typically not between the extremes evoked by his language here, is a very real one. Resources are scarce, especially public ones. How will we trade off the benefits of each use?

The rest of the address discusses new delivery systems of medicine in today's era of advanced technology, and the challenges Gawande argues are best faced by "pit crews" rather than individuals.

CSWEP wisdom

2011-05-30T09:26:00.001-07:00

I read a recent post by Greg Mankiw that cited advice from Robert Hall for the post-tenure academic, and then I looked at the website for CSWEP, the Committee on the Status of Women in the Economics Profession, which had included that article in its 2009 newsletter. What a treasure trove of plain-language wisdom! The current issue includes several articles on getting published in economics journals. I wish I'd read this several years back!

Letter to a WWII veteran

2011-05-30T09:00:00.000-07:00

According to the VA's VetPop2007 forecast, which was based on Census data, there may be around 1.6 million veterans of the World War II era alive today, or about 10 percent of the original cohort of 15.7 million who served. Their average age is 87.

In honor of Memorial Day, here are some thoughts about military service I recently shared with a WWII veteran:

Dear Mr. ________,

Born in 1973, I and my birth cohort have never known service in the way yours did. We registered for selective service, but participation in our era has always been voluntary. For many of us service has been an unknown concept in the sense of not being well understood outside of movies, books, and grandfathers' stories. Geopolitics had seemed a more appropriate backdrop for understanding events during the Gulf War era than duty or necessity.

As a postdoctoral scholar at the RAND Corporation early in the new millennium I began to think about military service in greater detail, still as an observer. RAND conducts many studies for the Pentagon, and I met a colleague there who had written her dissertation on the lifelong impacts and meanings of military service. Seven years later, she and I and other collaborators are conducting research in this area. We hope our efforts can ultimately inform policy as well as knowledge about how challenges affect who we are. Among other things, we are members of an Institute of Medicine committee convened to assess the challenges faced by service members and their families in the current conflicts in Iraq and Afghanistan.

For a member of the All Volunteer generation, it is a good feeling to provide public service in this way, adapting knowledge as best we can about the experiences of earlier generations. In many ways, your service and that of younger Americans was doubly valuable. It made our world safer then, and it also helps make future service members, veterans, and their families safer. I have been honored to play a small part in this.

Romer on the exchange rate

2011-05-23T07:34:00.000-07:00

Yesterday Christina Romer provided a very helpful overview of how exchange rates work alongside monetary and fiscal policies, perfect for any student of intermediate macroeconomics. But the piece de resistance was her recounting of how, during her pre-confirmation training, Larry Summers "boomed" the mantra regarding the strong dollar being the domain of the Treasury secretary.

Population pressures and development

2011-05-04T07:39:00.000-07:00

A Times Room-for-debate considers world population prospects and the challenges facing development. In particular, David Bloom and Warren Sanderson (and surely the others as well) write about promoting fertility reductions.

A look back at recent fiscal history

2011-04-30T07:11:00.000-07:00

The Washington Post offersa retrospective on federal debt, surpluses, and deficits over the past ten years.

Fogel on human development

2011-04-26T07:42:00.000-07:00

In the Times, Patricia Cohen reviews a new volume by Robert Fogel and coauthors about historical patterns in nutrition, body size, and longevity. Based on material in the related working paper, it appears that they analyze new data on real wages and food available and composition in Britain during the takeoff. They call attention to improvements in nutrition starting with birth cohorts born in the middle 19th century. The book review states that the focus broadens to other countries as well.

Development, family size, and female empowerment

2011-04-25T08:23:00.000-07:00

Recently Jill Lepore wrote an op-ed about Jane Mecom, Benjamin Franklin's sister. Lepore provides insight into the conditions of women and families in 18th century America, remarking that high fertility (and very high infant mortality) and lack of education were critical impediments to improving well-being. Toward the end of the piece, she mentions the decline in U.S. fertility rates starting in the late 17th or early 18th century, an abnormally early transition toward smaller families described in this economic history piece by Michael Haines.

Present Discounted Genius

2011-04-13T16:52:00.001-07:00

A little-known fact is that ex-major league ballplayer Bobby Bonilla is being paid $1.19 million each year from 2011 to 2025 by the Mets. Bonilla was bought out of the remaining $5.9 million in his contract in 2000 for this agreement, an annuity, as it's called in the retirement business or financial community.

