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I don’t have a strong enough since of the dynamics and limitations in mulit-family starts to give a really good answer. However, I want to suggest based on the historical data the answer is: pretty darn high.

Here is a comparison of mulit-family housing starts to single family

FRED Graph

Obviously analysts used to looking at the last decade are used to using words like “tiny” to describe multi-family starts as a part of the total picture. However, it wasn’t always so.

Look at the 70s and to a lesser extent the 80s. Multi-family is a big contribution. Its even more impressive when you consider that a few hundred thousand single families are built by owner or custom contractor, meaning they are not for sale or rent.

Looking at the market for-sale and for-rent, multi-family has been almost strong in the past as single family.

Given the current shortage of multi-family, the growing shortage of units generally and the burn that Americans and banks still feel from single-family I don’t see a fundamental reason why we couldn’t have a multi-family based boom.

That implies that we could see on the order of 1 million multi-family starts in the next few years. Its to early to “call” that but the fundamentals seem ripe for it.


I want to pick this thread up from Paul Krugman because I think some of my readers might be disinclined to accept Paul’s cursory treatment. However, its an important point.

In The General Theory of Employment, Interest and Money, Keynes writes

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

This leads a lot of economists and thoughtful people to the conclusion that Keynes is either ignorant of or ignoring the role of productive activity and trade. How is it that people are to become wealthier in an activity which is clearly wealth destroying?

You can see the point though if you look at why Keynes choose this particular example. It’s because it is exactly how a Gold Standard economy works. Keynes phrases it as this:

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly ‘wasteful’ forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

Though all of this might sound crazy, it actually extends from observations I think we all accept. Let me just throw in one more of my favorite quotes from David Hume and then get to the meatier explanation. Because its my favorite I am going to place the whole thing in, though the quote is usually cut down. Excuse the crazy emphasis, but it is my favorite quote and I got carried away.  Source EconLib:

In my opinion, it is only in this interval or intermediate situation, between the acquisition of money and rise of prices, that the encreasing quantity of gold and silver is favourable to industry. When any quantity of money is imported into a nation, it is not at first dispersed into many hands; but is confined to the coffers of a few persons, who immediately seek to employ it to advantage. Here are a set of manufacturers or merchants, we shall suppose, who have received returns of gold and silver for goods which they sent to CADIZ.*27 They are thereby enabled to employ more workmen than formerly, who never dream of demanding higher wages, but are glad of employment from such good paymasters. If workmen become scarce, the manufacturer gives higher wages, but at first requires an encrease of labour; and this is willingly submitted to by the artisan, who can now eat and drink better, to compensate his additional toil and fatigue. He carries his money to market, where he finds every thing at the same price as formerly, but returns with greater quantity and of better kinds, for the use of his family. The farmer and gardener, finding, that all their commodities are taken off, apply themselves with alacrity to the raising more; and at the same time can afford to take better and more cloths from their tradesmen, whose price is the same as formerly, and their industry only whetted by so much new gain. It is easy to trace the money in its progress through the whole commonwealth; where we shall find, that it must first quicken the diligence of every individual, before it encrease the price of labour.

This contains the central “Keynesian” observation, that sticky prices are the source of the non-neutrality of money. 

Its particularly interesting to pull out the quote from Hume because he is not discussing the decision of a Central Bank to print more money but an increase in actual gold and silver.

Keynes is agreeing with this point and saying yes, if people were to discover more gold that would indeed boost employment through the same means that Hume describes.

However, the way one discovers gold is by digging holes in the ground. Which, in Keynes words, have no purpose other than the accumulation of gold which people intend to use a backing for money.

Why not then just bury money in the ground and let people dig that up?

This would have the same effect as the discovery of new gold deposits and would alleviate unemployment though the same means.

But, wait then he says. What in the world is the point of burying money in the ground just to dig it back up again?

Why not have people do something productive like build roads and schools rather than dig holes in the ground. In exchange you can give them money. It will work just like gold mining will but instead of having a hole in the ground to show for it, you have a road or a school.


This is not to say that the government knows better than private markets what money should be used for. Its saying the traditional means of getting money into the private market involves mining purely for the sake of getting money.

Why not do something productive for the sake of getting money into the private markets and then once its there let people use it for whatever they think best.

Niklas says I should call this series “stream of consciousness”.

However, to be clear this is not meant to suggest that anyone I happen to mention is making an unsubstantiated claim but that this is just some things I have been thinking about but haven’t had the time to wrestle with so that I can be even reasonably confident that I am correct.

Nonetheless, I think it can be interesting/useful just to put ideas out there.


Lots of my Austrian Business Cycle Friends (as opposed to more political economy Austrians) I think are confused by believing that Mainstream Business Cycle Macro and Keynesianism in particular are theories about how an economy “prospers”.  That’s a much more general concept than what Mainstream Business Cycle Theory is trying to explain which is the general glut and particular the cyclical glut in unemployment. One could believe that Keynesianism is correct and still believe that policy wise we should not reduce unemployment because the cost to prosperity – whatever we mean by that – are too high.

The Near Term US

I continue to see the fundamentals for the near term US is being good. Indeed, the only negative I see is the overhang of household debt. However, that need not stop an expansion driven by business spending. 

Inflation and Business

If you really think household debt is the problem then inflation is the solution in more ways than one. First it erodes the debt – yes.

But more fundamentally it has the potential to raise the cost of consumption, by lowering the purchasing power of the dollar. This is actually what you want!

You want consumers to buy less crap yet work more. That is the solution to “over-consumption” and a weaker dollar facilitates that.

How Inflation Works Through the Economy

For some of my journalist friends struggling with this. Think about it this way. If we have universal 6% inflation then a Cheeseburger from the McDonalds $1 menu now costs $1.06.

Where does that extra 6 cents go?

If we trace it through the economy it winds up in one of three places basically. It could be higher wages for the workers at McDonalds. It could be higher prices for the material inputs to making a Cheeseburger. Or, it could be higher profit margins for McDonalds.

In the first case we have normal price-wage inflation. Debt burdens for households fall and the standard way economists talk about the world applies.

In the second case we have inflation in material costs. This can be very painful for everyone but the owners of raw materials. Its this type of effect that generates “stagflation”

The question we have to ask ourselves is how realistic is this?

Will the demand for material be that high without a corresponding increase in sales volume? As material prices rise will firms be able to economize of materials by using “relatively” cheap labor.

In the case of energy this can be difficult, but to generate sustained 6% inflation we either need a severe energy shortage or a shortage in other materials.

In the last case of profit margins we will see exploding equity values. We can work out the math but I hope its clear that profit margin have to rise much faster than inflation if they are absorbing inflation. (because they are not 100% of the cost base)

So we get much higher equity values which spurs business investment.

The basic way this can go “bad” is if inflation is absorbed by materials and those materials cannot be produced with or substituted for labor.

I am not sure if anything other than precious metals and oil fit this mold.

The Business Investment Story

I am dismayed by the fact that so little of the blogosphere seem even interested in dissecting what’s going on with Business Investment. I talked to one guy from Investment Business Daily who seems interested in the subject.

This is a big part of the recovery and will be important if growth is to continue.

When I have looked through the data it basically looks like this.

When the recession came businesses cut way back on industrial machinery and transportation. Now it turns out that – sadly or not – industrial machinery is not a big part of the US economy.

However, transportation equipment – cars, trucks, planes, ships – are a huge part of the US economy. These dropped like a rock.

However, investment in computers and software barely took a dent and has actually continued its accelerating pace. Indeed, looking at the data you have to be very careful about how you do the price indexes here because the quantity of investment in *computer power* and *software packages* are exploding through the roof. However, the cost is also collapsing, so netting out the “real investment” can be difficult.

Even still businesses are spending more raw cash on software and computing.

What’s happening now is that transportation spending is recovering. That’s driving the really big numbers. However, total fleets are still older than average so this could potentially last a few more quarter even by just coming back to normal.

Government Sector

The decline in the government sector has been a bigger deal than people realize. Especially since government grew so strongly during the 2000s.

Lots of people think about the Federal government. However, government as an economic producer happens at the State and Local level. That’s where the action is.

Its possible but seems unlikely that State and Local will continue to contract at the rate it did this past 18 months. This brightens our growth and jobs forecast.

Children and Voting

Though this seems like a silly issue to a lot of people its part and parcel of the whole: “are there a such thing as human rights” question.

People often appeal to the immature nature of children. But clearly there are mature children and immature adults. If you draw the dividing line at age then this is a line of convenience.

But, we would we tolerate that in other areas of human rights? Surveillance of Americans would be really convenient for catching criminals and terrorist and in reality few innocent people would probably be prosecuted. Perhaps, even fewer if we had lots of exculpatory data. Yet, are we ok with this?

The why are we ok with rules of convenience regarding children?

The Inequality Debate

In so many ways this entire debate looks jacked up to me. Its not clear what people are trying to prove/demonstrate. I see posts “refuting” the inequality stats that look to  me like they are just providing the mechanism.

I see people jumping to all sorts of conclusions about what this means for the rich and even “tax cuts” that don’t make any sense.

Part of this is that we are confusing the fact that people are upset about the real personal issue of not be able to find the type of job they hoped with this deeper headier issue about inequality.

However, rather than focusing on supporting or refuting inequality, what we need is some sort of schema or topology of inequality. We know some household effects are occurring. How can we decompose that into various other effects. We know this is not occurring by magic. There must be some decomposition.

My Brothers Keeper

Bryan Caplan makes does some really good posts about the welfare state and our obligations to one another. I know they are great because they leave me squirming in my seat.

I obviously want to hear more of what Bryan has to say but I think in the case of the Brother’s Keepers law the key is particular disgust.

So, its unlikely that someone is not going to give significant resources to support a family member in need unless they are particularly disgusted by them.

I am thinking about my own family and large income transfers are trivially done. Indeed, the only case when someone would be unwilling is if they have particular reason to think a family member will do something “bad” with the money.

I imagine that if you said you have to give family members money then the fear is that people would not be able to avoid these bad cases.

Now, perhaps this is also the key issue in redistribution. Some folks see the behavior of the poor and are disgusted. Some are not. This is going to influence how you feel about social redistribution.


Wasn’t the 1MW energy catalyzer supposed to be demonstrated by now. What happened?

US as a Natural Resource Extractor

I think some of my progressive friends should think long and hard about whether or not this is a bad idea. I know there is a reflex against Big Oil.

However, think about the employment of low skilled Americans. Isn’t this exactly the type of work that could raise their real wage?

Also, are we really going to have a major effect on the planet by reducing the amount of resources the US produces? Maybe some agreement will be reached under which the world can agree to consume less.

However, without that you are only going to have people going after more expensive sources for the same thing and low skilled Americans finding little demand for their labor.


My general sense looking at the roadmaps is that solar is the future and is not *too* far off. I think we are talking about the one to two decade scale here. Maybe a little more, probably not a little less.

However, remember that solar replaces coal. We still have nothing with even  the theoretical energy density of hydrocarbons. Hydrocarbons will play a major role for the foreseeable future.

They may be limited to large scale transportation. Particularly Air and Sea.

Virtual Rooms

We normally think of the future as coming with “implants.” So for example, glasses or contacts that project an imagine into your eyes.

However, consider that when you combine motion capture with a standard 3D screen you can create a virtual image that sits anywhere you want in realtion to the viewer.

