Archive for the Category Misc.


Global growth

McKinsey sends me their global economic reports, which are also available online. This caught my eye:

Screen Shot 2015-03-11 at 4.16.14 PMHow is that even possible?  Here’s how:

Screen Shot 2015-03-11 at 4.20.31 PM

You can see that the horizontal box representing China is about the size of the beige triangle, representing global GDP when I was 9 years old.  America’s per capita GDP has more than doubled.  The biggest gains went to blacks, Hispanics and Asians (in the case of the latter two groups, partly because many were living in other countries in 1964.) But whites are also modestly better off.

Of course that’s not where the action is.  In 1964 China was about as poor as the worst basket case in the world today.  Poorer than India in 1964.  You can barely see the rectangle.  So if you wanted to explain to someone from outer space what happened to the world over the last fifty years, you’d say Asians got a lot richer. Everything else is a footnote.

Here’s another nice graph:

Screen Shot 2015-03-11 at 4.29.43 PMSo that group of countries will gain 347 million workers (2014-64), but India and Nigeria alone gain 408 million.  Again, China is the elephant in the room, losing a massive 152 million workers.

The next graph shows the uncanny similarity between India and Indonesia, both over the past 50 years and the next 50.

Be careful, however, they have South Korea growing 4.3%.  South Korea’s already a developed country, and even McKinsey admits their population will decline.  If they growth 4.3% over the next 50 years then I will be the next Pope.  Perhaps they confused the two Koreas—North Korea will probably be the fastest growing country in the world over the next 50 years.  Japan’s growth rate will be close to zero, not 2.1%.Screen Shot 2015-03-11 at 4.33.59 PM

The rising dollar will not impact US growth

Here’s a new headline from the Washington Post:

U.S. economy’s surprise risk: The dollar’s surge could weaken growth

The surging value of the U.S. dollar promises new bargains for American consumers and travelers but also presents big threats to the U.S. economy — in a trend that is shaping up to be one of the most unexpected and significant factors driving the global economy this year.

This is wrong, one should never reason from a price change.  There are 4 primary reasons why the dollar might get stronger:

1.  Tighter money in the US (falling NGDP growth expectations.)

2.  Stronger economic growth in the US.

3.  Weaker growth overseas.

4.  Easier money overseas.

In my view the major factor at work today is easier money overseas.  For instance, the ECB has recently raised its growth forecasts for 2015 and 2016, partly in response to the easier money policy adopted by the ECB (and perhaps partly due to lower oil prices—but again, that’s only bullish if the falling oil prices are due to more supply, not less demand–see below.) That sort of policy shift in Europe is probably expansionary for the US.

However NGDP growth forecasts in the Hypermind market have trended slightly lower in the past couple of months. Unfortunately, this market is still much too small and illiquid to draw any strong conclusions.  Things will improve when the iPredict futures market is also up and running, and even more when the Fed creates and subsidizes a NGDP prediction market.  But that’s still a few years away.  Nonetheless, let’s assume Hypermind is correct.  Then perhaps money in the US has gotten slightly tighter, and perhaps this will cause growth to slow a bit.  But in that case the cause of the slower growth would be tighter money, not a stronger dollar.

Does that mean exchange rate changes are never informative?  Not at all.  When we observe exchange rates change in response to monetary policy actions, then we can pin down the direction of causality.  Thus the dollar fell 6 cents against the euro on the day QE1 was announced in March 2009.  We’ve also seen falls in the yen and euro on QE announcements in Japan and Europe.  But you need to know why the exchange rate has moved before drawing any conclusions about causality.

As an aside, late last year there was talk that the huge fall in oil prices would be “like a tax cut,” boosting growth in the US. I was skeptical, and still am skeptical. It’s worth noting that falling oil prices did not raise the consensus forecast for RGDP growth during 2015, indeed forecasts fell slightly between last fall and early 2015, “despite” the huge plunge in oil prices:





Who do you trust, Kotlikoff or the market?

Larry Kotlikoff is an expert on the US budget.  He pioneered the accounting system that takes into account not just legal liabilities such as Treasury debt, but also entitlement liabilities such as Social Security.  Here’s a recent article discussing his views:

The U.S. has a $210 trillion “fiscal gap” and “may well be in worse fiscal shape than any developed country, including Greece,” Boston University economist Laurence Kotlikoff toldmembers of the Senate Budget Committee in written and oral testimony on Feb. 25.