How could this be?! It's a great example of the concept of present discounted value. It turns out that the $25 million plus in cash that Bonilla will be paid over the next 25 years is actually less in present value than the $5.9 million he gave up in 2000 as part of the deal. (In my spreadsheet, I find the present value of the contract equalling about $4.9 million in 2000 dollars.)

Or at least the PDV is less if the interest rate they used to strike the deal --- 8% per year --- was realistic. Maybe that was a little high. The interest rate in the contract ought to be the rate of return that Bonilla would have earned on that $5.9 million were he paid it in 2000 and promptly invested it. Of course between 2000 and 2011, stock prices either declined or moved sideways as a result of all the turbulence in the interim. The average Corporate Aaa yield was probably around 6% during this period. Based on what's happened since 2000, Bonilla's deal looks pretty good!

It would be interesting to compare the "price" he paid for the annuity to what else prevails in private markets.

Student loan debt

2011-04-12T06:28:00.000-07:00

Here's an update about trends in student loan debt, which according to one data source have apparently reached the level of credit card debt. (The former has been rising while the latter has been falling!)

Surowiecki on the Solow Model

2011-03-25T07:57:00.000-07:00

In the current New Yorker, James Surowiecki discusses the implications for Japanese growth and well-being of the Sendai earthquake. He references the same article I found on disasters and growth, which suggests that beyond the neoclassical implications (fast growth along a return to the steady state), there might be something good about being forced to replace old capital with new capital.

UNSCEAR on Chernobyl health effects

2011-03-18T10:28:00.000-07:00

The UN Scientific Committee on the Effects of Atomic Radiation maintains a website on the Chernobyl disaster with a summary of their findings and PDFs of reports from 2000 and 2008. Their statistics aren't uncontroversial. To date, the UN estimates 28 fatalities associated with acute radiation syndrome (ARS) out of 134 highly exposed plant staff and emergency workers, another 19 deaths among that group that do not appear to be associated with ARS, and 15 deaths among the more than 6,000 children or adolescents exposed to iodine-131 via milk and diagnosed with thyroid cancer. The UN also cites some evidence of increases in the incidence of leukemia and cataracts among the larger group of recovery workers but argues it is inconclusive due to low statistical power.

Reports seem to suggest that conditions at the Fukushima Daiichi reactor are unlikely to result in releases of Chernobyl-sized plumes of radioactivity.

Earthquakes, tragedy, and growth

2011-03-16T13:46:00.000-07:00

In my undergraduate class at Queens College today, I found myself trying to turn a tragedy into a teachable moment, at least in the limited sense of better understanding macroeconomics. Humans are irreplaceable, but buildings and equipment are not. I suppose it might also be appropriate to observe that the environment is also irreplaceable, to the extent we might harm it enough that nature can't heal. My initial guess based on what we know is that the environmental impact of the 9.0 magnitude earthquake in Sendai is likely to be minimal compared with the human and capital costs, but I could easily be wrong given the current uncertainties.

Especially in a country like Japan, where population growth is zero or negative, people are very dear. They're dear regardless. But one of the lessons of the standard neoclassical growth model is that capital, on the other hand, is replaceable. Shocks to the Japanese capital stock, such as that associated with an earthquake, will reduce the levels of wealth and income in the short run, but income growth is likely to be more rapid after the shock than before.

A 2002 article by Mark Skidmore and Hideki Toya in Economic Inquiry went further than that, suggesting that turnover of the capital stock might also be good for fostering technological innovation. Another relevant article is by George Horwich in 2000, writing about the 1995 Kobe earthquake, where he argues that the greater importance of human capital, of which losses were high but not catastrophic, contributed to the quick recovery. He cites an estimate of fatalities of about 6,500 and destroyed capital of about $114 billion, or 0.8% of the nation's capital stock.

Costs, benefits, and nuclear

2011-03-16T13:37:00.000-07:00

This Monday's Room-for-Debate featured a perspectives from several U.S. physicists about the earthquake-related damage at the Fukushima Daiichi nuclear plant. The third, MIT's Michael Golay, points out some of the more subtle aspects of the problem that only an economist could love. (His piece is entitled "Realism about costs and benefits.")