So imagine a room with three walls that are large 3D projections. Now also imagine motion capture so that imagine depends on where the viewer is looking.

At this point we can make it seem like “anything” is in that room with the viewer and that the room is as big or as small as we want. As long as the ceiling and floor are consistent with the projected image and the view does not turn around to look at the door she came through, we can make the room seem like its anywhere.

We can also put people from different rooms all into the same room virtually. Each person will see and be able to talk to the other people as if they were there.

You just can’t touch them.

This is hardware that already exists. The software probably needs to be made and the cost brought down. Also there are going to be huge bandwidth requirements. Nonetheless, we can do virtual rooms right now.

I think that is enough to really change what it means to “be somewhere”

Modeled Behavior regular Becky Hargrove asks

Can you make a place in your categories for a quick reference to this discussion related to NGDP



I’ll  do this quick and graphically and see if it makes sense




From the Equity Residential Conference Call:

So turning now to the transaction market. I will tell you that remains very competitive. That remains and continues to be plenty of capital chasing very little supply. Cap rates in our core markets across the country remain in the low 4s today, as investors continue to underwrite strong revenue growth for the next several years. As we look across the marketplace today, we think values are now back to and maybe even above previous peak levels in our core markets, yet may still be down as much as 15% in others. So as we announced in our earnings release last night, during the quarter, we acquired 2 stabilized assets for $113 million at a weighted average cap rate of 4.7%. These were 118-unit deal in downtown L.A., and 247 units in Fort Lauderdale, Florida. We also acquired a 95-unit property in Daly City. It’s on the peninsula, just south of San Francisco. This asset was completed in 2011, and was totally vacant when acquired. This was the third acquisition we’ve made of a vacant property built as a for sale condominium product.

Like our other deals, we anticipate a quick lease-up and for a yield in year 2, in the mid to high 5s.

Russ Roberts writes

But what are aggregate demand and aggregate supply for an economy? Karl writes that aggregate demand “matches the total amount of goods and services people want to buy with the price level.” I’m not sure what he means by matches. I think he just means the relationship between goods and services and prices. But what does it mean to say that when the price level of all goods goes up, people want to buy less stuff? What’s the behavioral assumption? Is there a budget constraint? Is it meaningful to talk about aggregate demand at all, as if all the goods could be aggregated into a single good with a single price? Are people spending all their money?

And when you add in aggregate supply, that where it crosses with aggregate demand, does where they cross on the vertical axis determine the price level? That would be weird. Where’s monetary policy?

I do mean the relation(ship) between the amount of goods and services people want to buy and the price level.

There are several behavioral assumptions that are embedded in this.

First, is real money balances. The idea is that people hold money because its useful in helping them buy things. Most things are sold in exchange for money. Even things that are on credit are typically paid for on your behalf using money.

If the price level goes up then each dollar will not go as far. Thus, its useful to hold more money. One way to accumulate money is to refrain from purchasing goods and services. So, as the price level goes up people purchase less.

Second, is an interest rate effect. Another way to accumulate more money is to sell assets. As folks attempt to reduce their total holding of assets the interest rate will rise. Because of arbitrage in financial markets this will occur no matter what asset people attempt to sell, but it will probably make the most sense if we think of them as selling bonds.

As the interest rate rises investment will decrease.

Third, is an exchange rate effect. As the interest rate rises, capital will flow into the country. This will cause the value of the dollar to rise. As the dollar becomes more expensive foreigners will buy fewer American goods and Americans will shift towards buying more foreign goods. Thus net export demand will fall.

These three effects are why private demand is sometimes decomposed as C + I + NX.


Now, is there a budget constraint and is it useful to talk about Aggregate Demand as if all goods could be Aggregated?

Yes, and because of that yes.

There is a budget constraint but because we are dealing with multiple people, markets and goods its more useful to think of it as an adding up constraint. If economic agents are increasing their holdings of money then they have to be decreasing their purchases of real goods and services.

To see this you can think of money as just another good that you might receive in a transaction. If people are shifting their demand towards money then they must be shifting their demand away from some other goods and services.

So Aggregate Goods and Services is a way to talk about the set of commodities that are not money. That’s the characteristic that they all share. They aren’t money.


For the final questions:

And when you add in aggregate supply, that where it crosses with aggregate demand, does where they cross on the vertical axis determine the price level?


Where’s monetary policy?

In Aggregate Demand. That’s why the non-neutrality of money is so important to this analysis.


Now on non-neutrality. Russ says

At the end, Karl asks if I think money can be non-neutral in the short-run. Non-neutral means–can have real effects on the economy and the choices people make rather than just affecting the price level.

So, lets see how this works in our story.

The Federal Reserve prints some money which it uses to buy bonds. This affects all elements of our story.

First, in order to purchase bonds the Federal Reserve must purchase them from someone. This person gives the Federal Reserve the bond and in return receives money.  What are they going to do with this money? They have three options

a) They can try to re-save the money. This in effect would be an attempt to put it back into the bond market. Even if they try to save the money elsewhere, arbitrage inside of financial markets would send the money back around to the bond market. However, the stock of government bonds is fixed so this effort is ultimately futile and indeed the interest rate on government bonds will fall in order to induce people to stop trying. This will become important later.

b) They can increase their holdings of money. However, now they are holding more money that is optimal. The marginal usefulness of money has falls as the amount of money you have increases. That leads them to do

c) Exchange money for something that is not money. That is buy more real goods and services.


Second, as we saw above any attempts by people to resave simply drive down the interest rate. However, as the interest rate goes down, the desire for businesses to invest goes up. This means that businesses will attempt to purchase goods and services.


Third, as the interest rate falls capital flows out of the country. The causes the dollar to fall. As the dollar falls American exports become cheaper and foreign imports become more expensive. This causes net exports to rise.


So, an increase in the money supply causes the components of Private Aggregate Demand,  C + I + NX to rise.

That is, for any given price level people now want to purchase more goods and services.


Now, it could be the case that Aggregate Supply is simply a vertical line. In that case Aggregate Demand would increase but the only effect would be to raise the price level.

Money would then be neutral. An increase in the money supply would simply lead to an increase in the price level. Story over.


However, Russ already says that he believes that money is non-neutral. In particular, the non-neutrality I have in mind is that increases in the money supply will temporarily increase output and decrease unemployment.


What that tells us is that Aggregate Supply is not vertical at least in the short run. I am going to assume that Aggregate Supply is upward sloping. In part, because I think it is and in part because it will make the conversation easier. However, we could do this with a horizontal or downward sloping line. Just so long as its not vertical.


If Aggregate Supply is upward slopping then an increase in Aggregate Demand leads to higher output and somewhat higher prices.


If the story ended there then we could get permanently higher output just by printing more money. Unfortunately that is not the case. In the long run the Aggregate Supply curve shifts backwards as sellers adjust to the change in the price level.

[Note to other macro guys: I think one AS curve that shifts is just a simpler matter than an LRAS curve and an SRAS curve]

Now how does this Aggregate Supply curve work? What behavioral assumptions are imbedded in it? I can tell you some stories and indeed, much of business cycle theorizing is coming up with more compelling stories to explain this. However, the truth is that we believe it simply because it seems to fit the facts. And, a key fact is the non-neutrality of money.


This post is already incredibly long but I will take a stab at giving my explanation of why fiscal policy works given this framework.

So, lets imagine that the government borrows some money. It then uses that money to buy things. What happens.

Well, a couple of things.

a) The government may very well employ some resources that were idle. If this happens that’s great. However, its not really necessary for this story.

b) The government will employ some resources previously employed by others. Now people are not buying those goods and services because the government step in and bought them out from underneath them. So, those people have more money. What are they going to do with it?

They could try to save it, but we’ll explain in a second why they are going to run into exactly the same problem they did above. They could just hold more money but then they are going to have more than the optimal amount of money. Or they could buy something that is not money. That is, they could increase their demand for some other goods and services.

But, what if those are employed,you ask? Well, if they are then your run into the same cycle. Someone else now winds up with more money – because their goods and services were bought out from underneath them – and has to decide what to do with it.

This has to keep happening over and over until the money finds its way to some set of goods and services that weren’t being bought buy someone.

Now we can simplify all of this by noting that Aggregate Demand simply means things that are not money. So, as the government injects money into the economy, economic agents will try to shift their holdings to things that are not money. That is, Aggregate Demand will rise.

So, just dealing with the (a) and (b) part of the story we have the money finding its way to some unemployed part of the economy. However, we still have to deal with where the money came from. So,

c) To raise the money the government must sell bonds. As the government sells bonds the interest rate will tend to rise. At this point the Federal Reserve must step in and buy enough government bonds to send the interest rate back down again.

If the Federal Reserve does not do this then the rising interest rate will reduce investment and will cause net exports to fall. This will pull Aggregate Demand backwards.

So, the success of this entire enterprise depends on the Fed accommodating the government’s increased borrowing.


Indeed, all that is happening is that the government’s fiscal policy is a means through which the Fed can expand the money supply and inject that money into the economy.

OK, but I anticipate a few immediate questions

1) If this is all about the Fed why bother with increasing government spending? Why not just have the Fed increase the money supply and be done with it?

This method only makes sense when the normal methods used by the Fed have been exhausted and even then there is debate about whether this is the best auxiliary tool. In practice, that means fiscal stimulus only makes since when the Fed has reached the Zero Lower Bound.

2) Couldn’t the government just give people the money rather than buying stuff?


There is an issue about whether the hording of money gets to be a problem. To the extent that it is then you have to deal with that issue in a number of ways. One of those ways is by focusing more heavily on the government directly purchasing or encouraging the purchase of idle resources.


There is clearly much more to say, but I think this has gone on long enough for now, and I will stop here.

Personal Income rose by 0.1% in September while Personal Consumption Expenditures rose by 0.6%. These leads Bill McBride to say

Spending is growing faster than incomes – and the saving rate has been declining. That can’t continue for long …

Which is of course a normal sentiment but I think its wrong.

I would have to check to be sure but I believe there is no necessary limit on how negative the personal savings rate can go.

For example, its my guess, thinking about the way the index is constructed, that an increase in Private Equity mechanically lowers the personal savings rate.

This is because the return generated by a Private Equity firm should be counted as Personal Consumption Expenditures, but not as Personal Income.  Thus Personal Income goes down and Personal Consumption Expenditures go up.


Well, the Private Equity firm is providing a service for investors. How do we measure the value of that service? We measure by the excess return generated by the Private Equity firm over simple savings. This is in essence equal to the entire return to Private Equity.

On the other hand what happens to the returns made by the Private Equity firm. Generally speaking they are rolled over, so they are not paid out to investors.

Thus, mechanically the investors are consuming an enormous amount of financial services but they are not taking in extra personal income. This should mean that the savings rate falls, although what has in practice happened is that the accumulation of capital has risen.

Update: Spencer,in the comments is right. This only applies to the carried interest of the fund managers. The gains that on the balance sheet accrue to the fund investors are not imputed as financial services.

Gallup collects a rolling survey of unemployment. Unfortunately the series is not very old and there is no seasonal adjustment. One strategy to handle that would be to apply the BLS seasonal adjustment to the Gallup data. However, the methodologies are different enough to make this questionable.

Another, way to at least get some handle on what’s happening is to look at the year-over-year change in the unemployment measure. This should give us some sense as to whether things are getting better or worse.


