You are currently browsing the monthly archive for February 2012.

He writes

High frequency trading presents a lot of interesting puzzles. The Booth faculty lunchroom has hosted some interesting discussions: "what possible social use is it to have price discovery in a microsecond instead of a millisecond?" "I don’t know, but there’s a theorem that says if it’s profitable it’s socially beneficial." "Not if there are externalities" "Ok, where’s the externality?" At which point we all agree we don’t know what the heck is going on.

Tragedy of the Commons.

There is valuable unowned information in the pattern of trades and prices. This is an arms race to exploit it.


Scott Sumner responds

But my bigger problem is Karl’s claim that interest rates are of more interest to the average business owner than the monetary base.  Suppose Karl and I both looked into a crystal ball and saw that the fed funds rate would be 12% in 2014.  From Karl’s post, I infer that he’d advise that small businessman to hold off on the investment project, as the cost of that floating rate business loan would soar in 2014.  I’d have the opposite reaction.  I’d beg, borrow, and steal every penny I could get my hands on, and pour all the money into REITs.  That’s because the 12% rate in the crystal ball would tell me I am wrong and Bob Murphy is right—that the inflated monetary base is going to drive inflation and NGDP dramatically higher in 2014, forcing the Fed to raise rates sharply in order to hold inflation down.  I see that as incredibly bullish for real estate.

If you don’t know anything about the world then interest rates aren’t really helpful. However, one of the premises behind a world of differentiated businessmen and women is that they actually do know something about their business.

For example, I know unless something awful happens to the temperature there is some macro economic catastrophe, nominal residential rents in the Raleigh-Durham area will rise steadily over the next decade. I could cash in on this by investing in residential real estate. However, to do this I have to convince a bank to go for this and to that they mainly have to be convinced that their money won’t have commanded a higher price somewhere else.

This is what I mean, people have relatively good information about the dynamics of their local nominal revenue streams. Absent guidance from financial markets and hence the Fed they have absolutely no idea what the economy wide price of funds will be.

To put it another way, if gold were unloaded at the docks and then spread vendor to vendor throughout the country with no one knowing in advance when the mass of specie would hit then hearing that a wave was coming would be the best information that you could get.

However, in practice money leaks out of the bond market running all over the country at once through channels determined by the financial markets. In that case information on the prices of financial products – and the interest rate is just the price on bonds – is more useful to you.

Now, to be sure, I think that the most complete information the Fed could provide would be something like: We intend to hit 20 Trillion in Nominal GDP by 2017 and we predict that will require zero interest rates through 2014.

Implicit, however, is the message that you will be getting more nominal GDP come hell or high water, we are just letting you know what we think the interest rate path will be.

This graph – again from Bill McBride – shows us how in general terms housing is close to a criticality.

You can see that price-to-rent is approaching multi-decade lows. However, 30 year real interest rates are also near mulit-decade lows.

If housing were homogenous and there weren’t significant and idiosyncratic transactions costs involved in renting out single family units, you would see a genuine criticality. One month there would be lots of “excess supply” then it would cross a line and boom within-in days it would all be sold to investors.

The gritty nature of housing, renting and the loan market means that this can’t happen. But, you can none-the-less have a very rapid acceleration where it seems like nothing is happening and then all of a sudden everything is happening at once.

You knew this was coming. From an interview with Becky Quick

Buffett told Becky Quick that there are only four things you can do with cash: stocks buybacks, dividends, acquisitions, or "sitting with it."

"I went through the logic of each thing.  He told me they would not have the chance to make big acquisitions that would require lots of money… And then I asked him the question, I said .. ‘I would use it for buybacks if I thought my stock was undervalued.’  And I said, ‘How do you feel about that?’  The stock was 200-and-something.  He said, ‘I think my stock is very undervalued.’  I said, ‘Well, what better to do with your money?’  And then we talked awhile.  And, he didn’t do anything, and of course, he didn’t want to do anything.  He just liked having the cash.

And, so I ask you again shareholder. Who owns/owned Apple – you or Steve Jobs?

Whose whimsy dictates what is to be done?

Whose utility function is being maximized?

Scott says

. . . economics [took] a momentous wrong turn.  Under the influence of Wicksell, and then later Keynes, macroeconomists began to see the change in interest rates as not some sort of epiphenomenon associated with an increase in the money supply, but rather as monetary policy itself.  This culminated in the work of Woodford, who developed monetary models without money, where interest rates were all that mattered.

. . .

It seems to me that Woodford’s approach is capable of rescuing the QTM.  Think about it.  The QTM is criticized as only being able to explain price level changes in the long run.  And yet Woodford says that the current level of aggregate demand is mostly determined by the expected future course of monetary policy; i.e. the long run

. . .

The rate of growth in NGDP between now and 2014 will be strongly influenced by where people think NGDP will be in 2017.  There is no interest rate path that the Fed can describe that would give people even a ballpark estimate of NGDP in 2017.  But if they say they will set the currency stock at $1.6 trillion in 2017, (twice the 2007 level) then people will know that 2017 NGDP is also likely to be roughly twice 2007 NGDP.   And if they do that, NGDP will grow very rapidly over the next two years.

