Archive for the Category Misc.


The Greatest Stagnation

There are lots of Great Stagnations, all over the world.  I recently did a post on the situation in the US, and Tyler Cowen did one yesterday about Europe.  But compared to Japan, the US and Europe are enjoying Chinese style growth.  The modern world has never before seen a great stagnation quite like Japan.  Not that we haven’t seen horrible GDP numbers before, but never quite in these circumstances.  Let’s review:

1.  In the 1st 4 quarters of Abenomics (i.e. 2013), RGDP grew by 2.4%, which we now know was a flat out boom.  Inflation rose into positive territory and the unemployment rate fell from 4.3% to 3.7%.

2.  From the 4th quarter of 2013 to the 2nd quarter of 2015 the Japanese economy grew by a grand total of 0.1%.  And the unemployment rate continued to fall, from 3.7% to 3.4%.  That’s right, over the past 6 quarters the Japanese economy has been growing at above trend.  But that blistering pace can’t go on forever.  The unemployment rate is down to 3.4%, and unless I’m mistaken there is a theoretical “zero lower bound” on unemployment that is even more certain than interest rates. The Japanese economy is like a Galapagos tortoise that has just sprinted 20 meters, and needs a long rest.

Why is the unemployment rate falling when the economy is not growing?  Partly because the working age population is now falling at 1.4%/year.  But it seems to be more than that.  I don’t have the exact figures, but I believe Japanese total employment is up about 1% over the past 6 quarters, which suggests that productivity is trending downwards.  Or maybe their GDP is growing, but it’s all that free stuff on the internet that doesn’t get counted. Who knows? All I can say is that the statistical methods for measuring growth, and the rules of thumb about normal growth and business cycles, do not apply to 21st century Japan.  We are in are new world where growth no longer seems inevitable, almost effortless. Italy’s there as well.  Portugal and Greece may well be there too.  I wonder what Greece’s total growth will be from 2007 to 2027?  Maybe 0.1%?

Yes, there are still developed places like Singapore and Australia that have decent trend growth (although both are slowing), and the US still has a bit of growth left. But baring a miracle where Jeb Bush is elected and actually enacts his program . . . no that’s too far-fetched to even talk about. Nevermind.


There is no such thing as public opinion, example #421

A headline from Variety:

Study: Audiences Want Metal Detectors in Theaters, But Won’t Pay Extra

Fortunately the study shows exactly the opposite; the public doesn’t want metal detectors in movie theatres.  But it’s still rather frightening that 34% of the public does claim to hold that rather insane opinion. The “won’t pay extra” is a nice little cherry on top.  Let me guess; that same 34% wants a $15 minimum wage, but “won’t pay extra” for Big Macs.

PS.  In Switzerland a referendum for a $25 minimum wage actually got 24% of the vote.  My theory of public opinion polls is that there is almost no question so crazy that it won’t get at least 20% support.  And if it doesn’t (say legalizing hard drugs) it’s probably a good idea.

Further thoughts on Paul Romer

I did a post over at Econlog, discussing Paul Romer’s recent crusade against academic malfeasance.  It turns out that I didn’t do my homework, relying solely on Romer’s numerous blog posts on the subject.  Now that I’ve had a chance to read rebuttals by people like David Andolfatto and Stephen Williamson, I’m a bit more skeptical of Romer’s project (and I was already pretty skeptical in the Econlog post.)  But it was this remark by Nick Rowe that really set me off:

Paul Romer might like my old post “Macroeconomics when all goods are non-rival“, (even though it’s short run macro and not growth theory like he does). And I was doing (short run) macro with monopolistic competition (pdf) (a couple of months) before it was fashionable. So it’s especially silly (not to mention intolerant of disagreement) for him to make this accusation of me: “After twenty years of playing whac-a-mole with the die-hard price-taking neo-Marshallians, I can tell you exactly where the argument will go next. When the choices are stated as clearly as Dietz does, the neo-Marshallians will claim that there is no such thing as a nonrival good. Nick Rowe has already started laying down a smoke screen of obfuscation on this point.” Nope. He got that one totally wrong, on both counts.