What this seems to suggest is that the pace of recovery slowed dramatically in the early part of this year and was stalled through-out the summer. Yet, in the last few months it has picked up again and is running at roughly the rate it was in early 2011.

Karl raises some interesting questions about the morality of bringing someone into existence. These are tough questions, but one group makes it a little easier to narrow the overton window by earnestly putting forth some clearly terrible answers. The group is “Population Matters” and they have some truly egregious views (pdf). For instance consider this argument:

It is also a fact that if two people with two living children have a third child, they will ratchet up the population of the planet, and thus: ratchet up damage to the environment; bring nearer the day of serious ecological failure; and ratchet down everyone else’s share of dwindling natural resources to cope with this. So individual decisions to create a whole extra lifetime of impacts affect everyone else (including their own children) – far more than any other environmentally damaging decision they make. We need to be aware of the ethical implications of having large families; and sex education in schools should include it.

You’ll notice the complete and puzzling lack of productivity in this formulation of scarcity. In this model of the world there is only resources, and they are directly consumed. Imagine, for instance, if your two people with two living children have a third child whose inventions increase the efficiency of solar power by 1%, or increases grain yields, or leads to a new low cost recycling technique. This person coming into existence has clearly increased the amount of output than can be created with the resources on earth. The way Population Matters has formulated the problem of scarcity only makes sense if… well, if you’re determined for some reason to try and argue that more population is a really bad thing.

Another massive problem with their ideas is they’re confused about what coercion means. They state repeatedly they are only for non-coercive policies:

“…the government should state a national goal of stabilising and then reducing UK numbers to a sustainable level, by non-coercive means…”

But when the chair of the group was interviewed here at Grist, he doesn’t shy away from the extremely coercive policy of drastically restricting poor people’s freedom to move to developed countries:

“Half our population growth [in the U.K.] is due to migration, so [we advocate] balanced migration to stabilize that — no more in than out. “

So they don’t want to coerce anyone except when it comes to their decision about where to live. And they’re not for coercive policies except the one that prevent more wealth creation than perhaps any other.

The interview ends with this puzzling appeal to doing things “the nice way”:

“On a finite planet, we know for a fact that indefinite growth in anything physical is physically impossible. So physical consumption of resources per person and the number of consumers will quite definitely stop at some point. It will either be sooner, the nice way, through fewer births, or later, the nasty way, through more deaths. But there is no third alternative.”

One wonders if they are completely blind to the reality that preventing people in poor countries from immigrating to better lives in developed nations is probably not seen as “the nice way” from their perspective. Or are they just that stunningly indifferent to their well-being?

Russ asks for some clarification on Aggregate Demand

Does an increase in aggregate demand increase employment?

Yes, if by an increase in aggregate demand you mean people buying and selling more from each other where buying and selling includes consumers and manufacturers.

The above statement has virtually no informational content. It is equivalent to saying that when the economy is healthy, there is lots of exchange going on. When an economy is not healthy, there is less exchange. There is less buying and selling of goods and services and labor. To describe that unhealthiness as less aggregate demand is just to put the problem into different words.

It does not follow that an increase in government spending increases the amount of buying and selling or the health of the economy. It is an empirical question. It would surely depend on what the government buys when it increases spending.

In the end he asks for something to read, but based on what Russ wrote I think this is better done as a conversation.

In part, because I think there are a couple of things we will want to clear up from the start.

First, like ordinary demand, Aggregate Demand is not a quantity but a relation. It matches the total amount of goods and services people want to buy with the price level. So, saying Aggregate Demand has increased, in-and-of-itself doesn’t say anything about the volume of transactions in the economy. That depends on the equilibrium between Aggregate Demand and Aggregate Supply.

Second, the volume of transactions in the economy is not tautologically equivalent to its “health.” I suppose it depends on what you mean by health but there are lots of unfortunate macro-states that are independent of the volume of transactions.

For example, the value of the transactions matters. This will probably become important later in the conversation, because it is common to confuse the value of the total transactions in the economy with the economy’s position in the business cycle. However, one can easily have a very poor economy at full employment and output and a very rich economy mired in a horrible recession.

Third, not to get too far ahead of ourselves, but there is something important in the observation that lots of elements in the economy rise and fall together. So, that to say the economy is unhealthy is actually saying something about the economy. It is not merely a statement that the unhealthy subparts outnumber the healthy ones.

Fourth, I think its extremely important to remember that the concept of Aggregate Demand exists independently of any claims about the government. It is not even necessary to have a government in order to have Aggregate Demand. If folks are successful in creating an Anarcho-Capitalist society then presumably it will exhibit Aggregate Demand.

This feeds into a clarification about another point Russ brings up

A multiplier of .5 means that for every dollar of government spending, there is a 50 cent reduction in spending by non-governmental sources (private consumption and investment). A multiplier of 2 means that a dollar of spending encourages an additional dollar of spending by non-governmental sources (private consumption and investment).

So, its hard to make sense of the concept of a multiplier without Aggregate Demand. Even if the multiplier is negative, you are telling some story about how nominal shocks propagate themselves throughout the economy and that story is your story of Aggregate Demand.

What would be inconsistent would be a multiplier of zero. If you had a multiplier of zero then either Aggregate Demand falls apart or becomes superfluous.


With that as a baseline I would start by asking Russ whether he believes that money is non-neutral in the short run.

The reason I ask is because if you believe that then we can work fairly straightforwardly to both the concept of aggregate demand and fiscal stimulus. If you don’t believe that, then I am going to start by convincing you that money is indeed, non-neutral in the short run.

Last week I said

[The JD Power October Sales Estimate] seems weak to me, though its lower higher than the number people had floating around. I would expect to see some rise from the August numbers as both Honda and Toyota sales caught up. A big number like 13.8+ wouldn’t surprise me but 13.3ish would be my baseline. latest

An estimated 1,033,257 new cars will be sold in October, for a projected Seasonally Adjusted Annual Rate (SAAR) of 13.4 million units, forecasts … This sales pace would mark the highest monthly SAAR since August 2009, when sales were inflated by the Cash for Clunkers program. says

The October 2011 forecast translates into a Seasonally Adjusted Annualized Rate (SAAR) of 13.4 million new car sales, up from 13.1 million in September 2011 and up from 12.2 million in October 2010.

HT: Calculated Risk


I’m a pessimist. But, pessimism is not a forecast. It’s a disposition. The forecast says strong growth in Q4.

We haven’t done this in a while

From National Multi Housing Council (NMHC) via Calculated Risk

Increased demand for rental housing has led to a considerable uptick in multifamily construction, finds the National Multi Housing Council’s (NMHC) latest Quarterly Survey of Apartment Market Conditions.

The pace of development activity has increased in most markets. Two-thirds (67%) of respondents noted considerable activity, either in the planning stage or actual new construction. In particular, 20% said developers are breaking [ground] on new projects at a rapid clip. The other 47% reported an increase in pre-construction activities—acquiring land, lining up financing, getting building permits—but not much actual construction yet.

Even with this increased activity, more than half (54%) think new development remains considerably below demand.


From HousingWire

Equity Residential (EQR: 57.01 +1.12%) earned a net income of about $113 million for the third quarter, up from $29.8 million last year due in part to an increased demand for apartments, the company announced Wednesday.

The Chicago-based real estate trust also reported a net income of 35 cents per share for the quarter.

The number of tenant households rose 4% in the year ending June 2011, according to the Census Bureau.

"Fundamentals continue to be positive and we remain confident that increasing demand for apartment living combined with limited new supply will produce strong results next year and for years to come despite concerns about weakening economic growth," company president and CEO David J. Neithercut said in the release.

From the WSJ

While concerns about the economy are cooling the market for most other types of commercial real estate, apartment rents and occupancies continue to be boosted by demand from millions of people who are victims of foreclosure or are unwilling or unable to buy their own homes.

At the end of the third quarter, 5.6% of the nation’s apartments were vacant, down from 5.9% in the second quarter, and the lowest level since 2006, according to Reis Inc., a real-estate data service.

Rents are up even in some cities that have been hard hit by high unemployment and the housing crash, like Orlando, Fla., Detroit and Phoenix.

I am speaking most of today but wanted to put in some very preliminary thoughts

1) I was a bit shocked at how low the headline number was but I see change in private inventories is subtracting over 1%. I will have to dig deeper on my interpretation of this. My baseline is that inventories are already fairly tight so this represents business being behind the curve rather than sensing future falls in demand

2) Durable goods growth was strong as expected. This is the auto recovery. Non-durable is still lagging. Need to look into that

3) Non-residential fixed investment is on fire. Equipment and Software is burning it up at a 17% growth rate. Indeed, non-residential fixed investment contributed almost as much to growth as did consumption. Not grew at the same rate as consumption, but the absolute increase in business investment was almost as great as the absolute increase in consumption.

4) Net exports was mildly positive

5) Government was flat


On first glance the internals of the report are very good. In line with what I expected. We can probably count on durables remaining high into Q4 as the auto-rebound continues and I am still looking for a strong uptick in Residential Investment.

An open question is how long this blistering level of Business Investment can keep going. It’s a little crazy at this point. We are still below normal on capacity utilization. Real retail sales have yet to make new highs.

I have no particular reason to think there is going to be a “correction” and indeed if anything the rate of growth should accelerate, but its always disconcerting to make forecast that are so out of the box.

John Carney says

The advocates of NGDP targeting view it primarily as a communications strategy. It’s a way of telling the markets that the Fed will stay very loose for an extended period of time, even if this looseness becomes inflationary.

Of course, in conjunction with communicating the goal, the Fed would have to communicate a credible strategy to achieve the goal. How exactly will it pursue the goal of higher nominal growth? Most likely it would have to commit to a very aggressive, open-ended asset purchasing program. No more QE with limited dollar amounts. This would be a throw-open-the-vaults policy.

It’s not clear, however, that this will lead to growth. In fact, some of the proponents seem to think that the announcement of an NGDP target would just magically lead to growth.

I suspect John is being cute, but the idea is not that magic is at work but expectations.

To show people how this works I thinks its best to just forget about Quantitative Easing. Maybe that’s the tool – maybe its not – but it will be easier to think in terms of interest rates.

So, if you are a bank and you are thinking about lending someone money. Or, you are a business and you are thinking about borrowing money your key question is this: Will I make enough money to pay back the loan, with interest and still have something left for myself.

Well, if you know for a fact that interest rates are going to be zero until either people start buying more stuff or they start paying more for stuff then you are now facing a no-lose proposition.

Suppose you borrow the money and the new demand doesn’t appear. Well then by construction you can roll the loan over at 0% because rates are not going up.

If spending does rise then you may not be able to roll the loan over at no cost, but you will have increased revenue so you can repay the loan.

Either way you can’t lose.

This means that it’s a no brainer to take out a loan.

This is why a specific statement that said

The committee judges that economic conditions are likely to warrant exceptionally low levels for the Federal Funds rate until current value GDP exceeds $19.5 Trillion.

is likely to have an immediate effect.

I know that many of the hard core guys want to jettison the Fed Funds talk in favor of NGDP futures, but baby-steps fellas. I think NGDP can work as a communications vehicle but we don’t need to get crazy with largest central bank.