Are you simply saying that we can’t solve for the interest rate path and therefore it is difficult to set up an effective communications strategy?

I think that’s true though we have to be aware the problem works both ways. The actual economy consists of millions of different economic agents all of whom face an interest rate that is based off of the Funds rate or the Interest on Reserves rate. However, each of their relationships to NGDP is less clear.

To know what this policy means they – or more realistically their banker – has to solve backwards.

For example, suppose I am expanding a hot new burrito chain in East Texas. Does a 30% higher NGDP for the US in 2017 mean I – and my banker – want to expand faster or slower?

Its not clear. The overall growth path of NGDP for the US is only loosely connected the actual revenue that I am going to receive. A booming national NGDP might mean I grow at 14% nominal rate rather than a 11% nominal rate. Though it could go the other way if my customers get lured away to work in West Texas.

However, the interest rate over this period is going to determine whether dumping a bunch of money into new restaurants is a good idea or not. Is that going to be higher or lower because of your target. Again, its not clear.

So, its not clear what I should do.

On the other hand if you said – interest rates will be zero through at least 2014, then it is at least certain that no one is getting any surprises over the construction loan period and that more than likely some decent loan is going to be available when my stores are done.

So this is another issue on which I wanted to marshal more charts and evidence but at some point its worth it just to make a statement.

If you look across the demographic survey’s what looks to be the biggest effect of the recession has been to delay adulthood for folks born around 1990.

Rather than graduating high school or college and getting their own apartment and their own car, they stayed with or moved back in with their parents. This drove down household formation and drove down the demand for automobiles.

Indeed, the per capita stock of both homes and cars has been shrinking and the actual stock of cars has been shrinking over this period.

However, this will not last. There is nothing about America which says that lifestyles are forever changed. Young people themselves don’t say that in surveys. Firms of all shapes and sizes do not seem to be repeating that perception.

Folks think that this is unusual. That times are tough and people are having to rough it. Not, that it just doesn’t make sense anymore to move out in your 20s.

The more complete economic-y story address how the long term growth path was affected by financial innovation, the resulting deviation and the resulting return.

However, the short, short story is that after the collapse the risk premium associated with loaning individuals money for cars and houses went up and so either interest rates had to go down or marginal returns had to go up. Because interest rates could not go down, marginal returns went up.

Yet, this can only happen if the capital-to-labor ratio falls which is precisely what we mean by saying folks moved back in with their parents.

Still fundamental tastes and technologies have not changed. As the risk premium falls the return will also have to fall which means the ratio will rise, which in turn means heavy production of cars and homes.

We can – and I think have gotten – a clue as to when this is going to happen when the rental rates on these things rise. For homes, we can get that directly by reading rents. For cars we can look at the dynamics of the used car market, which will tell you how much maintenance cost people are willing to put up with.

Via Mark Thoma a paper a self-recommending paper by David Romer. A key take away – I think this comes from James Kwak paraphrasing.

To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.

This is roughly inline with my reading of the data which says a marginal tax rate of around 70 – 80% would maximize the government’s take.

An important thing that is not commonly talked about is the way income and work effects interact and this has important implications.

We usually think of income effects as causing people to substitute away from work towards leisure. However, causal empiricism suggests that one important use of income is to substitute out of household production.

For example, one definition of the “work” I do is attempting to interpret data for the benefit of public officials and my blog readers. However, at my current wage I also have to cut my own grass and wash my own dishes.

If I were paid more I would use some of that money to have my grass cut and a maid do my housework which would leave me with more time to look at data.

However, it would be wrong to interpret that as a substitution effect – which is how most studies would pick it up. Its really an income effect. If I won the lottery the same thing would happen. I wouldn’t look at less data, I would look at more data, because now I can pay someone to do household production for me.

The same thing is likely true with folks who become superrich. You might think that they became super rich because of they wanted to make a lot money. Unlikely. It is more likely that their obsession just so happened to coincide with something the market paid a lot of money for.

And, so as they get richer they can spend more and more time with their obsession. At lower levels of income it looks like you are picking up a substitution effect. Higher wages –> more work. But, you are really picking up an income effect. More wealth –> less household production.

Thus once you get to the super wealthy it looks like a surprising drop in the substitution effect, but its not. You have simply satiated the income effect. They now do almost no household production so it doesn’t matter.

The ironic thing is that even if you are a Randian, you can see this. Hank Rearden says he only cares about making money but this is an obvious lie. Like most male obsessives he cares about steel and about women who care about steel and about nothing else.

If he made money, so be it. If not, so be it. If metallurgy made you a billionaire he’d be a billionaire. If it made you a homeless crank, he’d be a homeless crank.

That’s the way obsession works.

What pisses him off is not taking away his money, its taking away his metal.

Its funny that intuitively folks pick up on that but then in an effort to defend egoism make up this story about loving money that is actually both less accurate and less compelling.

Lance Roberts says a bunch of stuff about housing. None of it matters.

The government programs, foreclosures, etc. It all means nothing.

Unless you think there will be a significant rise in homelessness the only thing that matters is formation vs. units.