In a study he led for Tokyo Power and Electric, the authors argued that any earthquake large enough to result in problems with radioactivity containment would cause many more direct fatalities than through any associated release of radiation. Thus the marginal dollar (yen) might better be spent on earthquake preparedness rather than nuclear safeguarding, because the former would result in more lives saved.

Not an argument that anybody probably wants to hear right now, but a sound if ultimately sad one.

New evidence on ARRA multipliers

2011-03-12T10:01:00.000-08:00

Jim Feyrer and Bruce Sacerdote report that at least a few quarters out, some of the fiscal stimulus had large effects, some had zero or even negative effects, and the total effect was probably lower than expected by administration economists, but not significantly lower.

A compelling part of their results is that they find that aid to state and local government to support teachers and police apparently did not save any jobs, or in other words, had no "permanent" effect on employment. Support to low-income families, on the other hand, did. This is fairly consistent with a "permanent income hypothesis" view of the stimulus. As reported by the authors, groups with long time horizons, like state and local governments and unions, correctly perceived the relief as temporary and didn't permanently hire or save a job, preferring instead to conduct business-as-usual as they would have without the stimulus. Groups with shorter time horizons or liquidity constraints made "permanent" changes, probably by spending the cash, a different outcome than in the counterfactual with the recession but no stimulus.

Core versus "populist" inflation

2011-03-12T09:20:00.000-08:00

The Wall St. Journal and Reuters reported on NYFRB President William Dudley's remarks about total versus core inflation (core is total excluding food and energy) in a Q&A session after his prepared remarks at a meeting of the Queens Chamber of Commerce and Queens Economic Development Corporation in Flushing. Dudley made the mistake of referencing the iPad 2, which the food-price conscious in the audience didn't appreciate.

My experience teaching macro at Queens College suggests that at least among college students, there is a general perception that the rate of price inflation never falls, and furthermore that prices never fall. I attribute some of this to the large portion of budget spent on rent here in NYC, where rent control and stabilization policies will typically prevent rents from ever falling. But I'm not sure whether people internalize how food and energy prices go down as well as up.

To be sure, central banks aim for a target rate of core inflation around 2 or 3 percent, so prices typically rise rather than fall. But we haven't done a very good job explaining why the target needs to be positive, nor why it should be core rather than total inflation.

Ironically, I'd say Dudley explained himself fairly well in his remarks, but probably not in a way that made sense to his audience:

[E]ven if commodity price pressures were to prove persistent, they have a smaller impact in the United States than they do in many other countries. Relative to most other major economies, the U.S. inflation rate is lower, the amount of slack much greater and commodities represent a relatively small share of our consumption basket. This small share helps to explain why the “pass-through” of commodity prices into core measures of inflation has been very low in the United States for several decades.

Thus, while rising commodity prices may be giving some of you a bad headache, they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate. We will have to ensure, however, that these pressures do not cause inflation expectations to become unanchored.

Retirement, budgets, spending

2011-03-09T10:41:00.000-08:00

Today's Conversation Blog post with David Brooks and Gail Collins raises some interesting points about retirement, pensions, and spending. The passage about the replacement rate --- a pension might replace 70% of income, for example --- caught my eye. Brooks jokes that the extra 30% you don't need was for gin and psychotherapy, which stress-addled middle-aged workers need to replace loss happiness.

A recent working paper by Michael Hurd and Susann Rohwedder shows only modest declines in spending associated with retirement, with somewhat larger decline among low-income households where health shocks may have caused retirement. This contrasts with evidence in the cross section or with limited spending data that had suggested larger declines in spending, more consistent with Brooks's gin and psychotherapy idea.

The blog post also discusses some fiscal sustainability issues with a clear eye.

I use slides

2011-03-07T13:26:00.000-08:00

I had to chuckle when The Times's David Carr compared Glenn Beck to a macroeconomics professor in an article today:

What had been a fast and loose assault on all things liberal has grown darker and less entertaining, especially with the growing revolution in the Middle East, a phenomenon Mr. Beck sees as something of a beginning to some kind of end. He’s often alone in the studio with his chalkboards and obscure factoids, a setting that reminds me of an undergrad seminar on macroeconomics with an around-the-bend professor I didn’t particularly enjoy.

