Archive for January 2014


Krugman vs. Barro

Paul Krugman has come in for a lot of criticism for this comment:

But if you follow right-wing talk “” by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro “” you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

Especially because his textbook says that UI is a disincentive to work.  I tend to agree with Robert Barro’s argument that extended UI benefits will raise the unemployment rate. However in this case I’m going to defend Krugman against Barro and Bob Murphy and Russ Roberts and David Henderson and lots of other guys I often agree with.  Here’s my problem with Barro’s article (or at least the version I found, I’m blocked from the WSJ.)  Barro correctly points out that there isn’t any good evidence of more transfer payments boosting GDP, and thus he’s very skeptical of the multiplier.

But in mocking “aggregate demand,” Barro never really says whether he agrees with people like Milton Friedman and Robert Lucas, who have argued that a big drop in NGDP will raise unemployment, or whether he disagrees with this view.  He simply dodges the issue.  But it’s a really important issue, as in my view the evidence for the claim of monetary offset (fiscal stimulus doesn’t boost NGDP) is 100 times more powerful than the view that AD doesn’t matter (i.e. more NGDP fails to boost RGDP.)  It’s especially disappointing because I recall an earlier Barro piece on fiscal stimulus where he said something to the effect that if falling AD is the problem then just print more money (I’ve forgotten the exact words.)

I’ve noticed an increasing tendency for people on the right to dodge the issue of whether nominal shocks matter.  And this is why I increasingly identify with people like Irving Fisher and Milton Friedman, but with hardly any living economists.

I suppose it’s possible that Krugman is sending a dog whistle to his liberal readers that Barro is a big bad conservative who thinks poor people are lazy.  But as I read the Krugman comment the plain meaning seems to be that Krugman was complaining about his views (that AD matters) being ridiculed by Barro, whereas as Krugman correctly points out the vast majority of economists do believe AD matters.  Barro didn’t literally say “Hahahaha” but he used metaphors like “bloodletting” that gave that impression.

Maybe I’m being too generous to Krugman, but when I saw that post I simply didn’t see the unfairness that others see.  Krugman always writes in an aggressive style, which in my view made other conservatives misinterpret him this time.

In other news, a man was just caught biting a dog.

PS.  I’m guessing other conservatives won’t buy my argument.  Here’s Russ Roberts:

How do you write a post on unemployment benefits without conceding the possibility that your opponents might be right, given that you have made a similar argument to theirs?

I don’t think Krugman’s post is about UI; I think it’s about AD.  The post is actually directed at what he sees as conservative denial that AD matters.  Krugman is just using UI as an example, but the real focus is on AD.  He’s trashing Barro for his views on AD, not his views on UI.   I think that’s why other bloggers had a different view.  The key phrase is “self-evidently absurd.” Krugman’s not unhappy that Barro has a different view on UI, he’s unhappy because Barro completely denies the importance of AD, and if you do that then Krugman’s view on UI would be self-evidently absurd. So AD is the real issue that bugs Krugman here.  Krugman’s not saying Barro’s view on UI is crazy; he’s saying the reasoning process (AD doesn’t matter) is crazy.  I’m not sure Barro actually believes AD doesn’t matter (my earlier NGDP/RGDP question), but he left that impression.

PPS.  With so many differing views we need a neutral observer here.  Josh?

Angry bear needs to be sedated

Now that one of Robert Waldmann’s reckless charges has been shot down, he makes an even more absurd charge:

Are you saying that Sumner cut and pasted a graph made by someone else without citing the person who actually made the graph ?  That seems to me to be rather serious misconduct.

The title of O’Brien’s piece was “The Most Important Economic Stories of 2013″”in 44 Graphs”  So stories of 2013 not Graphs published in 2013. – See more at:

Two more swings, and two more misses.  Normally I don’t quote private emails, but in this case I can’t imagine Matt O’Brien objecting.  Here’s the request he sent me:

We’re putting together our favorite charts from our favorite people, and were hoping you could send one in. Basically, whatever you think was the most interesting or important or insightful chart of the last year, and a few sentences explaining why.