If someone is for foreclosed on where do they go?

If someone short selling, where do they go?

If I am “waiting for a better” market to sell my house. What exactly am I waiting for? Presumably to buy yet another house or move into some rental.

You can’t look at for sale inventory and think that is telling you a lot because virtually every seller  – even REO – represents some buyer of either rental housing or an owner occupied home.

Only changes in formation matter for net demand.

The ZLB per se doesn’t matter it is that the Fed targets interest rates and that bank reserves wash with t-bills. Thus anything that attempts to increase the demand for t-bills in fact increases excess reserves. Funds flow straight through the t-bill market into excess reserves.

In addition attempts to save through buying government securities simply results in a monetary contraction and running up a deficit simply results in a monetary expansion.

Now outside the ZLB the Fed could simply cut in response to this but at the ZLB it cannot. That’s the difference. At the ZLB the Fed cannot – using standard monetary policy – cut the link between what happens in the T-Bill market and the effective money supply.

It could using non-standard monetary policy but that’s the whole issue in a way.

Ryan Avent writes

Second, we also need to note that rising oil prices represent both demand shocks and supply shocks to the American economy. Dear oil can impact demand directly, by reducing real household income, and indirectly, by influencing consumer confidence. If rising oil prices were purely a problem of demand, then the only thing to fear would indeed be fear itself—by households or by overactive central banks. They are not, however. Soaring oil prices can also dent an economy’s productive capacity. America relies on petroleum as an input to production in lots of different ways—directly, in the case of things like chemicals and plastics, indirectly, in the role oil plays in supply chains and labour markets (as in commuting). When oil prices spike some American production becomes uneconomic. Were the central bank to treat this disruption as a purely demand-oriented phenomenon, it would generate lots of inflation without returning the economy to its previous output peak

Much of the confusion on the blogosphere comes from conflating consumption and output.

Imagine that instead of pumping oil out of the ground in an incredibly capital intensive process primarily dependent on having access to rare geological deposits that we made oil this way: unskilled laborers squeeze dirt with their hands until it forms mush balls which were then turned into oil by mixing them with limestone, one of the most abundant minerals on earth.

Now imagine there is a huge spike in the global demand for oil. Do we think this will raise unemployment or lower it?

Alternatively, imagine that the United States produced three times as much oil as it consumed and that by law an oil dividend check was paid out to all US households from any profits from oil and gas production.

Now there is a huge spike in the global demand for oil. Is this contractionary or expansionary for the the US economy.

The point is that it matters what happens to the flow of funds. The fact that consumers in other countries bid up the price of scarce resources is a reason why consumption of those resources by US consumer might fall but it is not a reason why US unemployment should rise.

Even if it makes a whole host of US production technologies less effective, that is a strong reason why US consumption should fall but it is not itself a reason why unemployment should rise.

This is essentially the same mistake people are making on housing. That the bubble goes away is a reason for consumption to fall, but it is not – absent nominal effects – a reason for unemployment to rise.

I have argued that consumer pressure for better treatment of animals in agriculture is a good thing, but that pressuring for better treatment of workers might lead to worse outcomes. Obviously, there are a lot of consequential differences between workers and animals, but I will try to explain which differences specifically matter and why. Note that in both cases I am ignoring the welfare of consumers here.

The first and fundamental difference is that animals cannot bargain and do not have choices. Humans usually have other alternatives to a given employer, and even under a local monopsony they can move. So when you observe a workers current employment situation it likely reflects the best choice among all of their alternatives. When prevent a worker from making a particular choice, say by pressuring a corporation to stop employing those workers, then you are pushing them into their next best choices which is a good indicator that you are making them worse off.

In contrast, Animals are owned outright and have no alternatives, which means that if you push corporations from using them as they currently do, their next highest use may make them better off even if it is a less profitable arrangement overall. Since they do not share in their marginal product, this need not make them worse off .

Another fundamental difference in a similar vein is that the supply of animals is much more elastic than the supply of people who might wish to work. If a given industry were to fire it’s lowest level of workers because the jobs were seen as too dangerous, or if costs are raised due to higher job perks or safety, then those workers pushed out of that job and industry will be excess labor supply in another industry. On top of the next-worst-choice problem highlighted above, this means that workers currently employed in the next worst industry will face lower wages from higher labor supply.

In contrast, when a factory farm producing pigs is pressured into ceasing operations or increasing standards so the profit maximizing quantity decreases, the supply of pigs produced can be reduced quickly in a way that is not true of workers. Since agriculture is very competitive, it’s likely that pigs across industries are being produced near long-run average cost, so that any extra supply of pigs will only decrease prices for alternative uses of pigs in the short run, and in the medium and long run less pigs will simply be raise. This is also why the next-worse-choice problem that workers face isn’t as significant for animals: for most their next worse choice is probably never being born, which very often is an improvement.

This post was inspired by an old Tyler Cowen post that I think about often but can’t seem to find. What aspects of this issue am I missing?

Bill McBride – who strike a more Smithian tone by the day – delivers one chart that shows the core observation I made over a year ago now.


Probably my most concise early statement comes from a guest blog I did for Megan McArdle at the Atlantic.