“The first point I want to get across is that our nation is broke,” Kotlikoff testified. “Our nation’s broke, and it’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today.

“Indeed, it may well be in worse fiscal shape than any developed country, including Greece,” he said.

I do understand his point, but I’ve never quite bought the broader argument.  The bond market is clearly not concerned about US Treasury debt, whereas investors are rightly concerned about Greek debt—indeed Greece has already defaulted on a portion of its sovereign debt, so it is 100% “broke.”

I think the reason that markets are not too concerned about the US fiscal situation is that the entitlement liabilities can be adjusted at the discretion of the US government. For instance, in 1983 Congress scaled back future Social Security benefits, and various court cases have established that they have the right to do this.  Government spending is determined by the whims of Congress; if we have a shortfall in the future, we’ll spend less or tax more.

In contrast, corporations are assumed to be already maximizing profits.  So if they are unable to service their debt there is no obvious solution.  But if the Federal government spends 22% of GDP and taxes 19% of GDP, there is an obvious solution, indeed two obvious solutions, either raise taxes or reduce spending.

Does the Laffer curve argument factor in here?  After all, I’ve claimed that the US government may not be able to raise much more money than they are currently raising, as higher taxes would reduce GDP.  That’s why Europe raises about as much tax revenue as the US (per capita) despite higher rates.  The higher rates cause less work, which reduces GDP.  But that actually doesn’t matter for this argument, because if you raise tax revenue from 19% of GDP to 22% of GDP, while keeping spending at 22% of GDP, then you’ve balanced the budget, even if you don’t raise an extra dime of revenue from the higher taxes.

That doesn’t mean that the US does not face severe fiscal challenges, just that it’s unlikely that it would lead to the US defaulting, as we are not “broke.”

The market test also explains why I disagree with Tyler Cowen’s intuition on the effect of QE at negative interest rates.  The markets view QE as expansionary.  The market monetarist view is the market view. Whenever the market changes its view and becomes more Keynesian, or MMTist, or Austrian, or more new classical, I’ll change as well.

It’s hard to keep up with all the good stuff that people send me:

Travis V pointed me to a very good Noah Smith critique of Robert Lucas.

Saturos and ChrisA pointed me to a very good cartoon explaining how Janet Yellen could boost velocity.

Marcus Nunes pointed me to a post on the 1933 dollar devaluation, which is pretty good overall but contains two serious errors.  The author (who I believe is Eric Rauchway) repeatedly says FDR raised the value of the dollar in 1933, when he did exactly the opposite.  Perhaps he meant the price of gold increased.  He also suggests that Keynes approved of the destination of FDR’s policy.  That’s not quite right, as Keynes thought FDR overshot by about 20%.  He approved of the direction of change, and was relieved when FDR finally stopped the devaluation.  The policy was Irving Fisher’s, not Keynes’s.

I have a new post at Econlog.  I can already see that people misinterpreted the post.

Clear thinking about taxes

It’s clear from my comment sections that people just don’t understand taxes.  In this post I’ll try to explain a few basic concepts, so that we can have an intelligent discussion.

The biggest confusion is that people don’t understand why capital income should not be taxed, and why a wage tax is equivalent to a consumption tax.  Consider someone with $100,000 in income, who can choose to consume, or invest in a fund that will double in value over 20 years.  Suppose we want to raise revenue with a present value of $20,000, from this person.  We could have a wage tax of 20%, and raise $20,000 right now.  Let’s also assume that this person decided to spend 1/2 of his after-tax income—leading to $40,000 in consumption today, and save the other $40,000, leading to $80,000 in consumption in 20 years.  Note that both current and future consumption are reduced by 20% relative to the no tax case.

Alternatively, we could directly tax consumption at the same rate (say with a VAT). Let’s assume the person saved $50,000 and spent $50,000 on consumer goods.  After paying VAT they consume $40,000 today, and the government gets the other $10,000. After 20 years the $50,000 saved turns into $100,000, but you must pay $20,000 in VAT, leaving consumption of $80,000.  Exactly the same as with a wage tax.  The total revenue to the government looks bigger, but is the same in present value terms.

In contrast, an income tax doubles taxes the money saved, once as wages, and again as capital income.  So now it’s $40,000 consumption this year, and only $72,000 in 20 years ($80,000 minus 20% tax on the $40,000 in investment income), an effective tax rate of 28% on future consumption.  And of course with inflation the effective real tax rate is still higher.  Income taxes make no sense at all; if you want progressivity, tax big consumption more than little consumption.