Perceptions and war

2011-03-05T09:28:00.000-08:00

Another Disunion Blog post considers the rationality and expectations of both sides prior to the Civil War. The final two sentences nicely summarize the main point, that it seemed not to be irrationality that led to war, but miscalculation:

"Neither had a marked advantage when it came to rationality or madness. And neither had the least idea what war would mean, as is often the way with the best and the brightest."

Public-sector pensions

2011-02-28T05:48:00.000-08:00

Today a room-for-debate blog on public-sector pensions covers much relevant ground. The management costs and fees associated with 401(k) style investment funds are not insignificant, but traditional defined benefit pension plans require growth in the "tax base" associated with funding them. For plans funded solely by contributions (thus far, Social Security is an example), that ends up being total payroll. I can't imagine there are many states and localities that have been expanding their base of public employees much over the past several decades or into the future. No wonder these plans are massively underfunded.

Not what taxation is supposed to be for

2011-02-25T12:31:00.000-08:00

An article describes a "homebrew" tobacconist in Brooklyn, who has decided to reveal her money-saving hobby in order to highlight her dislike of local anti-smoking regulations. She claims her homegrown tobacco saves her a lot of money, and more:

“It’ll make the antismokers apoplectic,” said Ms. Silk. “They’re using the power of taxation to coerce behavior. That’s not what taxation is supposed to be for.”

It's probably a common belief that taxation is not for discouraging things. After all, we tax income but want people to keep earnings, and we tax sales although we want people to keep spending. But on the other hand, we traditionally taxed imports (we do that less now) because we wanted to reduce them and push spending toward domestically produced goods.

In the case of things like smoking, which affects other people besides the smoker who chooses to smoke, taxes move the private costs faced by the smoker closer to the larger total costs borne by all citizens.

We could do a better job explaining these aspects of economics in high school and college!

Economic Report of the President 2011

2011-02-25T08:24:00.001-08:00

The 2011 ERP was signed and released on Wednesday, and like always it provides a nice summary of economic events and analysis. Figures 1-1 and 1-2 up front were rather shocking; they reveal how little private nonresidential investment there had been during the recent boom.

A quick look at the stock estimates from the BEA revealed a similarly bleak picture about recent growth in the stock of productive capital:

Growth in the capital stock had really accelerated during the boom of the 1990s but hadn't done much during the 2000s.

Another chart I really liked was Figure 3-4, which shows average earnings by educational attainment based on CPS data since 1963. There's stagnation in each of the trajectories except for the BA or higher category.

State and local compensation

2011-02-24T13:39:00.000-08:00

All the recent fervor about state and local unions, budgets, and wage contracts seems not to have included much on the subject of whether state and local government workers are paid more, the same, or less than equivalent private sector workers. If the answer is the same or less, then legislated reductions in their compensation are likely to reduce the quality of government services. But if government workers are paid "more than they are worth," that implies that reductions would only reduce the pool of applicants and probably not the amount of employees nor their quality.

A book chapter by Alan Krueger in an NBER volume from 1988 discusses trends in earnings. A big part of his analysis concerns the federal worker bonus. The last paragraph summarizes his findings on state and local government workers' earnings:

At the state and local government level, both the longitudinal and cross-sectional analyses suggest that the differential in earnings between public and private sector workers was small and positive in the 1970s, but became negative by the mid-1980s. Furthermore, the empirical analysis finds no evidence of a difference in pay between union and nonunion members in the public sector.

One of the big changes since the 1980s has been the movement away from defined-benefit pensions in the private sector and toward defined-contribution plans. I think the primary difference between them is the amount of risk, and not the average level, but a larger issue today may be differences in post-retirement compensation for public versus private workers. Health insurance copays may be a big part, but pensions might be as well.

Fun with free markets

2011-02-21T07:41:00.000-08:00

A fun article on "Monopoly" and Milton Friedman appeared over the weekend. The author was a devout fan of both while a student at the University of Chicago, and the central tale is of a "no rules" night playing Monopoly. Zoning laws crumbled, and players could build as much as they wanted on property. Rents soared, and money was tight, so players printed new money. Prices soared (I'm a little less clear on how that happened), so players decided to retire some notes (since "inflation is always and everywhere a monetary phenomenon"). And then a liquidity crisis purportedly hit and caused bankruptcies among the players.