In response to my Apple and Central Planning post Eli Dourado writes

Armen Alchian takes this further in his 1950 article, Uncertainty, Evolution, and Economic Theory. Alchian models the economy as an environment that selects practices for survival on the basis of positive or negative profits. It’s not firms’ motivation that matters; it is results. This evolution-based account is necessarily more dynamic than the profit-maximizing (motivation-driven) model that economists usually adopt.

Which is interesting because this is precisely my view on the firm and almost everyone I mentioned it to has chuckled at it.

Though, I would perhaps take it further and say that ultimately no knowledge, planning, design, information or even intelligence is even necessary for this process to work.

Rather than being a signaling mechanism the price system is a selecting mechanism.

Further, I’ve argued that this is should be our concern with income taxes or at least taxes on capital. Not that they significantly reduce the incentive to accumulate assets, because this seems wildly implausible to me.

Instead, because almost by definition they remove assets from the command of people who – for whatever reason – are successful at accumulating them.

This is also why the predominance of small businesses is a sign of failure not success and so on.

Eli goes on

Framed in this way, we can now ask the important question: Is Apple successful because it was big and centrally directed, or is it big and centrally directed because it was successful? From a Hayek-Alchian perspective, the answer is clearly the latter. Having a Randian hero centrally direct a lot of resources is not, in spite of Apple’s story, a recipe for success. Instead, following a recipe for success will result in a lot of resources to direct.

Here I am not so sure. What is it about being successful that should lead you to being centrally directed? Big, of course. But, why not big and open?

What this is telling us is something about the nature of the evolutionary forces.  To be more specific it could be the case that the market selected for maximum feedback.

Or in more human terms we could say the market rewarded companies that listened to their customers and responded to price signals. In business lore and in my own personal experience I would say this is exactly wrong.

Instead it seems that selection – at least in many cases – favors the ruthless implementation of a singular vision. That is, it selects for minimal feedback.

Indeed, to pick up on Eli’s metaphor – from my readings limited readings – the Randian Hero doesn’t give a hoot about local knowledge, consumer preferences, or even at times profitability itself. He seems not trivially annoyed at being constrained by the laws of physics. Fortunately, Rand supplies him with technological breakthroughs without being burdened with explaining how such breakthroughs are possible.

But I think this furthers the message. The molecular structure of Rearden metal is beside the point. It might as well be forged out of the sheer determination of Hank Rearden himself.

As individualist and pro-capitalist as that story is, it is very much not the story of the market aggregating information in ways that no human or committee of humans ever could. This is the anti-“I Pencil” because you can be damned sure that if there was an iPencil, Steve Jobs would know exactly how it was to be made.

Kelly writes

First, it is tempting, but probably mistaken, to assume the Great Recession came along and knocked the U.S. off an otherwise sustainable growth track. It wasn’t an external shock, but internal weakness, that led to the economy’s collapse.

One worrying aspect of GDP growth prior to 2007 was that it came even as real household incomes stagnated. Assuming that boom-era growth rates were sustainable, and not fueled by a surge in house prices and a credit boom that simply pulled forward demand from the future, is a huge leap in logic.

This, I believe, misunderstands the concept of aggregate demand.

Regular demand measures how much of something people are willing to buy given its price in terms of other stuff. That other stuff is competing goods, their labor, their assets, etc.

Aggregate Demand measure the total amount people want to buy given the price index. But, the price index is the cost of all goods in terms of money. This is explicitly a nominal measure.

For real demand of something to be too low, the real demand of something else would have to be too high.

Said another way the recession makes no sense as a response to a country that is fundamentally overextended. That’s because the US economy isn’t overworked, its underworked.

In 2007 138 Million Americans were working and producing stuff. US industrial capacity was running at around 80%. Office vacancy rates were running at about 12%. And, the US was producing around 11 million motor vehicles a year.

By 2009 – at the bottom of the recession – 129 million Americans were working. Industrial capacity was running at 67%. Office vacancies were running at 18% and the US was producing around 5 million motor vehicles a year.

So in those two years 9 million people stopped going to work. 13% of our factories and utilities shutdown. 6% of our offices were emptied out. And, our car companies churned out fewer than half as many vehicles.

There is no sense to the idea that if we were over-extended and had bought too much that what we should do in response is work and create less.

If you think about how a nation as whole gets over-extended it makes perfect sense how this would work. If the US as a whole were living beyond its means that means that we were borrowing money from abroad.

Suppose that suddenly came to a stop. China or whomever else decided they no longer wanted to fund profligate American consumption. The Chinese would dump US assets, the value of the US dollar would fall and the value of the Chinese Yuan would rise.

The price of Chinese goods in America would rise causing American consumption to fall. We would have to buy less foreign goods. At, the same time price of American goods in China would collapse and the Chinese would buy more American goods.

The net result would be that demand for American goods would rise and with it American employment. However, the consumption of foreign goods by Americans would fall.

In the end Americans would be working more and consuming less. Which is precisely what should happen if you have over-extended yourself. You should cut back on your own consumption and do more work.

However, that is not what is happening now. Americans are doing less work. This is in part because far from contracting the credit they are extending to America, foreigners have been more than willing to increase lending to America and the US dollar rose during the crisis rather than falling.

What’s happened instead is nominal shock. The circulation of money within the United States ground to a halt because of difficulties at the institutions responsible for turning savings into borrowing, banks. This causes savings to pile up while borrowing goes undone.

The result is that the economic wheel slows down. We have at once people consuming less and producing less. We have an economy where there is simply less exchange going on. It’s a less economy, economy and that’s reflected in the collapse of nominal GDP.  What the Fed needs to do is to get our economy back; to get the dollar value of total exchange back to where it was before.

Megan McArdle pushes back

Have you spent much time working for small/growing businesses, operating one, or talking to those who fund them?

There are a lot of truly terrible small business CEOs. You look at someone running a successful small business and they don’t look that special because there are seventeen more just like him down the street. You don’t see the far larger group of folks who folded because they didn’t pay attention to their customers, their margins, or their supply chain.

I actually think it’s quite unlikely that the Lowes family just got lucky. Probably there were ten other businesses who wanted to do the same, and weren’t any more talented, but got unlucky. But there were hundreds more who wanted to do the same, and couldn’t hack it. Survivor bias works two ways.

I am not sure what counts as a lot of time. My stepfather, my father-in-law and my brother-in-law all operate small businesses. In different industries and with the intention of growing them.

Indeed, my step-father is a serial entrepreneur and I have worked with him on more than one venture.

Additionally, I founded an e-magazine in college. And, though time has rendered this no longer a legal matter, I want to say carefully that I ran a financial services firm for people who could not avail themselves of traditional providers.

My point, I want to be clear, is not that super successful businesses come from folks who were bumbling fools but won the economic lottery. People work hard and are driven to produce the product that they want.

However, let me give you a specific example. My step-father is obsessed – and I mean obsessed – with customer service. He is supremely exacting in how he wants his employees to respond to customers and furious when a customer does not get what he or she expected.

I have been at businesses that talked a big game but this is a whole ‘nother level.

However, by no means did he sit down and say: look the value that customers place on service is roughly X, the cost to my employees is Y, which means that I can expand my value add by increasing customer service levels by this much.

Nor – and being up close I can tell you this – did he do this subconsciously. This was not a pool player doing trigonometry in the back of his mind situation.

He does this because he has a belief about the way a business should be run. This focus on customer service has proven an enormous help in some of his businesses and a brutal failure in others. Yet, he does it in all cases because that’s who is.

This is what I mean by not having any real idea what you are doing. He does what he does because that’s his belief about what a business should do. If it happens to be the case that this behavior maximizes profits he will succeed. If it does not then he will – and has – failed.

It depends on the details of the industry, the price elasticity of the customers, the characteristic of the worker pool, the expanse of control he can manage, etc. However, none of this is going to affect is dedication to customer service.

Thus it is not conscious design. After the fact, you may look back and say “oh he really understood the market.”  Pardon me, but he understand nothing. He simply was, as a hurricane or a mountain simply is. And in certain industries, who he was, was extremely successful.

One of the things that I find interesting is the popularity of Steve Jobs and apple with Hayekians and Austrians in general.

Apple was principally the complete opposite of the decentralized local-knowledge driven catallaxy that Austrian’s trumpet. It was a highly centralized, tightly controlled integrated company that managed every step of the process from design to retailing.

It was complete with an Apple ethos, domination by a Politburo of Inside Designers and a cult of personality surrounding the leader. According, to reports by insiders the Politburo ruled largely by fear and the wrath of the leader was famous.

I don’t know how seriously to take these particular allegations but it has been suggested that the law constrained Apple’s treatment of its employees. That they would have been more harsh and more exacting if they thought they could have gotten away with it.

Even more to the point rather than a constant evolving relationship between consumer and producer Apple seemed to operate on the basis of “Five Year Plans” in which the Politburo decided what the future was going to look like and did what was necessary to bring it into being.

This is exactly what is supposed to not work, yet it worked spectacularly.

I am not saying this refutes anybody’s theories. There are always outliers and the Corporation as a central planning solution embedded in a larger free market has always been a curious question for economists.

Its just interesting and should spur us to ponder deeply about what we really think is going on in an evolving market economy.

Most potential parents I speak to – even generally wonky and nerdy ones – don’t think much about the morals concerns surrounding creating new people.

My wife and I struggled with this for years.

If you read what others have thought there are clear anti-natalist who believe it is always wrong. They have much to offer. Schopenhauer was in part responsible for my Pessimistic Awakening. Everyone should read Benatar even if you come away still thinking its lunacy.

On the other hand there are an almost endless list of pro-natalists. Being an economist I was attracted to the externality arguments of Simon – more people make a better world. And, the utility maximizing arguments of Bryan Caplan – children make your lives better.

However, I had a hard time finding pro-natalist who grappled deeply with whether or not having children was morally right for the child. There seemed to be a dearth of answers to the problem of “wrongful life” – the notion that brining people into existence is a crime against that person.

Even more  puzzling the space seemed to be fairly empty of persons who gravitated towards my final view which I can summarize in parts

  1. Bringing people into existence is a morally ambiguous exercise that depends in large part on your estimation of how much the person will suffer vs. enjoy life. Though this seems like an arrogant “god-like” judgment, you cannot avoid making it because you do in fact have the power to create life and all of the moral responsibilities that go along with it.
  2. Having created life you do have a special responsibility to that life. From a purely utilitarian perspective once a child is born his or her suffering is no less important than the suffering of millions of children around the world. However, your imposition of life creates a special moral obligation. Imposition is the word I think most appropriate. I can talk more about that later because I know it confuses some folks.
  3. If your reasons for creating life were selfish – and mine certainly were – then you need to acknowledge that every day. The fiction that you somehow did your child a favor for which they owe you is vicious and cruel.
  4. Suffering comes first. This I believe generally but I will restate for children. You might have all sorts of hopes and dreams for your child but the alleviation of suffering comes first. I won’t go so far as to say you should never impose suffering on a child because you think its for their own good later. However, you should be extremely wary of such arguments and whether or not you are really willing to make this trade because your own dreams about your child’s future are more important to you than your child’s first person experience.

There are so many other philosophical issues that children bring up: Does my son have human rights. If so are they different than mine. And, if I think his rights are some how curtailed by his mental development does that mean that the rights of adults vary with their mental faculties? Am I sure that anyone has human rights?

At what point does he “wake up.” I have watched him intently determined to see if I could tell when the light came on.  I have lots of thoughts on this but they should go in a separate post.