I’ve argued that whatever its flaws might have been, the subprime boom should be viewed as a technological innovation that allowed millions of households to switch out of the market for mutli-family homes and mobile homes and into the single family market. This drove both a switch in the type of construction and pushed up the price of existing single family homes.

Yet, even more important for understanding the current state of the economy is appreciating that while the increase in home building during the boom was not historic, the collapse in homebuilding has been. For several years now the United States has been building fewer homes than any single month in the 40 years proceeding.

And of course I cannot post this without calling attention to Cardiff Garcia, who distinguishes himself as a true scholar and a gentleman by digging up this old blog post which I would have otherwise have forgotten.


And remember time-to-build. Not many homes will be completed in 2012 either because not many were started in 2011. Perhaps not as deep of a record low as 2011 was but still completion this year will be dramatically low by historical standards, running, well over a million homes below the long run average.

A grad student asks Tyler for his pointers

The most important lesson is to use the right textbook.  Beyond that:

1. Give a damn.

2. Get to the point when you speak.

3. Expect something from them.

4. Teach to the students who are interested in learning.

5. At all levels, do not overestimate the attention span of your audience.

6. Do not be afraid to be idiosyncratic, provided you adhere strictly to #2.

. . .

Doesn’t Bryan Caplan have a post on this?  Here is John Baez on how to teach.  Peoples, what can you recommend from the literature?

My take:

If you are like most first time teachers the key is to show up and start talking. I’d like to say that your students are as afraid of you as you are of them but that’s not even close to being true. You are terrified. They are out for blood. That’s just the reality.

Once, you get passed that: enthusiasm, enthusiasm, enthusiasm. No matter what you are saying your effectiveness will be primarily determined by how much you love saying it.

If you think you are ready for the big time then I would offer this

1) Preferably the class as a whole and certainly every lesson should have an arc. Mine usually go like this: There is some mystery about the world. Obvious answers fail. This one succeeds.

2) Jokes work well but preferably when they are well rehearsed  and they come straight out of the flow. If you have to stop and say, “here is a joke” you are already in the second tier.

3) Contra most folks, I love Powe Point. However, at its best, the slide comes after its been explained or motivated. So that you are talking, building to a more and more technical point and then boom you tap next and it becomes clear.

4) Callbacks. They are damn hard, but worth it if you can nail it. I nailed a whole semester callback once and got a standing ovation.

The idea is that you motivate something as a quasi-interesting side point or strange technique obsessed about by odd people and then later it becomes the answer to some huge mystery. The big callback I nailed had to do with Hotelling’s Rule, but that’s all I’ll say on online.

4b) I have never figure out how to execute it but I heard a professor once give a lecture that started with an anecdote and then the entire lecture was told within the anecdote. However, after probably 5 minutes or so you had forgotten that this was an anecdote. Then he closed the lecture by finishing the anecdote. It was a work of art and needless to say I remember to this day exactly what that lecture was about.

Lastly, lots of folks say they expect economics to be boring or have had economics classes that were boring. I am sure that when I have been off my game I have bored a few students, but as a general matter this is baffling to me.

There is literally nothing that you have ever cared about or ever will care about that is not impacted by what you learn in this class. I sometimes tell introductory students that they will never experience anything as important or as profound as what I am about to tell them and I am dead serious. How could they?

This is the science of choice. Life is choices. Everything else is supplementary material.

Williamson writes

Here’s an idea that struck me in class last Thursday. There are basically two ways to think about financial crises, or the process by which financial factors affect aggregate economic activity. The first is indeterminacy.  . .

The second process potentially driving a financial crisis is amplification – the idea that financial factors can amplify a small shock to the economy and make it a big one. . .

What struck me is that my idea of what the real estate bubble was and Jim Bullard’s view are quite different. My view is that the bubble was about amplification.  . .

Bullard’s view is essentially indeterminacy. The real estate bubble was a self-fulfilling good equilibrium, and now we’re in a bad one.

The two views get us to the same place. I.e. potential GDP is much smaller than the Old Keynesians are telling us. What you see may be what you get. However, the policy conclusions implied by each view could be quite different.

If I may be so bold, the problem with both these views is that their end point is sharply at odds with reality.

Ignore any theory about the crisis or equilibrium and simply walk step-by-step through the elements of the current economy that is different from the one in 2006.

Is there some element of the economy that you can point to and say – this was supported in 2006, is not supported now and the resources cannot be repurposed.

To my knowledge the only elements are fairly minor

The biggest difference seems to be that it will be hard to support as much owner-occupied housing, which in turn will result in a higher rental stock, which is inefficient to operate with single-family homes.

However, to reorient the total stock towards multi-family is not that difficult. You just build almost no single family and a bunch of multi-family for a few years and the mix will have shifted back.

Now, what you do see is that consumption will be more expensive without the collateral coming from single family homes, because it will be difficult to hold down inflation in emerging markets in general and China in particular.

However, production in the United States doesn’t look to be changed in any way that is significant.

Tyler Cowen posts the following graph

and suggests that it is indicative of his Great Stagnation thesis.