A fun caricature of some classic insights, even if I'm not sure how much to believe. Then again, one can throw a Monopoly board a pretty far distance....

Productivity and measuring well-being

2011-02-15T06:08:00.000-08:00

I'm not sure it's his original contribution to the discussion on growth versus stagnation in the U.S., but David Brooks raises some relevant issues concerning how we measure well-being. I haven't read it, but Tyler Cowen's Great Stagnation book argues that growth in total factor productivity and median household income has slowed down after about 1973, which is undeniably true if perhaps a little overblown. Brooks points out that at least a portion of the new economy probably isn't being measured particularly well by GDP. Well-being has probably increased because we have access to a lot of free services like Twitter and facebook, and there is an array of other such pursuits that may not be measured very well by market transactions.

Brooks also worries about how the illusion of such non-market wealth --- if folks think they'll eventually see financial returns to welfare-improving contributions that are now largely free and not captured by markets --- could have played a role in driving folks into overspending. I think both points are interesting, but I also suspect that overindulgence prior to the most recent collapse was instead driven by very tangible market returns associated with real estate. One could certainly also call such market returns illusory, but they're very different from the perceived wealth that Brooks is talking about.

Is the share of our well-being being that is produced outside of markets rising, falling, or staying the same? The rise of market substitutes for household production, like cleaning and babysitting services, would suggest it's probably falling, not rising. But I would certainly agree that some part of my daily well-being comes from web services that are completely free and didn't exist at all several years ago. I just doubt that value has risen by a lot relative to all the other things I do.

UPDATE: An op-ed by Scott Turow et al. today obliquely speaks to these issues. Their point is that the thriving creativity of the Enlightenment was due in part to playwrights like Shakespeare and others being able to market their intellectual property and be protected by copyright. The link here is that if stuff is free, whether intentionally or unintentionally (through theft), its value added isn't measured, nor do any pecuniary profits accrue to the creator.

UPDATE PART DEUX: One thing Turow et al. left out is that innovation has often been supported by government, whether monarchy or republic. In Shakespeare's time it was the former; today, it's the National Science Foundation or the National Institutes of Health.

The Beveridge Curve

2011-02-01T13:00:00.000-08:00

The BLS posted an updated Beveridge Curve, which graphs the job vacancy rate against the unemployment rate. Last fall Paul Krugman wrote a blog post about recent developments. What's striking is the time we've been in that counterclockwise spiral "off" the curve in the direction of more vacancies but unchanged unemployment.

Debt rating and young workers in Japan

2011-01-28T07:37:00.001-08:00

Two related articles on Japan appeared in the NYT today, one on the plight of young workers in what seems like a permanently down economy with ossified corporate structures, and another on a downgrade in sovereign debt rating by S&P. Probably the most humorous part of either is the quote attributed to Prime Minister Naoto Kan in the latter:

“I just heard that news,” a flustered-looking Mr. Kan told reporters. “I am a little ignorant on those kind of matters,” he said. “Let me look into it more.”

Humility? Check. Qualifications for job? Hm.

Not to be cute, but in a nutshell, that's similar to the theme in the first article. Because of rapid declines in fertility and mortality, Japan's age structure is heavily weighted toward the old, who apparently dominate corporate culture. But I'm not sure it matters that much who's in the driver seat as long as they make productive use of it. While the article begins from the perspective of the demographic imbalance, which is real, it quickly drifts to the issue of rigidity in corporate structures and in society, and the lack of entrepreneurial possibilities.

Another antebellum war cost estimate

2011-01-28T07:21:00.000-08:00

Another post on the Disunion blog quotes Senator Alfred Iverson of Georgia in his farewell speech to the Senate during the secession crisis.

Iverson estimates that the North's "conquest [of the South], if you gain one, will cost you a hundred thousand lives, and more than a hundred million dollars. Nay more, it will take a standing army of 100,000 men, and millions of money annually, to keep us in subjection."

This certainly closer to the truth than Edmund Ruffin's estimate that appeared in an earlier post on which I commented. But it's still pretty far below the true cost borne by the North, let alone the total cost to the nation.

UPDATE: And here's another cost estimate on the Disunion blog.