However, to close this out I will say that the morality of creating life is a big deal that we need to struggle with more. It is perhaps the most pressing moral question of the 21st Century.

In the past we could be resigned to the fact that our biology was going to drive us to do this no matter what. However, we are facing an era where we may be able to create sentient life synthetically. Either through artificial intelligence or by growing individuals en masse outside the womb.

The excuse – my biological clock made me do it – will no longer cut it and we may be talking about trillions of lives here. If we get this wrong it will be the greatest moral crime ever committed.

Since economic evolution is right up my alley, I thought I would continue the theme of Karl’s recent post on the subject explaining while a plethora of old, small businesses is a sign of market failure, and specifically respond to a comment left by Jazzbumpa, which includes a common sentiment among the left, that is not at all a feature of a market economy:

So the natural evolution of capitalism is for each business segment to ultimately become a near-monopoly. This is economic growth, and it is a good thing.

And Private Equity funds accelerate this process, making it an even better thing.

I’m starting to get it. Who do think will eventually own the whole world – General Electric or Cerberus?


Let me ask you; are you afraid of dominance and market power of British-East India Company? If the above were an actual concern, you would be. B-EIC had the mother of all market positions, and not even just in the 17th and 18th centuries — but a position that would make any company today envious. It was largely horizontally integrated in trade goods, and fully vertically integrated (even featuring its own army and navy). B-EIC had a captive market of nearly 1/5th of the entire population on earth, and had was specifically handy at brutal oppression.

However, despite all of the advantages one could hope for, B-EIC went out of business in 1873. Which highlights what should be a fundamental law of economics (but is not):

All competitive advantage is temporary.

Billions of gallons of ink has been spilled chronicling the rise of giant firms, and detailing how their businesses were run to be “in it for the long haul”. However — and ironically — billions of gallons of ink has also been spilled chronicling the same companies’ fall from grace as quickly as a decade later. In fact, of the original Forbes 100 list of largest US companies, only eighteen sustained their performance to the 50 year mark…and if my memory serves me correctly only two are still there (one being Exxon).

In fact, with an increase in the level of competition, economists Robert Wiggins and Timothy Ruefli find that the ability of a single firm to remain in a position of competitive advantage shortens precipitously. This is just another way of saying that he “S-curve” of deductive tinkering/technological innovation has been compressed.

To sum it up: a healthy market is characterized by relatively easy entry to new participants, a healthy level of competition between firms, and the ability for firms to die gracefully. Large firms will come and go, and some may be quite intimidating (like IBM, Microsoft, or Google, for example)…

…their time, too, shall pass.

Matt Yglesias brings up this graph to counter small business fetishism

His take, which is my natural take, is that the represents a failure of the evolutionary process of the market.

For example, I like to show this picture to my students

This is Lucius Lowe’s Hardware store in Wilkesboro North Carolina. He opened it in 1921 and indeed until 1949, this was the only location.

Today Lowes has roughly 1800 locations and employs about 250K people. There were thousands of little hardware stores in small towns all across America. There was only one that became an nationwide Big-Box megachain.

Their primary competitor The Home Depot was an intentional big box creation.

The point is that Lowe’s became what it is today almost certainly by chance. Perhaps the Lowe’s family was blessed with simply amazing business insight but I doubt it.

They happened to do the right things at the right time and were rewarded for it. Their company grew and expanded to become the 7th largest retailer in the world.

The fact that business owners don’t actually have to know anything about business is the fundamental strength of capitalism and it goes incredibly unappreciated.

What happens is that people start small businesses. Then by sheer dumb luck  someone will be operating a business model that happens to serve the needs of millions of people.

This business will kill off the competition and grow to dominate its industry. Then all customers will enjoy the advantages of this business model. However, its crucial to realize that not a single human being anywhere in this process needs to have even the slightest clue about what he or she is doing.

The process of market selection makes it appear as if there was intelligent design but no intelligence and no design is necessary.

Indeed, the key in this entire process is the death of most businesses.  Most ideas are bad ideas. There are many more ways something can go wrong than for something to go right. So what you need is a process that destroys as many bad ideas as possible, leaving the rare good idea to prosper.

This is the market process.

If you see an economy that is dominated by small business then this tells you that something is keeping them from dying. That very thing is stopping market evolution and – we should expect – is holding back economic growth.

As noted earlier immigrants arrive with less debt and therefore help deleverage the country. However, I want to focus more on the fact that immigrants are also customers because this is always a hard sell.

And, let me cut to the chase and say in the short term we are really talking about Mexican immigrants here, so I am going to focus on that. I am a huge supporter of not just allowing but strongly encouraging South Asian immigration to the United States but that’s a whole different story.

Now we address the issue at hand. Here is the US trade deficit with Mexico:

FRED Graph

As you can see US exports to Mexico are less than US imports from Mexico, meaning we run a negative balance of trade. I apologize to my fellow economists for ignoring capital accounts and other details but I want to keep this particular post simple.

There are a of things going on here but one way to look at it is that Mexican labor is cheaper and so goods produced by Mexicans are cheaper. Thus its more likely that we buy from them than they buy from us.

If we move Mexicans to America their labor is still relatively cheap. Everyone experiences this.

However, now that they are in America they are buying American services. That means shopping at American stores. Renting American Apartments. Heating and cooling their homes with American power, etc.

So you can look at it this way. You can either have your turkeys gutted in Mexico and shipped to America. Or you can have them gutted in Texas. Either way the same guy is going to gut them. Immigration policy is not going to change that.

However, if he lives in Texas then at least his is renting a Texas apartment and shopping at a Texas Wal-Mart. And, if there is one thing the US needs right now its more housing demand and higher retails sales.

Remember that immigrants are new customers as well as new workers.

Yet, these customers typically arrive with no housing debt, no credit card debt and no major medical expenses.

As more immigrants arrive on our shores both private and public debt per American falls.

Tim Duy is bullish on the idea

In short, I think the US Treasury has good reason to consider adding floating rate debt – and should find a ready buyer not only in Wall Street, but just across town.

The US government already has floating rate debt. Its called T-Bills. When the your 13-weeks is up you simply issue/buy some more.

Unless I am missing something here the only real advantage to a floating rate long bond is transactions costs. You only have to sell/buy it once rather than 4 times every year.


Also, on a related note, there are no savings to be had from the federal government locking in low rates now. Not unless the government knows something about Fed policy the market doesn’t or is deliberately attempting to manipulate Fed policy.

This is because long rates simply are the market’s best guess at the path of short rates plus a slight risk premium and at this point option value because short rates can rise but they cannot fall.

Thus it ought to be the case that borrowing over a longer term increases the government’s borrowing costs.

What it does though is lower the government’s exposure to interest rate risk. I am not sure this is a huge deal or even a good idea, but if its what you want then you do get that.

A new Gallup poll of small-business owners provides evidence about what they’re worried about. Gallup themselves title an article on the survey results “Gov’t Regulations at Top of Small-Business Owners’ Problem List”. They present the following table, which is topped by “complying with government regulations”.

One thing that jumped out at me is that complying with government regulations is the most important problem for 22% of respondents, compared to 18% in the most recent  NFIB survey. One explanation for this difference could be simple margin of error: it is, after all, only 4 percentage point. However, Gallup respondents perceive regulation to be an a even bigger problem if you include “new healthcare policy” and/or “poor leadership/government/president”.

Another explanation for the difference could be the wording of the question. Gallup asks:

“What is the most important problem facing small business owners like youtoday?”

whereas NFIB asks:

“What is the single most important problem facing your business today?”

The subtle wording difference here could be consequential. It is quite easy to imagine a small business owner allowing his ideological bias to affect his beliefs about the problems facing businesses like his, but having more realistic understanding of the problems facing himself. It is likely that the latter mistake would be more costly than the former anyway.

Another difference is that in the Gallup survey, “lack of consumer demand” was cited by 12% compared to 28% who cited “poor sales” in the NFIB. However, Gallup also has “consumer confidence” as the most important issue for 15%, which you could combine to 27% for “consumers” as the biggest problem, which is close.

When it comes to what businesses would need to see in order for small businesses to thrive, the evidence again favors demand explanations over regulatory ones. Only 12% felt that “fewer government regulations” would be sufficient, and 6% cited better tax laws. Growth in sales was 15%, consumer confidence was 5%, and an improved economy was 8%. How many of these can you pin on aggregate demand?

Overall, signs continue to indicate aggregate demand is a more important problem problem than regulations. Hat tip to Catherine Rampell.

Sarah Kliff reports

Erik Brynjolfsson, director of the MIT Center for Digital Business and Andrew McAfee, the center’s associate director, had originally planned to title the book The Digital Frontier, a nod to all the opportunities that grow out of new innovations. As they recount in an e-book published today, their research led them in a slightly different direction: namely, to a book titled Race Against the Machine .

When discussing jobs and unemployment, there was a great deal of attention paid to issues like weak demand, outsourcing and labor mobility but relatively little attention given to technology’s role,” they write. “We wanted to correct that.”

Now, one could be saying that robots are changing the structure of the workforce so that demand for some jobs is up while demand for other jobs is down. Yet, the winners outweigh the losers. number of losers outweighs the number of winners.

That’s not, however, a story that is backed up by the data.

FRED Graph

Though construction is well ahead of the pack the unemployment rate in all industries has risen in unison.

Now perhaps this isn’t the right breakdown. I can try to guess at a few others.

We can try computer systems design services, which seems like it ought to be a net beneficiary of this trend and motor vehicles and parts, which I think is the most highly robotic industry in America and should therefore be shedding workers.

FRED Graph

Now the trend over the last decade has mirrored what the authors suggest. Cutely these two guys are on the same scale so, it was the case around 2002 that they had roughly the same number of employees.

But now lets look at year-over-year payroll growth

FRED Graph

You can see they move sort of together but certainly in sync once the recession hits. Its just that growth in computer systems designers is going from strongly positive to slightly negative while growth in autoworkers is going from pretty negative to really darn negative.

When the economy rebounds, note that actually autoworkers rebound more strongly than computer systems engineers. You can even see in the first chart that the recovery has changed the trend for autoworkers while computer systems designers have yet to return to their old trend.

Based on all of that its hard to say that the problem we are having now is that technology is shifting the nature of work. If so then the trend should have improved for someone.

However, there is another take on this which makes it a nominal issue. I have had trouble explaining it but I think this route might work:

Suppose that because of all of this great new computer/robotic technology the CPI was actually overstating inflation by 2%. Well then look at what happened to America over the last five years.

FRED Graph

The US just went through a strong deflation in 2009 and a double dip late last year.  If you strip out food and energy then the drop off isn’t as sharp but the picture might be more reminiscent of how the economy feels.

FRED Graph

That is, taking into account technological change one might be able to say that we have been experiencing deflation every since late 2008.

Put another way, its saying that monetary policy has been too tight because it has been underestimating the extent to which technology is expanding people’s standard of living.

It would also turn this mind-boggling graph

FRED Graph

into this

FRED Graph

Since the CPI is overstating inflation by 2%, bonds that are linked to the CPI – like TIPS – are actually paying you a 2% higher real rate than the numbers show.

So if your story is that technological change isn’t showing up in the data, either because of CPI bias or because of non-market rents (Tyler Cowen, 2011) then we are saying that for the market economy monetary policy had already been quite tight going into 2008.