People also get confused when we try to link these abstract concepts to real world aspects of the tax code, like IRAs and depreciation.  Consider the wage tax and the VAT tax discussed above:

1.  Wage tax = Roth IRA with no restrictions–pay when you earn

2.  VAT = 401K with no restrictions–pay when you spend

An unlimited Roth IRA would allow you to put all of your savings into IRAs, as would an unlimited 401k.  And you would not be forced to withdraw at retirement–you could have your heirs spend the money, and pay the tax.

What about depreciation?  Why should capital investment be expensed?  The IRAs I just discussed are financial investments.  But we know that saving equals investment, so there is a corresponding physical activity associated with financial saving.  Consider a simple example:

A utility spends $1 billion on a huge solar facility in the desert.  For simplicity assume they can sell $100,000,000 in electricity each year, and there are no there costs.  If we treated this like the 401k, the utility would deduct the expense of the initial construction from its current taxable income, just as you deduct money you put into a 401k.  But then they’d have to pay taxes on the full $100 million in annual revenue (unless reinvested), just as you must pay taxes on the full cash flow of your 401k (unless reinvested).  If the utility later sells the solar facility to another company, obviously the full sales price is taxable, just as money you withdraw from a 401k is fully taxable.

Note that even though you pay tax on money you withdraw from a 401k, this is not a tax on capital income; it is a deferred tax on labor income.

In principle, you could tax consumption, or you could tax all of GDP.  We’ve adopted a weird intermediate scheme, to tax GDP minus depreciation, sometimes called net income.  If there’s a rationale for this I’d love to hear it.  Now of course we don’t actually deduct depreciation, as it’s hard to know how fast assets are deteriorating in value, so we simply make up numbers, like a sliding 30-year depreciation schedule.  This is lots of busywork for accountants, with no practical value that I’m aware of.  I can think of two things that accountants might be interested in:

1.  Cash flow

2.  Value of a company’s assets

The later might involve “depreciation,” but it might just as well involve “appreciation,” especially in real estate.

If you allow companies to expense all investments, then you have essentially turned an income tax into a consumption tax.  (Unless I’m mistaken, that’s what Rubio/Lee is trying to do.)  If you allow no write-offs of depreciation at all, then you have a tax on GDP, or gross income.

I get hit from both the left and the right, both sides making errors:

1.  The left complains my proposal is too regressive, as it LOOKS LIKE income taxes would hit heavy saving rich guys more than a consumption tax.  But people only absorb the burden of a tax to the extent that it reduces their consumption.  If Bill Gates pays an extra $10 billion in taxes, and doesn’t reduce his consumption, but instead gives $10 billion less to the poor in Africa, then he hasn’t really absorbed the burden of this tax. Look, a country can’t consume more than it consumes.  Does anyone disagree with that?  But lots of liberals believe in the following combination of statements, which is logically impossible:

1.  Most Americans live right on the edge, consuming all their income.

2.  Rich fat cats have lots of extra income they don’t need, which could be given to average Americans.

3.  Lots of redistribution would not hurt investment.  OK, that means it won’t boost consumption.

4.  Even paying lots more taxes, the rich would consume almost as much.

So if the rich consume almost as much, and total consumption doesn’t change, how are the rest of us helped?  If all those things are true then it’s logically impossible for the average people to be better off, as we’ve assumed they consume all their income, and you’ve told me that aggregate consumption and investment don’t change.  Liberals simply aren’t thinking clearly about the true burden of taxation.  Gates and Buffett aren’t bearing the burden of the taxes they do pay, someone else is.

From now on liberal commenters must tell me why so many brilliant liberal economists have favored replacing income taxes with progressive consumption taxes, and what’s wrong with this argument.  If that can’t do so, I won’t respond to their complaints.

2.  Conservatives complain my proposed tax rates are too high.  I agree.  Let’s reduce loopholes and lower government spending.  But the GOP doesn’t want to do this.  And that means we need much higher tax rates than Singapore.  All that Medicare spending and military adventurism and no-child-left-behind from the Bush administration must be paid for.