A nice overview of the renminbi/dollar exchange rate issues

2011-01-21T09:34:00.000-08:00

Paul Krugman provides a nice overview of the Chinese renminbi and U.S. and Chinese monetary policies. But I'd say there are probably two reasons why inflation is running high in China: rapid growth irrespective of the exchange rate policy that is keeping the renminbi undervalued, and the exchange rate policy. Krugman focuses on the latter, but I'm not sure how that could drive broad-based inflation. Maybe he's absolutely right, but I would have imagined that an undervalued currency would drive inflation via the high prices of imports, which would allow domestic producers of substitutes to raise their prices as well. Unless the import is a widely demanded item like oil, I'm not sure why such a dynamic would have such a broad effect on inflation, such as in real estate.

The Obama economic team v1.0

2011-01-19T09:43:00.000-08:00

The Times Magazine article on the emerging jobs policies of the Obama administration and its economic team v2.0 - with Gene Sperling, Austan Goolsbee, and Jack Lew having replaced Larry Summers, Christina Romer, and Peter Orszag from v1.0 - focuses more on the challenges faced by the latter group. It provides some insiders' perspectives on the way the 2009 stimulus package was created. And like all media reports, it digs up dirt. I especially liked how Summers gave a three-hour interview over dinner but requested that all quotes come from email correspondence in which he sharpened his messages. It's a wise choice!

Predicting the costs of the Civil War

2011-01-16T09:44:00.000-08:00

The Disunion Blog on the NYTimes website, a personal obsession of mine these past several months, included an interesting gem in a recent piece entitled "Declining War, Rejecting Piece." The setting was early 1861, when an uneasy standoff prevailed prior to the assault on Fort Sumter. Quoted in the blog article is a statement by the "Fire-Eater" secessionist Edmund Ruffin in the Richmond Index the week of 1/12/1861 to 1/18/1861, a Saturday to a Friday. He was referring to the costs to the Union of a civil war:

"They could not win such a contest without the sacrifice of fifty thousand lives and one hundred million dollars."

As I recounted in a recent working paper, the actual cost of the Civil War for the North turned out to be 364,511 killed, or more than 7 times as many as Ruffin's guess. The North spent $2.3 billion in current dollars on direct military expenditures, or 23 times more than Ruffin imagined. The benefits that the U.S. would eventually extend to Northern veterans would eventually double that figure in terms of present value.

Ruffin's was only one cost forecast, but he had an incentive to exaggerate it. It would appear this is another example of systematic underestimation of the costs of war (Nordhaus, 2002).

Cuomo's Queens accent

2011-01-02T09:32:00.000-08:00

Not that I could ever in a million years distinguish the accents of different boroughs, but apparently the natives of those boroughs can, as recounted in an article on Andrew Cuomo and his accent. Favorite line: "[I]f a New Yorker pronounces 'Korea' and 'career' the same way, he is from Queens."

Squeezing the 55-to-64 year olds

2010-11-29T07:25:00.000-08:00

The Times reports that Defense Secretary Robert Gates is contemplating cuts to the military's Tricare medical insurance program, only reportedly for retirees who are under 65. The article states that fee hikes would not apply to soldiers on active duty (and presumably their families), nor to military retirees over age 65. That leaves an age range of about 55 to 64, maybe a little wider, given that retirees typically serve 20 years on active duty.

To my knowledge, Tricare for life, the over-65 piece, effectively provides a 100% subsidy of medical care by covering what Medicare does not. To be sure, working military retirees may be a group with greater means and thus more suitable candidates to shoulder the burden of fiscal adjustment. (Yes, you read that correctly; career soldiers typically retire from service and then obtain employment and receive a pension, although their earnings tend to lag those of equivalent nonveterans.)

Monetary policy here and abroad

2010-11-22T06:34:00.000-08:00

With all the hullabaloo about the Fed's second round of quantitative easing or QE2 (which Bernanke argues is just monetary policy), recent actions by the People's Bank of China, that nation's central bank, offer some interesting insights into exchange rates and monetary policy.