Even pushing short term nominal interest rates to zero, barely got the 5 year real interest rate below 2% and then only in a sustained way just recently.

This is a long winded way of saying a technological story is a story about inadequate nominal demand.

With sufficient nominal demand the economy will create a job for everyone who wants one. This is what markets do. When their aren’t enough jobs that telling you that markets are failing to clear and that is a nominal problem. That is to say, it is a problem with prices.

I think some of my readers are confusing my claim that United States essentially cannot end up like Greece with the claim that any amount of government spending can financed through money creation.

The US could, in theory, end up like Zimbabwe. Indeed, in the column that started it all Greg Mankiw used that example and I didn’t dispute it. It is entirely possible to print your way to hyper-inflation.

This is different, however, than the claim that high levels of borrowing would force the United States to default.

Let me take the issue by another handle to see if I can explain.

The fact that US T-Bills are traded for reserves means that barring a complete financial collapse the US government can always extract funds from the banking sector.

What happens is not that banks refuse to lend money to the government – this is never sensible – it is that in order to reign in inflation the Federal Reserve must contract the total quantity of reserve and drive up interest rates on all borrowing.

Or put another way: as the interest rate on T-Bills rises then money will flow out of the Federal Funds market and into the T-Bill market. This will cause the Federal Funds rate to rise.

Normally the Federal Reserve would then step in and buy T-Bills. The way they buy T-Bills is by simply increasing the reserves the bank has with the Fed. This causes the supply of reserves to expand and the Federal Funds rate to fall.

In theory the Fed could simply not do this – though this would be a radical change in monetary policy. Then money would continue to flow out of the Federal Funds market into the T-Bill market.

The Federal Funds rate would start to rise. In response banks would then curtail lending. Credit card offers would dry up. Financing costs for cars and trucks would rise. Business loans would be harder to come by, etc.

This action would restrain the growth of the economy and keep inflation from occurring.

In the data you would see retail sales fall and the savings rate rise to cover the large budget deficit. This is exactly similar to what is going on now, accept for different reasons. In this case the private sector recession would accommodate the fiscal expansion.

Now as always there is a limit on how much the government can extract from the private sector. At some point you are going to generate a banking crisis.  Rising short term interest rates are going to lead to falling asset prices, including the assets on bank balance sheets.  Eventually, the banking system will find itself insolvent and will collapse.

This can indeed happen, but this is different than the Greek scenario. Importantly while Greece’s problems were caused by a recession, this situation would be eased by a recession.

Some commenters pushed back on my suggestion that it was “essentially impossible” for the US to end up like Greece. I say essentially because the way monetary policy in the United States is conducted could change dramatically or there could be a wholesale irreparable shutdown of the US financial system.

Those scenarios would be similar – though with some important differences – to Greece.

To address my commenters specifically: Megan McArdle says

. . . this seems to me to rely on the assumption that the US always borrows in its own currency.

Countries like Argentina did not stop borrowing in their own currency because they liked dollars better; they stopped borrowing in their own currency because eventually they exhausted their central bank’s balance sheet, and they were monetizing the debt. And borrowers caught onto that pretty quickly, and refused to lend in domestic currency–even domestic lenders.

It assumes that monetary policy is conducted by trading bank reserves for government bonds. This does not require that domestic lenders do anything special.  It’s similar to saying “borrow in your own currency” but I think highlights the relevant points.

First, the monetary authority may have other objectives besides accommodating the Fiscal Authorities or even controlling inflation. The US dollar for example could be pegged to Euro. Some third world countries do this to guarantee their domestic private investors access to foreign capital for example.

If the Federal Reserve chose to do this is would not be able to accommodate fiscal expansion. Interest rates would have to rise in order to make foreign investors indifferent to holding German bonds or US T-bills. If not the peg will break. Or at least could be broken by a determined speculator.

The fact that the US has no dollar policy is what allows the Fed to accommodate either completely or partially, depending on the focus they place on US inflation.

Nick Rowe says

Karl: there’s presumably an upper bound on seigniorage revenue. The central bank can’t print enough money to buy more than the whole of GDP. And in an OLG model, the equilibrium real rate of interest rises as the debt/GDP ratio rises, and once the real interest rate exceeds the growth rate of real GDP, a Ponzi scheme becomes unstable.

The first point is certainly correct. If the Central Bank tries to hold interest rates down in the face of an ever rising deficit then the result will eventually be hyperinflation. The government will loose its ability to extract resources from the economy because it will not be able to issue debt fast enough to purchase things at the market price.

The second point on OLG – I think – ignores the role of the banking sector. It presumes that government bonds must be held by households and that the households will attempt to consume the principal of their bond holdings in the later period.

With a banking system this need not hold because banks can expand their balance sheets so long they have reserves to do so. Furthermore, they do not cash in their bonds in the second period. Both of these factors implies that carrying the debt only requires economic agents to reduce consumption or investment enough to pay the deficit each period. They do not have reduce enough to re-buy the debt every period.

Bob Murphy says

Karl, in your last scenario (with foreign bond holders dumping the dollar), why wouldn’t US interest rates rise? I agree the dollar would fall, imports would become expensive, and Americans’ standard of living would fall (which you cheerily describe as a boost in working), but wouldn’t interest rates spike too? If so, isn’t that like Greece? That’s what Mankiw is taking about.

US interest rates are set by the Federal Reserve. No amount of selling on the part of foreign holders can change that. If the Federal Reserve refused to raise interest rate to support the dollar a “Willie Coyote Moment” would ensue. The dollar would keep collapsing until if fell below its “new equilibrium value”

Then the dollar would rise slowly over time and the combination of the rising dollar and the low interest rate on bonds would be enough to get foreigners to hold US bonds.

This is similar to what happens when a peg breaks. So here is the value of the Thai Bhat in dollars.

FRED Graph

In this case the Bank of Thailand was trying to control the exchange rate through foreign reserve accumulation rather than interest rate policy. However, when they relented the Baht collapsed below what its long run value would be and then proceeded to rise.

I preface pretty much all my critiques of Greg Mankiw’s writings with a note on how good he has been to me. Some of my readers find this annoying. Yet, I think its important partially because I am a deep believer in academic civility and in part because making note of that fact is personally meaningful to me.

That having been said, I think Greg’s analysis is a bit off in his recent NYT column but most notably here.

The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard & Poor’s downgrade of United States debt over the summer is a portent of what could lie ahead.  In the long run, we have to pay our debts — or face dire consequences.

To be sure, the bond market doesn’t seem particularly worried about the solvency of the federal government. It is still willing to lend to the United States at low rates of interest. But the same thing was true of Greece four years ago. Once the bond market starts changing its mind, the verdict can be swift, and can lead to a vicious circle of rising interest rates, increasing debt service and budget deficits, and falling confidence.

Bond markets are now giving the United States the benefit of the doubt, partly because other nations look even riskier, and partly in the belief that we will, in time, get our fiscal house in order. The big political question is how.

This – I believe – is an inaccurate description of how the bond markets and deficits work. I will try to lay out several counter-intuitive positions in what I hope to be a relatively short post.

First, the US government never has to pay back money that it borrows. I actually think if I pressed Greg on this he would agree – infinitely lived organizations whether they are companies or government never have to repay their debts.

Where the disagreement comes in over servicing debt. A common belief is that all organizations must service their debt. That is, they at least have to be able to make the interest payment. This does put an organization in jeopardy if investors believe that it may not be able to afford the interest payments. This causes the interest rates to spiral ever higher and for the organization to reach illiquidity.

Can this happen to the US government? The simple answer is no.

As long as T-Bills are traded for bank reserves in Open Market Operations this essentially cannot happen. The interest rate on T-Bills will have to be the interest rate equal to the Federal Funds rate.


Well suppose the interest on T-Bills rose above the interest on reserves. Then it would make sense for banks to buy T-Bills rather than loan reserves to other banks. After all, if they need to get back reserves they can all ways sell the T-Bills to the Fed.

This draws money out of the Federal Funds market, which tends to raise the Federal Funds rate. To correct this the Federal Reserve will buy more T-Bills to supply reserves to the banking system and drive back down the rate of interest on T-Bills and with it the Federal Funds rate.

So, as long as monetary policy is conducted by swapping selling T-Bills for reserves the interest rate on T-Bill will equal the interest rate on reserves.

That’s all well and good but certainly the US can’t live beyond its means forever – what happens if it tries?

Well lets break this into two potential cases. One, the US lives beyond its means by borrowing money from domestic bond holders. Two, the US lives beyond its means by borrowing money from foreign bond holders.

In the first, case what the government has to be worried about is excessive deficits. Not so much the debt per se but the deficit. That is revenues versus expenditures in the current year. The consequences of excessive deficits depends on how the Federal Reserve responds.

The Federal Reserve could respond by keeping the Federal Funds rate low in spite of increases budget deficits. In this case Aggregate Demand is very high because the government and private parties are both borrowing very heavily.

The economy will not be able to produce enough resources to satisfy all of the demand and the result will be ever higher inflation. This scenario frightens a lot of folks but I actually think that it is not that likely.

Alternatively, the Federal Reserve could raise interest rates to curb the inflation.

The result will be a crowding out of durable goods, housing and business investment. As interest rates go higher people will find it difficult to afford the financing for these things. 

However, the government will avoid a death spiral. This is because the decline in the demand for housing, durables and investment will create contractionary pressure in the economy that will lower both employment and inflation. This will cause the Federal Reserve to stop raising interest rates.

What you wind up with is a moribund state in which investment is weak, personal savings is high and the government consistently runs a massive budget deficit. However, no budget crisis.

In short, the government is effectively taxing investment and durable consumption to support its deficit.


Lastly, lets consider what happens if the US has substantial foreign holdings of debt. In this case many of the bonds will be held outside of the Federal Reserve system.

If the bond holders become nervous and want to reduce their exposure to the United States they must sell the bonds for US dollars and then trade those dollars for some other currency. This will put downward pressure on the US dollar.

The result will be a decline in imports into the US and a ramp-up in exports. The manufacturing sector of the United States would expand rapidly while consumer would find it harder to afford foreign goods such as TVs and Cars.

Employment in the United States would expand and consumption growth would decline as the country became a major export engine.

In this case, the US governments deficit is being paid for by increased work effort on the part of Americans – as marginally attached workers are soaked into the manufacturing sector – and by lower consumption on the part of US workers.

However, in none of these cases does the United States end up like Greece. In order for that to happen the United States would have to abandon its own currency and conduct monetary policy using something other T-Bills.

Given our current set, however, ending up like Greece is essentially impossible.

Though a wide-swath of economists have bought into NGDP, I think there is still much dissention over exactly what it would.

Robert Waldaman makes some detailed critiques. Let me address them one by one.

So what is the proposal ? That the Fed have a target for 2012 nominal GDP or first quarter of 2012 nominal GDP ? Even if it isn’t measured, the Fed could try to get the November 2011 nominal GDP it wants. As far as I know, advocates of nominal GDP targetting don’t even acknowledge this question.

I suggest putting NGDP language into the policy statement. The “instrument of record” will remain the Federal Funds rate. This is the opportunity cost on bank lending and banks understand what it means.

However, we make movements in the Funds Rate conditional on Nominal GDP. I have offered as a draft policy statement.

The Committee judges that economic conditions will warrant exceptionally low levels for the Federal Funds rate until current value Gross Domestic Product exceeds $19.5 Trillion.