And that sort of response doesn’t create a productive environment for new ideas. People need space to muse over old and new ideas, without the authorities making nasty accusations about their motives.

If you are going to be rude and obnoxious to an economist with lower academic status, you might at least try to avoid being laughably wrong.  For those why don’t know, to call Nick Rowe a “die-hard price-taking Marshallian” is about as silly as calling Milton Friedman a die-hard Keynesian.  In this case, Paul Romer literally doesn’t know what he’s talking about.

Paul Romer is a brilliant economist, but like a certain other brilliant economist blogger, when he takes a stab at trying to evaluate the motives and quality of his fellow economists, he quickly becomes a very ordinary human being.  (Maybe that’s an unfair comparison, I haven’t seen Romer claim that Donald Trump might win the nomination.)

Here’s the latest from Romer, posted yesterday:

Faced with macro fluctuations, there are some policies, such as providing support for cartels, that the government should not try. There are other policies, such as countercyclical purchases of construction services, that it could safely try. After all, it is hard to see the harm that could come from buying more when the price is low. If economists stick to the well established methods of science, it shouldn’t be that hard to tell the difference.

There is no reason to stifle the development of new lines of theoretical or empirical inquiry out of fear that some terrible harm will ensue. If economists stick to science, the insights that are wrong will fade away. Only the ones that are right will having lasting influence. Sticking to science means both paying attention to scholars who are exploring new paths and refusing to pay attention to breakaway groups. No matter what they say, when they stop engaging with outsiders who disagree, they stop doing science.

Hard to see the harm?  So are we now to believe that “the well-established methods of science” means making the simple error of reasoning from a price change?  No, there is nothing in economic theory that says that more construction should be done when the price is low.  That would be true if the price is low because there is more supply of construction services, but not if the low price is caused by less demand for construction services.  And at least since 2008, the fall in the cost of construction services is almost certainly do to a decline in demand.

After 2008, there was a virtual collapse in housing construction across the US.  If governments had responded to that development by building lots of roads, sewers, schools and other projects in the desert outside Phoenix, I don’t think it would have been a wise use of resources.  Military construction?  What’s the marginal value of spending another trillion dollars on jet fighters, when our primary enemies are ISIS and Al Qaeda?  How about high speed rail?  That’s fine in theory, but because of environmental red tape those projects take at least a decade to be “shovel ready”, by which time the recession will be over.  In fact, government investment should have declined after 2008, as the small areas where an increase would have been useful (say filling potholes) were nowhere near substantial enough to offset the drop in construction of infrastructure for new housing developments that quite sensibly occurred in the sunbelt.  So a claim that seemed patently obvious to Romer is in fact very likely wrong.

PS.  This post has nothing to do with Romer’s dispute over the right way to do growth theory.  I’m not well informed on the issue, and suspect that if I was I wouldn’t agree with either Romer or his UC school opponents.  I don’t think mathematical models are very useful in economics, with a few exceptions.  For me, Friedman and Schwartz’s Monetary History is a model (at least in term of method) of what macroeconomic research should be.  So both Romer and Lucas are too mathematical for my taste.  I was deeply influenced by Lucas, but it was by his verbal arguments.

PPS.  I just found out that Romer was at the UC at the same time as I was.  We both had Lucas advise our dissertation.  He’s one month younger than me.  And yet I don’t recall ever meeting him.  Possible reasons:

1.  Perhaps he was a high status student; I was definitely not a high status student.

2.  It was a very big program.

3.  I have a poor memory (so perhaps I did meet him, and don’t recall.)

Recent links

It’s becoming increasingly difficult to keep up with all of the stuff I should be reading, but here are a few links I noticed after returning from vacation.