The Times and the Journal both reported last week's 0.5 percentage point increase in the required reserve ratio for Chinese banks, from 17.5 to 18%, but the two reports offered different analytical perspectives. Both cited a domestic inflation rate of 4.4% in October over the previous year, above the Bank's target of 3%. But the Times report quoted arguments by banking analysts that raising reserve requirements was a way for the People's Bank to obtain more funds it could use to purchase foreign currencies. Tighter monetary policy would tend to appreciate the currency if interest rates rise, especially when the Fed is trying to lower long-term interest rates with its purchases of U.S. government bonds, but currency purchases could offset that.

For all the talk of an undervalued renminbi, it has been rising, at least prior to the crisis in 2008 and again since September.

Budgets, Taxes, and Spending, Oh My!

2010-11-18T06:05:00.001-08:00

The award for the most self-referenced post goes to the Times, whose "Budget Puzzle: You Fix the Budget" online tool has captured a key element of recent media interest: trying to offer concrete ideas about fiscal policy rather than simple blanket statements. Republican Representative Paul Ryan of Wisconsin was one of the first to start talking about specifics, and a bipartisan fiscal commission has recently weighed in. Glenn Hubbard discusses it.

The Budget Puzzle is certainly nifty, but it doesn't do everything economists think is important. In particular, there's no behavioral or welfare response to any changes in taxes or spending. We'd like to know the costs of cutting spending, namely the lost welfare of recipients and market participants, as well as the benefit (the dollars not spent). Same goes for taxes, labor and capital supply, and growth.

Clickers for Classroom Critters

2010-11-17T09:16:00.000-08:00

Today an article in the Times recounts the use of classroom clickers to engage students in large lectures. I particularly liked how students could foil their use as automatic attendance checks: just give it to your friend to bring in! But kidding aside, they seem like a useful tool to increase participation and learning. I gave Twitter a go this fall and it didn't take, probably because I didn't set up anything specific for students to use it for other than their own questions.

Brooks on psychology vs. rules in economics

2010-11-16T13:47:00.000-08:00

Today David Brooks writes about psychology, economics, and to what extent we can formulate detailed policies that produced desired macroeconomic results. I think Brooks was talking more about fiscal policy, taxing and spending, as opposed to monetary policy, but his thesis about psychological factors mattering could also apply to the latter.

I think he feels that some of modern macroeconomics, in particular the part that thinks that government spending actually increases national income rather than perfectly crowding out private activities, leads the left-brain wing of the left to advocate such policies. But Brooks feels that the net result can be different because of psychology; people presumably fear higher debt and future taxes, or the uncertainty about them, and reduce or put off their current spending.

Brooks probably has a point about policymakers' poor understanding of this or their poor communication to voters about it, or some mixture of both of those. But like everything in an opinion column, it cuts all kinds of corners, and it caricatures modern and historical macroeconomics.

Keynes, whose writing provide the backbone behind the idea that public spending might be a good idea when the economy is down, was actually really big on such "animal spirits" being important for the macroeconomy. There are also plenty of neoclassical economists who feel that expectations are important, consumers are smart, and that many won't get fooled by spending or tax cuts. But a middle-of-the-road view held by many economists is that fiscal policy is a good idea to try in such hard times, if for no other reason than to offset the effects of budget cuts at the state and local level. The stimulus package seems not to have worked extremely well --- but it probably did work to some extent, especially when combined with the rescue of the financial sector, a great success --- so it would be worth trying something different, like more tax cuts rather than spending. Temporarily extending the Bush tax cuts seems like an attractive option.

The debate over monetary policy now is a little mystifying to me. The Fed is trying to increase the availability of credit any way it can, in order to get investment but especially consumption back on track, but banks and other financial institutions aren't really cooperating. They're hoarding credit, inflation is very low, and there are few signs it is on the rise. Arguably the bigger danger is deflation, which would raise the real costs of borrowing and reduce it even further.

Immigration and jobs

2010-11-02T04:25:00.000-07:00

Tyler Cowen writes about immigration and its effect on domestic employment in a nice summary piece for the Times. He summarizes much recent work by Giovanni Peri at UC Davis, a solid researcher whom I met while at Berkeley in the 1990s.

Orszag and fiscal policy

2010-09-07T03:41:00.000-07:00

Peter Orszag, the former CBO and then OMB director, is now a contributing columnist for the NY Times. In his first column, he argues that the across-the-board tax cuts passed during the first term of George W. Bush, which are set to expire, ought to be extended for two years and then allowed to expire.