However, if we disaggregate the overall stock of capital – which is ultimately what we care about – even a little bit we see three very different trends underlying business investment.


I apologize for the graph quality but the BEA is no FRED. In any case the dark blue line is industrial equipment and has been rising at roughly the same pace over the past 40 years, which means in log terms there has been a steady slowdown as the US deindustrializes. But, of course that is nothing new to any of us.

Transportation equipment – the very light line – is extremely sensitive to the business cycle. It flattens out during the 1980s, reaccelerates in the 90s and then falls off a cliff in the recent recession.

That’s not even investment – that’s the overall stock. The stock of automobiles has been falling since 2007.

On the other hand the yellow line – information processing equipment – has simply exploded as was unaffected by the recession, or any recession for that matter.

The lesson is that what we call fluctuating investment net investment is largely fluctuating investment in transportation. When money is tight or fuel is expensive the stock of transportation equipment in general, and trucks in particular falls. Not, just investment but the actual stock.

While that does represent important losses in economic potential I think its different than what folks have in mind when they conjure up the term “investment.”

I’ve seen some commentary questioning when new home sales are going to turn northward and whether or not that’s key sign for the recovery. Yet, there is one thing we can say for nearly certain – New Home Sales aren’t going to hit records anytime soon.

How can we be so sure?

Because there aren’t any new homes to sell !!!

FRED Graph

What’s more with completions running just above sales, the number of new homes for sales is likely to decline in coming months. This in turn implies that new sales only have so far Northward to go.

FRED Graph

Now- to be completely honest- this isn’t technically speaking “true.” One can sell a new home that does not exist. The following is the lead photo on an actual for-sale listing here in Raleigh.

206 Drummond Drive, Raleigh, NC.

No artist rendering. No photo of the lot. Because their isn’t even a cleared lot. Here is the Google Streetview of 205 Drummond Drive. Its just trees.


However, the market for this stuff is fairly limited.

Most of the time developers at a minimum acquire property and begin to – you know – build houses before they can convince buyer to buy the properties.

This is part of why I think the popular interpretation of the housing overhang is misinterpreted.

The market for new houses more or less clears in the sense that the homes for-sale run at roughly the rate of homes being purchased.

However, what that implies is that changes in household formation will show up as a reduction in new home building – exactly what a competitive market should do. On the other hand slowdowns in household formation will result in an overhang of existing homes, as people move out – or are pushed out – of their existing home and into the arms of relatives.

So as always the key driver is household formation. As it picks up the overhand will fall and new home sales will pick up. But neither of the two are pushing on each other. They are both being pushed on by household formation.

An oldie but a goodie from Gallup

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Mike Konczal posts a summary of a working paper by Mason and Jayadev. The leader:

Changes in debt-income ratios can be attributed to primary borrowing, interest rates, growth, and inflation. In a new working paper, we apply such a decomposition to the evolution of U.S. household debt.  This shows that changes in borrowing behavior has played a smaller role in the growth of household leverage than is widely believed. Rather, most of the increase can be explained in terms of “Fisher dynamics” — the mechanical result of higher interest rates and lower inflation after 1980. Bringing leverage back down will similarly require contributions from factors other than reduced borrowing

Having read over the post I would say there is both more and less here than meets the eye. I think the authors are essentially correct – declines in inflation are the key driver behind high household indeptedness.

What they are not as explicit about is that indeptedness is fundamentally a nominal phenomenon. Its always difficult for me to lucidly explain this even to myself but these two graphs should help.

First, look at how household debt has grown

FRED Graph

An almost inexorable rise since the early 1980s. Even now we are barely back to 2005 levels.

Now compare that to debt service payments

FRED Graph

Though by 1995 the level of debt-to-income had gone up by about 50%, debt service payments were almost as low as the through in the 1980s.

And, today while debt-to-income is just shy of 200% of early 1980s levels, debt service payment are not that far off the bottom.

This is because inflation causes your debt-to-income ratio to fall faster, but it does this by requiring a higher payment at even given level of debt. So even though debt-to-income was much lower in 1985, for example, debt payments were higher.

One of the things I think these means – but I haven’t worked it out – is that low inflation creates a fundamentally more precarious economy, even without thinking about the zero lower bound.

In short when a lot of your payment is interest then the “price of debt” is less sticky. When lots of your payment is principle then the “price of debt” is very sticky.

The current recession has a weird extra stickiness because the falling price of land now means that lots of folks can’t refinance or sell out.

David Pogue has a very nice piece about Apple, China, and Foxconn over at the NYT that I recommend reading in full. But I want to highlight one part in particular where he quotes from a letter he received from a Chinese man whose aunt got a job at a Foxconn like factory that allowed her to leave her old job of prostitution:

If Americans truly care about Asian welfare, they would know that shutting down “sweat shops” would force many of us to return to rural regions and return to truly despicable “jobs.” And I fear that forcing factories to pay higher wages would mean they hire FEWER workers, not more.

What bothers me about some of the commentary I’ve been reading on this is that  many who are bothered by Foxconn are saying things that imply they don’t in fact truly care about Asian welfare, as Pogue’s correspondent put it. But I don’t think most don’t care, rather I agree with Krugman they simply haven’t thought through the implications.