If you have the time, we’re trying to get these together by Monday night. Thanks!

So they requested my favorite graph from last year, not my favorite chart with data from last year.  But in any case, the chart I sent does show results that hold up pretty well in 2013, as the US continued to outperform the eurozone by a wide margin.

Oh, and about my failure to cite the person who made the graph, here’s the email I sent Matt in reply:

This David Beckworth post has a nice graph.  The US and the Eurozone did roughly equal amounts of austerity.  But the US had some unconventional monetary stimulus whereas the eurozone raised rates several times in 2011 to slow inflation.  David has a graph that shows the results of this natural experiment:

So in a short email I only mentioned David’s name twice.  Yup, I guess that shows I was trying to take credit for David’s work.

To say that 2014 has not been a good year for liberal bloggers would be like saying 2013 wasn’t a good year for the Syrian people.  What a train wreck over there.

PS.  I have a new post on inequality over at Econlog.

HT:  Mark Sadowski

Mike Konczal and Robert Waldmann don’t seem to know what “year-over-year” graphs mean

Robert Waldmann quotes from a Mike Konczal post that has already been discredited.  Even Paul Krugman has the good sense to avoid adopting Konczal’s losing argument.  So it looks like I’ll have to shoot it down one more time.

When you have growth rates expressed as quarterly year-over-year changes, it shows a lagged growth rate.  Thus the 2013:1 y-o-y growth rate is actually the economic growth from 2012:1 to 2013:1.  That means it is basically showing growth that occurred in 2012.  To be more specific, roughly 5/6th of the y-o-y growth for 2013:1 occurred in calendar 2012.

Now let’s suppose we are going to look at the effects of the big tax increases of 2013, including an extra 2% on payroll taxes that Krugman insisted was very important, as well as the spring of 2013 sequester and other cuts. What does 2013:1 y-o-y growth tell you?  Almost nothing.  The ideal would be to average 2013:4 and 2014:1, to get a point estimate of end of 2013 GDP.  Then do the same for an estimate of end of 2012 data. Then compute the rate of change.  We don’t even have the data yet to do that, and won’t until late April.  But the data we do have suggests that the market monetarist model was almost certainly supported by 2013 data.

Mike Konczal seems to think it is important that David Beckworth used a year-over-year graph for a completely different purpose, and that I endorsed this graph.  So what?  Unlike Konczal, Beckworth was looking at multiyear changes, where a y-o-y approach is much more valid.  And even if he had misused the graph, what possible difference would that make for the 2013 test of MM?

Waldmann notes:

I can’t help thinking of whether Konczal’s criticisms amount to a credible accusation of impropriety.

I’m seeing impropriety all over the blogosphere, but people like Robert Waldmann and Noah Smith don’t seem to know how to recognize it.

PS.  Waldmann also criticizes Beckworth’s graph for not including 2013 data, but as Mark Sadowski points out in the comments, the graph was posted before the release of 2013:1 GDP data.

I welcome “abrupt policy adjustments”

Here’s an interesting report on unemployment:

The concurrent decline in labor force participation, however, has prompted many assertions that unemployment is falling “for the wrong reasons” “” i.e., the unemployment rate is falling because unemployed Americans who can’t find work are becoming discouraged and dropping out of the labor force.

This idea has had profound implications for Fed policy.

Fed officials have sought to de-emphasize the decline in the headline unemployment rate “” previously considered a key input to policy decision “” suggesting it does not reflect the true health of the labor market. This orientation toward the labor market is being used as a justification inside the Fed for continued extraordinary monetary stimulus. 

Yet contrary to this popular narrative, the data suggest that the vast majority of the decline in labor force participation in recent years can be accounted for by the retirement of the “baby boomer” generation of American workers.