Aging and tenure

2010-08-16T06:47:00.000-07:00

The Times features a Room-For-Debate about hiring on the tenure-track at colleges and universities prompted by a Chronicle of Higher Ed piece that focused more broadly on the macroeconomy's impact on hires and leaves in academia.

I felt like almost all the contributors to the Times piece said the real issue was adjunct or part-time labor being increasingly substituted for tenure-track or full-time labor. Those who didn't took on the issue of whether the tenure system was a good idea or how it could be improved. Few had anything to say about the inflows and outflows per se.

CUNY is experiencing a wave of early retirements this fall, induced by financial incentives. But the majority of them seem to be among staff rather than faculty. What motivates faculty to become emeritus or not?

Mulligan points out that summer still happens

2010-08-13T12:30:00.000-07:00

Casey Mulligan's economix blog post asserts that labor supply is an important part of the labor market. That's hard to argue with, but it's also hard to swallow the evidence he offers as a particularly clear-cut reason why the "stimulus law is partly responsible for today’s low employment, precisely because so many of its components have eroded work incentives."

Mulligan show that seasonally unadjusted employment for 16-19 year olds has continued to jump each summer. His graph also shows that while the seasonal summer spike is still there, it too has fallen lower each year along with the rest of the monthly trajectory as the recession has taken its toll. (Or as anti-recessionary policy has created disincentives, if you like.)

I'm not surprised that the recession hasn't halted summers! Or put differently, summer activities. Something tells me that some moms and dads still ship their kids off to summer camp, where some of the workers are ... 16-19 years old. But there are probably fewer parents doing that than normal, because some are now unemployed and can spare the time themselves, or they're cutting camp costs out of their tightened budgets. Camp employment is surely not all of the spike among 16-19 year olds, but I'm not convinced that it's a pure labor supply effect, with idled teens facing a lower price of time (during the school year, the opportunity cost of working is skipping school!). It seems to me that there is probably a seasonal labor demand effect too, tied in to seasonality in preferences.

Greg Mankiw's take is that Mulligan offers a reason to eschew extreme Keynesianism (demand-driven everything) in favor of more of a synthesis view. It's hard to argue with that one, too!

I was surprised

2010-08-12T06:53:00.000-07:00

The Modern Love column in the Times featured an article about the "two body problem" in academia, where both partners are searching for tenure-track jobs simultaneously. I thought for certain that the author and her husband were going to split up in the end, but instead the story took an unexpected turn. I don't want to spoil it.

Academics are just obsessed with themselves, aren't we? But part of me wonders how common it may now be for dual-career spouses outside of academia to choose a two-city arrangement, at least temporarily. Or maybe it's just we academics who are completely out of our minds.

NEC, CEA, OMB: The Alphabet Soup of economic policy

2010-08-11T08:26:00.000-07:00

The OMB and CEA chairs are leaving, while the NEC chair is staying ... so what in blazes does that all mean?! For the nostalgia factor alone, Keith Hennessey's post on economic policy inside the Executive branch is a fun read, and it's also helpful for thinking about who does what and with how much of a consulting vs. advising role.

Thanks as usual to Greg Mankiw's blog for that cite, and to Ezra Klein's informal poll about the Laffer Curve. That's interesting on several levels, and definitely because it illuminates the different objectives one might have in mind when discussing an "optimal" tax rate. Does that mean, "revenue maximizing," as is typical in discussions of the "Laffer Curve," or does it mean "growth maximizing," which could easily be different?

Money & banking on the brain

2010-08-09T05:29:00.000-07:00

I've been prepping Econ 215, Money & Banking, for the fall, and I've got money on the brain even more than usual. The Fed Bank of Atlanta has a nifty "macroblog" with a recent posts about quantity theory, perceived uncertainty in inflation forecasts, and the Fed's policy since the fall of 2008 of paying interest on bank reserves.

Demographic change and grocery stores in Queens

2010-08-06T09:22:00.001-07:00

The WSJ reports on grocery stores around Flushing, Queens, where closures have apparently reduced the availability of one type of ethnic cuisine: Caucasian! The article reports that data from the 2008 ACS show nearly equal numbers of Asian Americans and whites in Queens community district 7, north of Queens College. But at least in some parts of Flushing, it's apparently become difficult to find cold cuts and bread on the store shelves.