Take, for example, Andrew Leonard writing at Salon about a labor union PR man who is searching for “an ethical smartphone”:

Wood embarked on a quest to see if he could find, at the very least, a smartphone that wasn’t quite so badly compromised as all the others… He wondered whether he should cut Samsung a break because the company kept more of its manufacturing in house in South Korea — where the labor laws were better enforced than in China or Vietnam.

Now South Korea has a per capita income of around $30,000, while China’s is around $8,400 and Vietnam is even lower at $3,400. So, predictably, Wood thinks it’s more ethical for a company to locate it’s operations in the nation that is somewhere between four to ten times richer than the alternatives. I struggle to see what the moral philosophy is that finds benefitting richer workers instead of poorer ones to be more ethical. He frames the issue in terms of rewarding nations that enforce labor laws better, but it will almost always be the case that richer nations enforce labor laws better.

And no, contrary to some of the arguments I’ve been seeing, a nation does not move from poor to rich by having stronger labor laws (or for that matter through more “ethical” consumption and the decision by consumers altruistically to pay more for goods). Yes, well functioning governments and institutions are an important part of the recipe for growth, but labor laws will be skated even in very rich countries when businesses save a lot of money by doing so. Thus we see that even in the U.S. many employees break labor laws by hiring illegal immigrants, but very few attempt to sneak past regulators by instituting 1800s style safety regulations. This is because 1800s safety and work rules would cost employers a lot of money as the laws are very far from what the free market would dictate. If you want workers with high marginal productivity and concomitant ability to demand high wages to do something dangerous then you have to pay them to do it.

This is why the causality works primarily like this:

  1. Worker productivity rises
  2. Wages rise
  3. Workers are less willing to accept unsafe conditions for marginally higher wages
  4. Compensating differentials increase so dangerous working conditions become more expensive for employers
  5. The difference between free market safety levels and those specified by labor laws narrow
  6. Complying with said laws is cheaper
  7. Compliance increases

This is not to say that labor laws can’t or don’t increase safety. They certainly can on the margin, especially as rising wages and worker safety preferences makes complying with them cheaper. But most of the observed difference in working conditions between the developed world and the developing world is due to the above mechanism, and not labor laws themselves.

If you want to make Chinese workers better off in terms of safety and working conditions, you’re missing the main point if you ignore productivity. Which, by the way, is hurt when foreign investment and capital locates in richer countries instead of poor ones. People who don’t like what they see at Foxconn would do well to remember this and stop calling companies who choose to locate operations in rich countries more “ethical”.

Maybe there is something I just don’t get but folks seem to be taking the seasonal adjustment issue way too seriously. For example, DK at Alphaville writes

FT Alphaville has written a fair amount about seasonal distortions in economic data but thought this latest piece of research from Nomura was worth highlighting (mostly because it involves time-travel).

It pokes a small but important hole in the surprisingly low 348k new US claims for unemployment insurance which were filed in the week ending 11 February, the fewest since March 2008.

. . .

Nomura thinks as much as one half of the decline since early January this yearmay reflect distortions in seasonal adjustment.  Looking ahead, the best guess is that distortions are likely to be neutral in the next couple of months, and then turn modestly negative in the spring:

That the seasonal adjustment factors were distorted by the sharpness of the post-Lehman drop was an interesting observation but its not a huge deal. If absolutely nothing else just chuck the seasonally adjusted numbers and use the unadjusted ones.

FRED Graph

What do see there: The 2010 to 2011 peak is a softer decline than either the 2009-2010 or the 2011 to 2012 peaks. This is consistent with the basic observation that the recovery slowed in 2010 but picked up again going into 2012

You can also see the summer the last two summer peaks show very little difference, reinforcing the general sense that summer 2011 was particularly off track data wise.

That there is a pattern here makes it kind of interesting but in terms of importance I think falls under the heading: There Be Noise.

Most measures of the economy have improved recently, however, I have mentioned that this is not the Kick, the point at which growth is self feeding. The following charts give a good representation of my thinking on the issue

This from Gallup is small business expectations for capital spending over the next year.

Trend: Wells Fargo/Gallup Small Business Index -- Future Expectations for Capital Spending

As you can see it is not only up but has crossed over, with more business expecting to increase than decrease investment.

However, here are small business expectations for obtaining credit over the same period.

Trend: Wells Fargo/Gallup Small Business Index -- Future Expectations for Obtaining Credit

They haven’t changed that much.

Which implies that businesses are planning to invest despite the fact that liquidity constraints are still binding.

The point I make, is that these businesses don’t think in terms of how everyone else’s plans are going to affect their plans. They simply take the world as it is.

However, if they all try to purchase capital then hiring will have to pick-up to meet demand. This in turn will increase their revenues which will increase their credit worthiness. It will also decrease default rates which will make banks more willing to lend generally. This will bring down the difficulty of obtaining credit number, which in turn will make expansion even easier.

My macro interpretation is that depreciation is driving up the natural rate of interest causing increased investment. Once the natural rate breaks through zero then monetary policy will be expansionary again and this will lead to self feeding growth.