David Glasner has a very good post on NeoFisherism, and I especially like his conclusion:

But the problem for monetary theory is that, without a real-value equivalent to assign to money, the value of money in our macroeconomic models became theoretically indeterminate. If the value of money is theoretically indeterminate, so, too, is the rate of inflation. The value of money and the rate of inflation are simply, as Fischer Black understood, whatever people in the aggregate expect them to be. Nevertheless, our basic mental processes for understanding how central banks can use an interest-rate instrument to control the value of money are carryovers from an earlier epoch when the value of money was determined, most of the time and in most places, by convertibility, either actual or expected, into gold or silver. The interest-rate instrument of central banks was not primarily designed as a method for controlling the value of money; it was the mechanism by which the central bank could control the amount of reserves on its balance sheet and the amount of gold or silver in its vaults. There was only an indirect connection – at least until the 1920s — between a central bank setting its interest-rate instrument to control its balance sheet and the effect on prices and inflation. The rules of monetary policy developed under a gold standard are not necessarily applicable to an economic system in which the value of money is fundamentally indeterminate.

Viewed from this perspective, the Neo-Fisherian Revolution appears as a kind of reductio ad absurdum of the present confused state of monetary theory in which the price level and the rate of inflation are entirely subjective and determined totally by expectations.

I’ve also argued that NeoFisherism exposes important gaps in the New Keynesian model.

Kevin Erdmann has another of his excellent posts on the US housing bubble.  Here’s an excerpt:

From the end of 1997 to the home price peak in early 2006, home prices nationally rose about 110%.  Rent rose 30%, which was 10% more than core CPI.  So, about 1/3 of that rise was simply reflected in experienced cash flow increases.  The required yield fell from 4.1% to 3.2%.  That corresponds to an increase of just under 30% in price/rent.  So, about 1/3 of the rise in home prices can be attributed to falling yields.  And, persistent rent inflation pushed cash yields down from 3.2% to 2.4%.  That corresponds to an increase of  just over 30% in price/rent.  So, about 1/3 of the rise in home prices can be attributed to persistent rent inflation.

Two-thirds of the rise in nominal home prices came, then, from rent.  And, rent continues to rise now that we are past the recession.  I think this demonstrates two ideas.  First, we don’t need a speculative frenzy to explain the 2000s housing market.  The rising rents were done.  They happened.  The yields were falling in line with long term TIPS yields.  And expectations of rent inflation were justified by past and subsequent developments.  The rising prices in the 2000s housing market reflect reasonable, income-based long term investing.

In my view the crackdown on immigration slowed the housing market in 2006, especially in the 4 subprime states.  But I’m increasingly persuaded by Kevin’s argument that prices were not far out of line, and that it was primarily tight money that depressed the housing market, especially after 2007.  Suppose NGDP had kept rising at 5%/year—where would home prices be today?

Like Kevin, Mark Sadowski likes to do long series of posts on a given topic.  He has one set of posts (over at Marcus Nunes’ blog) on VAR studies of QE.  Here’s a portion of his concluding post that summarizes the series:

Modern applied macroeconomic models of the liquidity trap usually rely on some version of the David Romer’s ISLM/ISMP model.

If expected short-term real interest rates cannot be lowered to a level prescribed by some version of a Taylor Rule, the only way to increase real output is by increasing inflation expectations. This is because the central bank can only determine the level of real output through changes in the expected short-term real interest rate.

But as we have seen here there is really is no monetary transmission channel that works primarily, much less exclusively, through expected short-term interest rates. Thus any model that relies on the supposed inability of the central bank to lower expected short-term interest rates to demonstrate the ineffectiveness of monetary policy is guilty of assuming its conclusion.

Central banks usually target short term interest rates as an instrument of monetary policy not because there is any credible mechanism by which they directly and significantly impact the economy, but because 1) they are quickly and accurately measurable, 2) the central bank can exercise a great deal of control over them, and 3) because changes in them usually lead to reasonably predictable outcomes in terms of policy goals. These qualities may make short term interest rates convenient as an instrument of monetary policy away from the zero lower bound, but they should in no way cause us to confuse short-term interest rates for the actual mechanisms by which monetary policy is transmitted.

Marcus also hosts other market monetarists, such as Benjamin Cole and (more recently) James Alexander.

And this essay on regulation by John Cochrane might be the best post I’ve read all year (with the exception of Scott Alexander posts.)