Their second mistake is to confuse consumption tax rates with income tax rates.  Yes, a 50% income tax rate for the rich is too high.  Hell a 1% income tax rate for the rich is too high.  But a 50% marginal consumption tax rate for the rich is not too high, given the amount of revenue we need to collect.  Also recall that the rich don’t pay payroll taxes above about $120,000 or so, and they pay relatively little tax on gas, booze, cigarettes, etc.  But again, convince the GOP and Dems to reduce the size of government, and I’m all for lower MTRs.

Another mistake is to complain that some plans are hard to enforce, because of tax evasion.  Yes, but that’s equally true of YOUR plan.

1.  If we go the wage tax route, tax should be paid on all cash and financial assets you receive from the company you work for.  Period.  If you’ve paid taxes on the fair market value of company stock that you get in year one, then no more tax should be paid if the stock later appreciates.  I understand that people will look for loopholes AS THEY ALREADY DO, but the IRS needs to do the best job it can.

2.  If we go the VAT route, then you must distinguish between consumption and investment.  I propose all business meals be treated as consumption.  Ditto for company cars that can be used off hours.  For air travel, it should be the difference between actual cost of travel and an economy class ticket.  The extra luxury is consumption.

Arguments over “who pays” are usually ill informed.  People simple assume that just because big corporations write out checks to the IRS, that corporations must be bearing the burden of the corporate income tax.  Well cigarette companies write out big cigarette excise tax checks to the government, does than means smokers don’t pay? The fact is that no one knows who ultimately bears the burden of the corporate (and to a lesser extent personal) income tax.

In a better world both parties would agree on an efficient tax regime, and then fight over progressivity.  When the GOP won elections they could cut taxes, and when the Dems won elections they could raise taxes.

In a better world.


Who’s afraid of the great outdoors?

At age 59 I’m discovering what makes people become reactionaries as they grow older. You see cultural change and miss the culture of your youth.  Today I’ll talk about the outdoors, which seems to be gradually receding in importance.

When I was in high school I used to take off Tuesday and Thursday afternoons to going biking in the countryside.  When I reached my 30s I began to hear stories of students doing extracurricular activities just to get into good colleges.  It seemed like the most ridiculous thing I’d ever heard of.  Free time was for play.  In 1972 we were actually told NOT to study for the SATs.  Even 8 years ago I used to go on long walks in the late afternoon, looking at the wonderful residential architecture in Newton.  Now I spend almost all of my time indoors, in front of the computer.  I wonder if this is increasingly true of society as a whole.

When I was young I viewed my (boomer) generation as much healthier than my parents’ generation.  Middle age people had no interest in biking, jogging, health foods, etc.  And yet it was our generation that became obese, not them.  I recently did a post on a tropical paradise that no one wanted to move to.  Back in the 1960s and 1970s there was a real back to nature movement, where hippies idealized a cabin in the woods.  Now it’s back to the inner cities.

Tyler just linked to an article about the rapid decline in golf:

The game — with its drivers, clubs, shoes and tee times — is expensive both to prepare for and to play. It’s difficult, dissuading amateurs from giving it a swing, and time-consuming, limiting how much fans can play. Even what loyalists would say are strengths — its simplicity, its traditionalism — can seem overly austere in an age of fitness classes, extreme races and iPhone games.

Graph the rise of the iPhone against the decline of golf.  I know this is going to sound strange, but I found the following bit in The Economist to be incredibly depressing, one of the saddest things I’ve read in years:

But overall, a pastime dominated by older, white, rural men is on the wrong side of demographic forces upending so many aspects of American life, from pop culture to politics. And it is not just grey hair that worries those in charge of the sport.

Wisconsin, a hunting-mad corner of the Midwest, makes a good case study. Wildlife officials there joke that folk in their state revere God, the Green Bay Packers football team and deer-hunting, and not necessarily in that order. At the peak of the season, on the weekend before Thanksgiving, 100,000 white-tailed deer may be killed in Wisconsin’s woods. The state offers ponds thick with duck, soft southern dairylands full of game, and—in the north—wilder woods where bear and wolves prowl.

Yet even in Wisconsin there has been a 10% drop in licences to hunt deer with guns since numbers peaked in 2000. Worse is to come. A recent state-sponsored demographic analysis predicts a 27% fall in gun-licence sales over the next 20 years.