John Cochrane writes

Runs don’t have a single cause, they have a straw that broke the camel’s back. Ask yourself, would simply bailing out Lehman have avoided this whole mess? Obviously not.  People saw Lehman go under — and Paulson’s speech, plus short-sale ban, plus everything else going on at the time — and asked themselves, "gee, my bank was investing in the same things Lehman was. I wonder how they’re doing? I’d better pull my money out just to be safe."   ("People" here means institutional investors in the shadow-banking system, i.e. prime-brokerage customers, repo investors, derivatives counterparties, asset-backed security investors.)

This gets it backwards. I’ll say more when I can figure out how to phrase it so as not to get death threats, but to be short the entire Lehman-TARP debacle exposed how little control Wall Street had over Washington and that deeply deeply frightening.

However, it was clear in August 2007 that this whole thing was going down on its own. The only question was when and how the Fed was going to stop it. But, they didn’t. They hemmed and hawed about tightropes.

Then in the shocker of shockers they let Lehman go down. At that point who knew what they wouldn’t allow to happen. It was insane.

But, don’t listen to me. Give this another listen, if you missed it the first time around, and then tell me whether or not you think Paulson’s  Oct 2008 testimony was what “clued people in” that there might be a problem here.


I agreed with Jim then and I still agree. You can call us supporters of crony capitalists, apologists for plutocracy, etc.

BUT, you might also want to mention the fact that we were right.

Well sort of,

She writes

This was exciting news for fans of the alternative economic school, more popularly known as MMT, which asks people to think of money, credit and tax in a completely different way to what is usually considered conventional in economics.

All in all, we have to say, the article did a good job, at least when it comes to explaining the origins and basics of the theory. As a primer it worked well.

. . .

The reaction, of course, is interesting because it shows to what degree MMT really does represent a paradigm shift in economics. If you can’t flip your brain into MMT mode, try as you might, you’ll never really understand what they’re going on about.

So earlier I made some disparaging comments about folks who don’t get the basic ideas that either the MMTers or the MMers are pushing. That was at minimum inappropriate.

Still, I think it’s a mistake to talk about MMT as if it is some grand new way of looking at the world. Its basically just understanding how Central Banks with a little bit of progressive liberalism sprinkled on top for extra fun.

For example Izzy quotes Stephanie Kelton as saying

And while “Keynesians” worried about the impact that large deficits would have on US interest rates, we calmly explained the flaws in the loanable funds framework and insisted that rates would remain low as long as the Fed was committed to low rates (as the Bank of Japan has shown for decades).

That has nothing to do with being a Keynesian or anything. It simply has to do with not thinking about what you are saying. Is there any theoretical difference here between this framework and the dominant economic framework?

I don’t see it.

Its just that people saying that interest rates would rise in the face of massive deficits are not even trying to walk through the mechanics of either interest rates or deficits. They are just asserting something that they think they heard once but weren’t really even paying attention to.

Maybe I am wrong.

If so I would like to hear the alternate story. I posit that no such consistent story exists. Anyone claiming to have one is engaging in hand waving or is speaking gibberish.

Or take this also from Kelton

And while Nobel laureates, like Robert Mundell, were espousing the virtues of a common currency in Europe, we warned that the new design would put bond markets in charge of government policies. At some point, being right should actually count for something.

Mundell’s endorsement was aesthetic. For example, I am allergic to cats. If someone said we should adopt X monetary policy and I knew a side effect was going to be to run all the cats out of America (sorry Kevin) then I am going to be more predisposed to supporting that monetary policy.

However, that is not to say I have an “alternative theory of money and cats.” I just don’t like cats or rather I don’t like their effect on my immune system.

Or take Micheal Hudson quoting me and responding

“You can’t just fund any level of government that you want from spending money, because you’ll get runaway inflation and eventually the rate of inflation will increase faster than the rate that you’re extracting resources from the economy,” says Karl Smith, an economist at the University of North Carolina. “This is the classic hyperinflation problem that happened in Zimbabwe and the Weimar Republic.”

Me: Wrong again. The Weimar inflation stemmed from the balance of payments. The Reichsbank created deutsche marks and threw them onto the foreign exchange markets to raise the money to pay reparations to the Allies (who turned around and paid the United States for arms purchases made prior to U.S. entry into the Great War).

What exactly are we disagreeing on here?

I am tempted to say nothing and that this is just a meaningless exchange of English phrases. But, if anything then it is probably the definition of the word “government.”

I am happy to talk this over with Michael but I feel overwhelming confident that he will agree that attempting to purchase an unbounded quantity of goods and services with no countervailing extraction of purchasing power from the economy will lead to hyperinflation.

The only place that I could possibly forsee a disagreement is over whether Michael thinks the extraction limit is less than 100%, which I would suggest that it is. However, that is first an empirical question and second I don’t think would prevent us from agreeing that by virtually any sensible definition of terms an extraction rate of 500,000% is not possible and absent any bank intervention the means through which it would be thwarted would be hyperinflation and a rejection of the currency.