Consider the findings of a recent study by  Shigeru Fujita, a senior economist at the  Federal Reserve Bank of Philadelphia, titled “On the Causes of Declines in the Labor Force Participation Rate.”


Reasons for leaving the labor force

Federal Reserve Bank of Philadelphia, BLS

Reasons for leaving the labor force can be broken down into three categories: retirement, disability, and “other.” The “other” category is made up partly of discouraged workers. The chart illustrates that in recent years, retirement has been the primary driver of the decline in labor force participation.

Fujita demonstrates that “discouraged workers” only made up about a quarter of those leaving the labor force between 2007 and 2011, while “t he decline in the participation rate since the first quarter of 2012 is entirely  accounted for by increases in nonparticipation due to retirement.”

So far I am 100% on board with this “hawkish” article.  But then they begin to lose me:

If this is in fact the case, the current headline 6.7% unemployment rate may indeed reflect the true health of the labor market, the inflation the Fed is trying so hard to stoke may be a lot closer at hand than it expects, and the central bank risks falling behind the curve with regard to policy.

I see little risk of that happening, at least under the Evans Rule.  Remember, under the Evans Rule the Fed also looks at inflation.

The counterargument is that a wave of discouraged workers will re-enter the labor force as the job market improves, sending the labor force participation rate “” and therefore, the unemployment rate “” higher again.

Such developments would perhaps constitute a proper justification for continued zero-interest rate monetary policy, in line with the Fed’s projections, which imply no rate hikes for nearly two more years.

Nope, the real argument is that even under the assumption of this hawkish article we still have several millions of unemployed workers who need to find jobs.  There is still an output gap.  What’s their counterargument?

“Should we really be concerned about the Fed  being ‘behind the curve’ given that a rebound in participation should be  forthcoming with a rebound in the economy?” asks Drew Matus, deputy chief U.S. economist at UBS, in a note to clients.

Matus implies that the answer is yes.

“Although we believe that  there could be a modest cyclical rise in participation as the economy  improves, we believe the likely scale of the increase will not  significantly alter the basic equation,” he says.

“Payroll growth averaging 200,000  per month should continue to pull down the unemployment rate under all  but the most aggressive labor force expansion estimates.”

All of this suggests that labor market conditions are tighter than the popular narrative about the “accuracy” of the headline unemployment rate would have you believe.

If that is the case, the inflation that has thus far been elusive in this economic recovery may be closer than the consensus expects, especially if the unemployment rate continues to plummet toward the Fed’s estimated range of the unemployment rate in the long run between 5.2% and 6.0%.

The Fed should heed the message being transmitted by the headline unemployment rate if it wants to avoid the need for abrupt policy adjustments as the economy continues to improve.

We should welcome an “abrupt policy adjustment.”  It’s much better to get to full employment in one year and then abruptly adjust policy to keep NGDP rising along a 4.5% trend line, than it is to have a gradual recovery that asymptotically approaches full employment over many years.  Which has been the actual policy since 2009, in case anyone didn’t notice.

Despite my objections this is a very informative article, and should be read by all my fellow “doves” who believe there is a hidden army of 20 million unemployed just itching to get back to work.  There isn’t.  But 3 to 5 million excess unemployed for demand-side reasons is still a tragedy.  After we re-employ them we need to start working on the supply-side problems that reduce employment in America. Step one—replace the minimum wage with a wage subsidy.

PS.  Notice the retirement surge after 2011?  Count back 65 years and you get 1946.  Hmmm, what began in 1946?  For the foreseeable future we’ll have roughly as many workers retiring as entering the labor force.  (A bit fewer retiring right now, but a bit more than new entrants retiring in 10 years, ignoring immigration.)

Goodbye BRICS, hello IndoAsia

I never really bought into the BRICs concept.  It’s a hodgepodge. Brazil and Russia seem closer to Mexico and Turkey than to India and China.  But it did capture the growth spurt in the emerging markets after 2000.