PS.  Don’t forget that I also do posts at Econlog.  My latest is on Paul Romer’s criticism of the Chicago School, and before that I do one on the superiority of markets over policymakers–they don’t mind admitting error.



Letter to the NYT, etc.

My posting will be relatively infrequent for the next couple of weeks. I just returned from DC, where I finally got a chance to meet John Cochrane.  He’s taken a position at the Hoover Institute.  Although we disagree on sticky wages, we have uncannily similar views on a wide range of other issues, such as immigration, health care reform and financial system reform.  I also got a chance to meet quite a few of the Mercatus scholars, and came away very impressed with the organization.

[BTW, the acronym for the new monetary program is POMP (Program on Monetary Policy.)  My enemies are thinking, “I always knew Sumner was a pompous ass.”  Or perhaps “pomp” indicates that it will eventually be regarded as the queen of the monetary policy programs.]

Over at Econlog I have a post on Krugman’s recent minimum wage column. Caroline Baum (you’ve probably seen her columns at Bloomberg, and elsewhere) responded to the column with a letter to the NYT.  They didn’t print it, so I thought it would be a good idea to post it here.  The rest of the column is her letter.  I request that commenters be more polite than usual.  I don’t mind obnoxious comments, but let’s please treat her as a guest—if you disagree, do so respectfully:

To the Editor:

In his July 15 op-ed, “Liberals and Wages,” Paul Krugman states definitively: “There’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” In support of his no-evidence conclusion, he cites a widely discredited 1994 study by economists David Card and Alan B. Krueger.

So flawed was the study – it relied on telephone surveys of fast food restaurants in neighboring counties in New Jersey and Pennsylvania after New Jersey raised its minimum wage – that Card and Krueger were forced to redo it. Using official employment data the second time around instead of a telephone survey, they re-published their findings in 2000, claiming similar results to the first study.

Economists who have reviewed the body of literature on the effect of an increase in the minimum wage have criticized both the methodology and the results of the second Card/Krueger study. David Neumark and William Wascher, both widely respected for their work in the field, cite the vastly different patterns of teenage employment in the two states that pre-dated the study, disqualifying Pennsylvania as a good “control” group. They also find that the depressing effect of a minimum wage hike on employment occurs with a lag, not within Card/Krueger’s short-term time frame. (Neumark and Wascher’s study can be found here:

What’s more, unlike a randomized controlled trial for a new drug, Card and Krueger have no way of measuring what would have happened to fast-food employment in New Jersey absent a minimum wage increase.

It is disingenuous for Mr. Krugman to ignore the wide body of evidence demonstrating that an increase in the minimum wage deprives entry-level workers of an opportunity to enter the workforce. Instead he relies on the findings of an outlier study that contradicts basic economic theory. An increase in the price of any good or service, including labor, results in a decrease in demand for it.

No one will argue with Mr. Krugman’s point that paying workers a higher wage and providing good benefits increases employee loyalty. Businesses choose to do it all the time. Henry Ford didn’t double his workers wages to $5 a day in 1914 because he wanted them to buy Model T’s. He paid his workers more because he wanted to reduce turnover on the assembly line, which proved to be a hard, unappealing line of work.

When the government mandates a floor on wages, many low-margin businesses can’t absorb the higher costs and raise their prices. Even high-margin businesses pass the cost along to their customers.

The New York Times does a disservice to its readers when it allows a Nobel prize winning economist to dissemble to make a political point. Progressive economists may argue in favor of a minimum wage on compassionate grounds, but they all understand the economics of supply and demand. The non-partisan Congressional Budget Office reported last year that raising the federal minimum wage to $10.10 an hour from the current $7.25 would eliminate 500,000 jobs nationwide. (Currently 29 states have minimum wages higher than $7.25.)

And yes, a higher minimum wage is great for those who keep their jobs. But it’s an impediment to those starting out in the workforce.

Mr. Krugman is entitled to his own opinion; after all he writes opinion pieces. But he is not entitled to his own facts. As an opinion writer myself for three decades, my work is always fact-checked for accuracy. Perhaps the Times should make accuracy in support of opinions a priority.

Caroline Baum

West Tisbury, Mass.