The trend that most troubles Wisconsin officials is a sharp loss of interest among middle-aged, male deer-hunters. They used to be the bedrock of hunting, recruiting their children into the sport and heading into the woods for an annual “deer camp” in autumn: they would meet up with fathers, brothers and cousins for a week of shooting, beer-drinking, card-games and tall tales round the campfire. In 2012 the state’s Department of Natural Resources (DNR) commissioned an academic study of Wisconsin hunters who had stopped buying gun licences, involving thousands of questionnaires and multiple focus groups. Behind its unpromising title—“Why fewer middle-aged gun-deer hunters bought licences in 2010 and 2011”—lurks a novella’s worth of familial angst and male soul-searching.

A divorced father sees his children every other weekend: he is not about to park them with a babysitter just to go hunting. The economic and social power of wives is much discussed: the days are gone when men could head to the woods for a week without a qualm, confident in their supreme authority as breadwinners. The anonymous quotes ring with hurt, guilt and bafflement: the sound of men struggling with a world that has turned maddeningly complex and touchy-feely. Hunters describe Chekhovian family rows—pitting young against old, insiders against newly arrived in-laws—over who got to shoot which deer, one mournfully reporting that at the end, “The ladies all hollered at me.”

I grew up in Wisconsin and recall many very thoughtful, kind, highly intelligent deer hunters.  And yet it’s clear to me that history is written by the winners, and that hunters will lose in the end.  The urban sophisticates will mischaracterize them as drunken yahoos.  Even worse, the state I remember growing up in is gradually disappearing.  I used to tell people that Wisconsin schools NEVER close due to cold or snow, and that we’d walk 2 miles to school in 20 below zero weather (28 below C).  But now I’m told even Wisconsin occasionally closes it schools.  People used to be very friendly—since Scott Walker people stopped have talking to their neighbors.

Notice that one factor in the decline in hunting is that dads need to be with the kids. What happened to kids playing on their own, as we did?  This is what happened:

A slim majority of Americans, 53 percent, say it is okay for 12-year-old children to play at a public park without adult supervision. Women are 12 points more likely than men to say 12-year-olds should be supervised at public parks. And majorities of households with incomes less than $30,000 a year (56 percent) and Americans with a high school education or less (52 percent) think government should require 12-year-olds to be under supervision. In contrast, nearly seven in 10 of those making more than $90,000 a year, and 67 percent of college graduates say supervision isn’t necessary.

I’m not sure which is more mindboggling, that 47% of parents think 12 year old kids shouldn’t be able to play in a park without adults, or that the “helicopter parent” phenomenon is most prevalent among low income people.  By the way, 68% think it should be illegal for 9 year olds play in a public park without adult.  Who are these people?  I’ve meet a couple families from Europe that just roll their eyes at American attitudes toward children being left alone.

[As an aside, I’ll bet that poll questions of “should people do X” and “should people be legally allowed to do X” would generate very similar numbers for a wide range of issues, even though the questions are radically different.  That’s one reason I don’t trust public opinion polls.]

Where I live in Newton I see almost no children out playing, but they do all have smart phones.  My daughter’s relationship with the outdoors is so different from what mine was that she might as well be growing on a different planet.  Just to be clear, I’ve always believed it’s up to the young to run the planet as they wish, and that the older generation should step aside and let the culture change.  I’m glad the younger generation has embraced things like gay marriage.  I mourn the loss of the old way of interacting with nature, but I don’t want to try to stop change.

One lesson here is that many of the things you hold dear, including moral values, will be rejected by future generations.  Just as the views of older people toward gay marriage now seem neanderthal, the views of young hip urban liberals will seem hopelessly reactionary a century from now.  The lesson is that we should be less condescending toward people with different views.  As a general rule, conservatives look down on people living in different parts of the world, whereas liberals look down on people who lived in the past.  Both are understandable but regrettable forms of bigotry. Just remember that future people might look down on your enjoyment of watching a Redskins football game while eating a bbq pork sandwich just as much as you look down on hunters, and just as much as the hunters I knew looked down on 19th century men who thought that dueling was a respectable way to settle disputes.

Hey, it was their world, not yours.

PS.  I strongly dislike the way that many upper class intellectuals (on both the left and right) tell us what is “wrong” with working class culture.

PPS.  And no, the crime rate was not lower back then.

Update:  After writing this I came across Karl Knausgaard being asked about his children:

Are you optimistic about the world they’re growing up into?

Yeah, I do. There is a German writer who said that every generation has the key to their own time, which I think is true. It’s exciting to just send them out into the future – and then it’s up to them, really.

HT:  Gordon