To me the real story was China and to a lesser extent India.  And now the NYT says China is beginning to shift to a new trajectory:

Rocketing wages and benefits reflect an acute shortage of manufacturing labor, as a younger generation goes to college instead of heading for factories and as rural China has mostly run out of young adults to send to the cities.

.  .  .

The trade gains for China are magnified because over the last several years many companies have shifted the production of components from high-wage Asian countries like Japan and South Korea to China itself. So China is producing more of the value in each product, and not just doing the final assembly of products produced elsewhere.

.  .  .

In separate interviews this week with nearly a dozen Chinese exporters, at Hong Kong trade fairs or by telephone, all said that their biggest problem lay in labor: finding enough blue-collar workers and paying for their soaring wages.

Mr. Cheng said that a decade ago he paid about $75 a month for entry-level industrial workers and provided virtually no benefits. Now, he said, his 200-worker business, the Hangzhou Luyi Arts & Crafts Company, pays $570 a month plus $100 a month in government-mandated benefits.

That works out to compensation roughly three times as high as in Indonesia, four times as high as in Vietnam, five times as high as in Cambodia, and as much as 10 times as high as in Bangladesh. But all of those countries have other problems, such as overburdened, unreliable electricity grids, which force companies to install costly generators and buy expensive diesel instead.

Like many companies in China, Hangzhou Luyi has responded to surging wages with increased investments in automation.

So what does all this mean?  First of all Chinese labor costs will continue soaring if China follows the path of South Korea and Taiwan, which seems likely to me, but not certain.  So what then?  Who makes the world’s sneakers in 2030?

Latin America is already a mature economy.  Mexico will keep growing, but it doesn’t have global implications.  Africa will grow with a commodity model, manufacturing will come later.  The Middle East is only good at doing two things, producing oil and fighting.  The developed world is already developed.  That leaves places like this (data from The Economist):

Country      Population   GDP (PPP) per person    RGDP growth/2014

Bangladesh     157 m              $2130                           5.7%

India             1,260 m            $4350                           6.1%

Indonesia       253 m             $5470                            5.4%

Philippines      108 m             $4620                            6.6%

Vietnam         91 m                $4020                           5.5%

That’s 1.87 billion people.  Throw in a bunch of similar smaller places like Sri Lanka, Cambodia, etc., and you have 2 billion out of the global population of 7 billion.  By comparison developed East Asia plus China has roughly 1.5 billion, the Western developed world 1 billion, Latin America 1/2 billion, sub-Saharan Africa 1 billion, and the other billion in places like the Middle East, Pakistan, Russia, etc.

Unlike the BRICs, it seems to me that IndoAsia is an actual category of similar countries.  It’s the next China, but it won’t be as dynamic as China.   I tried to come up with a clever acronyn for those 5 countries but failed.  In any case, they share pretty similar GDP growth rates and income levels (except Bangladesh for income.).  And while China’s population will soon start shrinking, they will keep growing.  IndoAsia will have the young workers of the 2030s that will produce all that cheap stuff that used to be made in China.

If you believe that China depressed wages in the West, do much higher wages in China make that problem go away, or does it simply shift to IndoAsia?  I can see arguments both ways.  IndoAsia has enough labor to pick up the slack, but does it have the productivity to depress US wages?  It seems to me that by the time Bangladesh gets to the point where it could threaten the US autoworkers, those workers will be replaced by robots and 3D printers anyway.  So my hunch is that IndoAsia is a nonissue for US inequality going forward.  It will be increasingly the case that most US workers do things that need to be done in the US for various reasons, or where we have strong productivity advantages.

Also note that these countries are growing at 6%, not the 10% that China grew when it was that poor.  That suggests they’ll get stuck in the middle income trap unless they do more reforms.  Or perhaps I should say until they do more reforms.  In the very long run all countries may escape the middle income trap, the question is whether in the interim they go through decades of mediocre growth like Latin America.