Since I am a Burkean at heart I see no need to jettison Fedspeak or the Feds Funds rate as the instrument of record. What we are saying here is that we will guarantee low interest rates until we see a specific level of economic performance.

And, note NGDP is not only constantly measured but very easy for the public to understand since it involves no deflating. It is literally an adding up of all the value produced by the US economy. That’s sounds like a thing policy makers should try to promote.

Waldmman goes on

I think Krugman understates his case when he claims that the Fed can’t target nominal GDP when we are in a liquidity trap. I would define targeting X as making the conditional expected value of X equal to the target. There will be a disturbance, but if the expected value is different from the target no matter what one does, then on can’t target X. The concept of daily GDP is meaningful (although it would be crazy to try to measure it and correct accounting for inventories would be key). Do quasi-monetarists really think that the Fed can make the expected value of tomorrow’s nominal GDP whatever it wants ?

I admit I am being fairly twitty, but I think this question isn’t totally stupid, because I think it shows that they just don’t think about what monetary policy can and can’t do. The Fed can move the Fed funds rate very fast. The Fed can change the money supply quickly at least if it wants to reduce it or we are not in a liquidity trap. Nominal GDP can only jump if prices are flexible. Monetary policy is effective because they are sticky. We have a problem.

I don’t think there is a problem here. I am not quite sure what Waldmman means by jump but our best case scenario is that Nominal GDP will move towards the long run path over a matter of months to a year. That would, however, represent blazingly fast economic growth and be consistent with a strong reduction in unemployment – which is what we should really care about.

OK a more serious issue. Can the Fed get the 2012 annual nominal GDP it wants by buying Treasuries. Jah Hatsius (and Brad DeLong) argue that the Fed should declare its intention of buying whatever quantity it takes of long term Treasuries to achieve a nominal GDP target. But what if there is no such quantity ? Then the announcement would be a false claim.

Is there any such quantity ? I think not. Certainly not if one wants 2011-2012 growth to be well over the trend growth rate say 10% (Brad DeLong seemed to call for this when he said to target the level). I admit that I will go rational expectations and argue that if it can’t happen, then people won’t believe it can happen. So I assume model consistent expectations.

I obviously want to come to consensus on this issue as fast as possible but I don’t think we have to worry about Quantitative Easing or Qualitative Easing. A well designed target and what I am going to start calling the Smith-Sumner Rule*, will get us there.


There are a couple of ways to think about it. Intuitively it makes sense to me to say that all long interest rates are simply the expectation of the time path of short rates adjusted for the probability that you might be wrong. Thus if you give clear guidance on the path of short rates you have immediately set long rates, regardless of whether you buy Treasuries or not.

Perhaps a more common sense way of putting it is this. You are guaranteeing banks that they will have access to low cost credit until the level of spending in the economy picks up. This straight forwardly means that the opportunity cost of lending will be low until such time that your borrowers have more money to pay you back.

That instantly makes every loan a better deal. A bank might worry that it has all of this long money outstanding, much of it potentially going bad and then suddenly the Fed raises rates on it. However, the new target says this explicitly will not happen. Either, the economy gets better or your money stays cheap. Either, way you are not going to get squeezed.

If you like to do analysis in BL-MP then you would say that expectations of Future Monetary Policy (MP) pushs out Bank Lending (BL) in the current period.

*Not-yet tenured Professors can always use a little shameless self-promotion.

Dennis Lockhart notes that the economy is now starting to beat expectations on a regular basis

The somewhat overlooked story of the period since the end of August is that much of the incoming data have exceeded most forecasters’ low expectations. For the third quarter at least, it appears that downgrades of growth forecasts have been too pessimistic.

. . .

In support of this view, I’ll paint a picture from our working with the data. We at the Atlanta Fed regularly monitor the data series that directly enter into the GDP calculation, along with important other series, including employment. We compare these data elements to Bloomberg’s published consensus expectations for each. In the months leading up to July, the downside surprises in the data dominated. In August and September, upside and downside surprises were roughly equal. But in October, the surprises have generally been to the upside. Importantly, these surprises to the upside exceeded expectations by a significant measure. I’ve concluded an unqualified narrative of a downward trend is unjustified.

An important aspect of making forecasts in an uncertain environment is to deconstruct the narrative. This doesn’t always work of course because things can happen which are beyond your capacity to imagine. Nonetheless, you give your estimates a second look if you can’t tell a story about how they come to be.

In particular, looking at the Summer Slowdown, it was easy to tell a story about temporary shocks. A tsunami, an oil crisis a potential debt crisis. Yet, it was a bit harder to tell a story about the economy taking a nose dive.

Was construction going to contract further? How, into where? Was the pace of teacher layoffs going to accelerate going into 2011? What would that imply for class sizes. Is it realistic to think the local electorate would tolerate that?

Manufacturing is a different story. We could talk about some real losses there because we were in a mini renaissance. All that had to happen was a return to the normal pattern of decline.

Still, it was hard to couple that with a full story about the economy turning significantly down rather than just the same crappy jobless recovery we had the last two go ‘rounds. We would need a big shock to make a huge drop make sense.

That’s not say one isn’t waiting in the wings, but it is to say that “stall speed” thinking never quite made sense to me. There are a lot more stories one can tell about growth that gets a spark and jumps into high gear than about a self-fulfilling downward spiral. Self-fulfilling stagnation – sure. But, downward spiral? We need a strong outside force to make that believable.

From Calculated Risk two notes

On auto sales

Auto research company J.D. Power and Associates estimates an annual industry sales pace of 13.1 million vehicles for the month, about the same as September and a big jump from earlier in the year.

That seems weak to me, though its lower higher than the number people had floating around. I would expect to see some rise from the August numbers as both Honda and Toyota sales caught up. A big number like 13.8+ wouldn’t surprise me but 13.3ish would be my baseline.

PCE should register very strong growth in the last quarter.

Which brings me to

Our tracking model of third quarter GDP has been running well ahead of our former official estimate of 1.8% growth. Today, in our US economic weekly, we officially revise up our Q3 forecast to 2.7%. We expect some of this strong momentum to carry over into the fourth quarter. We bumped up our Q4 estimate to 2.3% from 2.0%.

I am not sure how you get a baseline slower growth estimate for the last quarter than for the 3rd quarter. PCE is going to be stronger. The early signs on net exports look good.

Inventories are running tight. ISM is probably going to turn higher as we go down the stretch.

So I know lots of outrageous claims are made against the President. However, we shouldn’t let that distract us from claims that are pretty straight forward. For example, a commenter asks

where in the world did you get the idea that have an administration which is openly hostile to fossil fuels and wants to promote industry which will put fossil fuel extractors out of business?

I understand that the language of “putting fossil fuel extractors out of business” sounds harsh but is there really another way of interpreting this:


Clearly the Administration is promoting stricter standards on fossil fuel usage and increased investment in Green Energy which is a direct competitor to fossil fuel extraction.

Our government is openly against fossil fuel extraction as the future for American energy and has a website devoted to it. Now, they are not absolute zealots who want to put oil and gas extractors out of business tomorrow, but there is clear an effort to make business more difficult for oil and gas and less difficult for green energy.

Indeed, this is what must happen if the US is to reduce its carbon footprint.

My only point is that this clear, stated open hostility to the oil and gas industry has not stopped investment.

In the same way I should note that there is clear open hostility from all segments of the American governing establishment against the tobacco industry. Yet, that industry is growing.

File this under both: Politicians generally tell you what they plan to do and Federal efforts to stop industries they intend to drive into the ground typically don’t work.

There are reasons why we would prefer individuals to pay for their own programs rather than pay for them out of tax money.

However, there is a notion floating around that somehow long term cost expenditures only become real when they are moved on to the government balance sheet.

For example Paul Ryan defended cutting Pell Grants by saying

. . . Pell Grants have become unsustainable. It’s all borrowed money…Look, I worked three jobs to pay off my student loans after college. I didn’t get grants, I got loans, and we need to have a system of viable student loans to be able to do this.

I point this out not to pick on Ryan but for us to examine more closely what he saying because I think he means it and I think it represents the views of a fair number of people.

First, he is saying that cannot – indeed cannot – continue the Pell Grant program because its based on borrowing money the Federal Government doesn’t have.

Instead, he suggests student should borrow money to pay for tuition the same way he did.

In both cases, however, money is being borrowed to fund a student’s education and in both cases that money will be repaid by extracting some amount of consumption in the future.

The idea that the government has to stop its massive borrowing resonates with a lot of people. However, the notion that students could borrow for their education makes a lot sense.

However, in a flow of funds sort of way these are the same thing. We might want to talk about incentives but that’s a slightly different conversation and for now I want to keep it separate. Let me just say that I am not ignoring incentive arguments, I am just separating them from what I think is a real concern people have: that Federal Borrowing is unsustainable.

I think people feel this way at least in part because the analogize the federal government to themselves. They could not keep borrowing money forever and ever.

At the same time it makes a lot of sense to have think that a young person might borrow money to pay for college.

What we don’t see is that the United States is not a single individual or even a household. Its an ever changing group of people. Just as the young student will be able to pay off his future debt as his income grows, so will the United States as a whole.

Moreover, the taxpayer is a changing and – at least for now – ever expanding group of people. More and more tax payers are born every year. More and more tax payers move to the US every year. That means that the US’s fiscal profile is more like that of a young person than of an older one.

Indeed, we could make the US even younger by increasing the rate of legal immigration. I know there are a lot of tense emotions surrounding illegal immigrants and those who broke the law.

Lets set that aside, however, and focus on the advantages of radically increasing legal immigration.

According to Gallup over 150 Million people want to move to the United States. I actually think that’s a dramatic understatement that is influenced by how notoriously hard it is to move to the United States.

Letting those folks in through legal channels would radically expand the number of taxpayers we had in one swoop. That would lower the burden of the debt on everyone.

It would also mean that government spending was less of burden generally. The size of the US military is one of our biggest expenses. We can debate whether the military is the proper size but because we use our troops all over the world adding more residents doesn’t mean we need a bigger military.

The war in Afghanistan is still the war in Afghanistan whether there are 100Million Americans footing the bill or 500Million Americans footing the bill. Yet, its much cheaper per American the more Americans we have.

In addition, many of our costs are for the elderly: Social Security, Medicare and the majority of Medicaid. Immigrants would lower those costs per person in the short term.

Now, eventually those immigrants will age as well. However, the aging of the immigrant population give us an enormous amount of breathing room.

For starters so long as the immigration rate is strongly positive, the number of workers relative to retirees will grow. We could probably sustain large positive immigration for the next 50 years or so.

Even after that ends immigrants tend to have more children than natives. This means we have an extra generation of so, even after then immigration wave stops of a growing population. That may be another 30 – 40 years.

At this point we are talking about a scenario that is 70 – 80 years in the future before costs we start to slide back to where we are.

That presents a huge opportunity for the dynamics of the economy to change. if nothing else we will probably transition even further away from manual labor. That means phasing up the retirement age starting 100 years from now will be much less painful than phasing it up starting 20 years from now.

We also don’t know the direction of medicine but there is good reason to suspect that the excess cost growth will not continue indefinitely. This means in 80 years we may be facing a much different cost dynamic for Medicare and Social Security than we are now.

All of that is to say that the US has available to it policy alternative that not only make it just as easy for the government to manage its debt burden as private citizens but in fact makes it much easier.

We can expand the number of tax payers and lay the burden on a greater number of shoulders. And lest one think that this is exploiting the poor immigrants who come here and are suddenly burden with our legacy costs, remember that they are currently willing to risk their lives to do this.

Having them take on legacy costs but dramatically increasing the number of folks who come in is a win-win for everyone.

Regime Uncertainty

A number of intelligent economists appear to take the regime uncertainty argument seriously. As Russ Roberts notes there is probably some ideological component to this, but at its heart I suspect its what I think of as “real variable bias.”

There is a tendency among a lot of economists to vastly over-estimate the importance of real versus nominal variables. Real things seem like they ought to matter more. After all they are real. Nominal things making all the difference means that these massive effects we are seeing are generated from what are ultimately mistakes.

I think that misses the true nature of what it means to be nominal and that nominal should be thought of as “keeping one’s word.”  That is actually quite important in massive economy, even though it can cause problems when you run into a situation where everyone would be better off to accept a round of promise breaking.

Anyway I wanted to get to one of the reasons why I think regime uncertainty is highly unlikely to explain our current economic conditions. The idea here is that government policy has created an environment where companies are afraid to invest and hire.

The problem is that in most sectors of the economy you have to jump through a lot of hoops to explain exactly why it is that the current environment is so detrimental to hiring.

Oil and Gas Extraction

This issue is made worse once you look at resource extraction in general and oil in particular.

We are just coming off the BP Gulf of Mexico oil spill. We had a Congress that passed Cap-And-Trade, a bill specifically designed to make it more expensive to operate as a greenhouse gas emitter. We have the possibility of the EPA regulating greenhouse gases. We have an administration which is openly hostile to fossil fuels and wants to promote industry which will put fossil fuel extractors out of business and we have protesters pushing the President to deny a crucial private infrastructure initiative to help develop fossil fuels – the Keystone XL project.


Yet, with all of that employment in oil and gas extraction is booming

FRED Graph

If the government can’t scare off the oil and gas extractors, when the government’s stated goal is to replace them with solar or wind then is it reasonable to suspect other people are scared off.


That being said I do believe that loosening current day regulations on oil and gas extraction as well as working with industry on developing safe and easy to implement fracking regulations is a step in the right direction.

Our total employment numbers are still awful. We need to push for more jobs on all fronts. This includes looser monetary policy, simulative fiscal policy and easing restrictions on capital intensive sectors like oil and gas.

As I laid out I don’t think regime uncertainty is stopping the oil and gas industry from expanding but ordinary regulatory impediment is. We need to encourage not discourage new off shore drilling. We need to approve the Keystone XL pipeline. We need to support not oppose new fracking projects in the Eastern United States.

Quite frankly I also believe we need to open up ANWR, though I understand this issue has already become such a hot button that it may not be a fight worth having.

Protecting the environment is an important long run goal. Human suffering, however, has to take priority. Around the globe humans are suffering from a lack of demand. This is one industry where the demand is there. We should let it prosper.


The incoming data continues to support my baseline forecast of moderate and potentially accelerating growth for the United States. Note that I am not considering European contagion in my analysis because it is so far beyond my expertise.

I am considering the possibility of a EuroZone recession resulting from too tight monetary policy and the spillover effects seem to be small to me.

Again, however, if you are concerned about US banks going under or a powerful run to the dollar in the wake of European banking crisis then you should be listening to people who have deeper European knowledge.

In the absence of all that the numbers seem to be progressing as I expected. Multi-family starts are rising. Builder confidence is increasing. New Claims for Unemployment insurance are falling. Consumer lending is loosening. Chain-store sales are strong.

I have never really thought consumer confidence mattered for anything, and so far I have been safe in that assumption. Could bite me in the coming months, but for now this is my perspective and I am sticking to it.

One area that did give me pause was the BLS inflation report.

While some people took – false – comfort in waning inflation the internals did not look good to me.

I saw falling used cars prices. Maybe that is ok as the supply of new cars is expanding but I am still watching it closely.

Shockingly, though I saw both staling rents and falling lodging prices. This I don’t understand. Of course one month does not make a trend but I though I was seeing very strong pressure on these sectors.

Vacancy rates for both hotels and apartments are moving quite low. Obviously there is very little supply on the horizon for at least 18 months. What I expect to see is rising prices.

This is a positive sign for me because it indicates that more projects will be able to get the green light. The important thing to remember about structures is that while future demand projections matter you really need to be making enough money to cover your financing costs as soon as possible. Otherwise your are in a massive liquidity spiral.

So, to get more starts we simply have to have either cheaper money (and that can’t get much cheaper) or lower vacancies, higher rents and higher lodging rates.

Thus I think that economists should view declining rents the same way the view declining wages – as a net negative for economic well being, not a positive.

This makes sense from a philosophical perspective as well since both land and labor are the ultimate scarce factors of production and so should accrue all surplus from an expanding economy. If that didn’t make sense don’t worry, the point is that rising rents means more construction and construction is in an unsustainable depression that needs to be alleviated.

NGDP Targeting

Now on NGDP targeting. I think we are all buying into the idea that it is better and easier to sell an NGDP target than calls for higher inflation. Even writing out the mock statement, it sounds like something it would be hard for the average Financial Times reading citizen to object to. Here again is my mock statement:

The Committee judges that economic conditions will warrant exceptionally low levels for the Federal Funds rate until current value Gross Domestic Product exceeds $19.5 Trillion.

However – and this may be the traditionalist in me – I don’t think we are even in the same ballpark, the same universe, of adopting naked NGDP targeting as the Fed’s policy or even more out there, creating a market for NGDP futures.

What we do is we change the statement to reflect an NGDP perspective. What that then requires is a relationship between the NGDP path, our current NGDP and the proper interest rate response of the Fed.

This is what I mean by an NGDP “Taylor rule.” I think a rough version should be easy enough to estimate based on past behavior. My strategy is to first take the period from 1990 to 2007 as being optimal in terms of NGDP and then just back-out the implicit interest rate response function.

FRED Graph

After that we can think about welfare measure.


Based on Cowen’s Law, I am sure work has been done on this before, so if anyone has links let me know.

However, I would love for this to be an example of where the blogosphere collectively worked on an emerging problem and came up with a series workable solutions not using the traditional platform of working papers, conferences, and seminars.

The blogosphere has the potential to be faster, more transparent, more open to outside participants and directly understandable by journalists and involved citizens. This, in my mind, is the way academics ought to be doing business.

Brad Delong suggests we need a combination of monetary and fiscal policy. I am not opposed to that but I think the statement could do it alone.

You would say something like the following.

The Committee judges that economic conditions will warrant exceptionally low levels for the Federal Funds rate until current value Gross Domestic Product exceeds $19.5 Trillion.

$19.5 Trillion is the level we would have reached in late 2013 had we continued on a 5% growth path. The key is coming up with the target date then you derive the NGDP number and set the funds rate conditional upon that.

I think coming up with something like a Taylor rule for NGDP is useful. If its already be done let me know, if not I am on it.

It seems as if the most famous of economic writers himself is jumping aboard the “market monetarist” train, and advocating a level target for NGDP as a Fed regime shift:

At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.

And one thing the market monetarists may have been right about is the usefulness of focusing on nominal GDP. As far as I can see,the underlying economics is about expected inflation; but stating the goal in terms of nominal GDP may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and anti-social.

I whole-heartedly welcome Dr. Krugman aboard, and am happy to have him on our side (although I never really imagined that I was arguing against Krugman, except on an infra-marginal level — his views of the concept of the “liquidity trap” nonwithstanding). Krugman’s 1998 paper outlining an expectation model of monetary policy is a go-to paper for my understanding.

In my opinion, a credible central bank does have nearly unlimited power (in theory, perhaps not legally) to move nominal GDP anywhere it likes regardless of the level of short-term rates. There are points in the actual transferring of assets blurs the line between what would be considered monetary policy and fiscal policy on a technical level…but in my experience, market monetarists have always emphasized the expectations channel (rather than, say, the credit channel, or interest rates) as the primary monetary transmission mechanism[1]. And it has always been the case that market monetarists believed that the expectations of the future path of NGDP drives current NGDP (rather than the size of policy interventions).

In any case, as Scott Sumner recently said, “There is nothing so powerful as an idea whose time has come.”

[1]Nick Rowe has a recent post on this, and David Beckworth has done excellent work on expectations vs size.

P.S. It will likely be a long time before I can regularly blog again. It is the government’s end of fiscal year, and so it is my organization’s as well…and that means reports, audits, presentations, etc…on top of my usually high workload. I do miss blogging, but I’m glad that there are plenty of others out there taking market monetarism (and specifically NGDP level targeting) seriously!

I do want to get to the NGDP petition today, but the following actually relates to a lecture I am giving this morning so I am going to throw up at minimal cost.

At least causally we have long thought of consumer sentiment as being an important determinant in spending. This has always struck me as contrary both to human nature and economic principles.

I’ve said that consumer spending is held in check by a single phrase: “Your application for credit has been denied”

Indeed, the very fact that banks turn away paying customers – rather than simply raising the price on them – I think is key to understanding the business cycle. Its one of those odd but key facts that tells us something important is going on under the surface. Similar, is the fact that the spread on Prime Adjustable Rate Mortgages is higher not lower than Prime Jumbo 30 year.

On the surface this makes little since given the huge imbedded option in the 30 year mortgage. This tells us something is odd about ARMs and since in an environment of falling home prices fixed rate mortgage debt becomes a “radically sticky price” this tells us something important about how economies get themselves in rough shape.

But, enough of all that, you come to Modeled Behavior for charts.

Here is growth in real retail sales versus consumer sentiment.

FRED Graph

Pretty good. But, here is growth in real retail sales vs. a survey of senior loan officers willingness to issue new consumer installment loans.

FRED Graph

Consumer sentiment would tell you that retail sales should be in the toilet. Bank willingness to lend should tell you they are surging and indeed, they are surging.

This is why I believe that bank willingness to lend, not consumer willingness to spend or animal spirits of investors is what matters.

Further, I think when you put bank lending front and combine that with Fed policy you see that “savings” is not as meaningful a concept as we might think.

The amount of savings in the economy is a result of what goes on in capital markets and – I think – consumer behavior can only impact this through effects on inflation. Changes in consumer behavior will change the relationship between savings and inflation, but its not really correct to think of savings as being determined by consumer behavior.

This is all kind of hazy and I depend on Brad Delong to point me to important historical references of people having worked all this out before.


Also as a side note: I am always open to advice and criticism but I think Brad Delong misunderstands me. I am not suggesting that some jobs do not create value but that we are currently experiencing a job crisis not a value producing crisis.

Said another way, policies which increase employment even if they result in less efficient production of consumption goods will make people happier.

Look at these numbers

Trends in Recognition and Positive Intensity for Herman Cain

I understand the smart person thing to say is that “The Party Decides” and I don’t see how the party chooses Herman Cain. Nonetheless, I really want to see how this ends because barring a major misstep on Cain’s part what do you do against numbers like this.

Even if every Republican who doesn’t know about Cain decides that she hates him he still has a net positive favorability rating. And, that’s seriously unlikely to happen.

Not only that but he has been at every debate and is only getting more popular as he is more well known.

My money still says Obama over Romney 49-48, but again I really want to see how this Herman Cain thing ends because right now I can’t envision it.

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