Casey Mulligan writes

I agree that unemployment benefits and other safety net benefit payments are many times financed with taxes in the future or taxes in the past. But that “financing channel” still does not make the payments free from the perspective of today’s economy.
Suppose the government has been borrowing the money to pay for unemployment benefits. It borrows money by selling bonds. The purchasers of those bonds have less to spend on something else.

As I explained last week, government borrowing to pay for safety net benefits may increase consumer spending and reduce investment spending, because it does put money in the hands of consumers.

Lets try it this way. I am going to number each statement so anyone can point out the number where they think we disagree.

  1. The Treasury market is fully liquid
  2. Anyone who wanted to buy a T-Bill could.
  3. Yet, people are not choosing spend all of their funds on T-Bills
  4. They are not doing so because at the current interest rate their holdings of T-Bills are optimal
  5. If the interest rate on T-Bills does not change private parties buying behavior will not change
  6. If the interest rate on T-Bills rises above the interest rate paid on excess reserves then banks will use excess reserves to buy T-Bills
  7. Banks will continue to do this until the price of T-Bills falls to the interest rate on excess reserves
  8. Once Banks have achieved this the interest on T-Bills will be once again equal to the interest rate on reserves
  9. The incentives for non-banks buyers will not have changed
  10. Thus all the funds to pay for T-Bills are drawn from excess reserves


Where will the money come from?

It will come from here:

FRED Graph


To be clear for this example there is nothing special about the excess reserve set up, apart from the way the Fed has always worked. However, it should be abundantly clear where the money comes from now that there is a huge pile of money and not simply the daily creation and destruction of reserves to make the excess equal zero.

Matt Yglesias starts but obviously I would go much further

Call this the foundational myth of modern central banking. Like all good myths, it doesn’t withstand even the tiniest amount of scrutiny. Consider Alan Greenspan, the most celebrated central banker of our era. To serve as a technocrat he must possess the techne, the knowledge of the discipline of economics that makes him credible as a High Priest of the economic order. And yet he is a man of flesh and blood. He cannot serenly segment his views of the monetary policy aspect of macroeconomics from his views of the rest. And he has a duty—a solumn duty—in his role as technocrat to do what’s right for the county. So in 2000 Greenspan tightens money, George W Bush wins the election, Greenspan explains that the budget surplus runs the risk of plunging the country into socialism and endorses the Bush tax cuts, in 2004 he maintains loose money, Bush wins again, and Bush sets about to try to privatize Social Security.

It would be scandalous to admit that such considerations entered into the mind of the Maestro, but it would be equally absurd for him to forget about them.

Ben Bernanke has said that he could not save Lehman because it would be have been in violation of the law. My response is that it is not his responsibility to enforce the law. It is his responsibility to safe guard the lives of millions of people.

When the Capitol Police haul him away in chains then his responsibility to prevent the Great Recession ends. Until that moment the choice not to act, is his choice alone.

The constitution is no shield.

Arnold Kling writes:

I challenge any supporter of the sticky-wage story (Bryan? Scott?) to write a 500-word essay explaining how this graph does not contradict their view. If employment fluctuations consisted of movements along an aggregate labor demand schedule, then employment should be at an all-time high right now.

My working story:

The graph helps tell the story. Labor’s share began a secular collapse sometime in the 1990s, leading to a large run-up in loanable funds. That run up put large downward pressure on the natural rate of interest. This was offset for a time by finding ways of expanding the pool of credit worthy borrowers through financial innovation. Once a major set of those methods was revealed to be untenable the natural rate of interest collapsed not only below the Funds rate but well below zero. The large gap between between the natural rate and the Funds rate put large downward pressure on aggregate labor demand resulting in the Great Recession.

To have cleared the labor market with the pool of borrowers available in 2009, real wages would have had to make up for over a decades worth of missed decline. This was exacerbated by the fact that falling nominal wage disbursements (whether from pay cuts or layoffs) further depress the pool of eligible borrowers by raising real debt levels, requiring even further falls in the real wage.

Rising oil price remain my principle concern regarding the recovery.

My thesis is that rising oil prices are a monetary contraction because the funds are just parked in T-Bills.

Imagine for example if rising oil prices caused Oil Producing countries to buy more Boeings or Catepalliar Equipment. Would we expect oil prices to be contractionary?

Or would they simply shift production away from consumption and towards exports? Economists naturally think of international trade as pure exchange but of course its not. Dollar denominated assets are accumulated. This means it has monetary effects particularly at the zero lower bound.

If we were in a normal world the appropriate response to higher oil prices would be to cut interest rates as T-Bills are seeing higher demand. Otherwise, the Fed will have to slow the growth of the money supply in order to maintain the Funds rate – which must wash with the T-Bill rate – and would otherwise fall.

However, we at the ZLB we do not have this option. We do still have the option of using the statement.

My advice would be to go with something like this

Higher oil prices represent headwinds for the US economy and may justify more accommodative action to prevent job growth from slowing.

Note that this alone will convey to markets that the higher oil goes the longer the funds rate will stay low.  This is the opposite of what they believe.

Yes, there will be freakout. Yes, people will say we are entering a new era of inflation. My advice is simply to ignore them.

A relative of mine who is a litigator often uses the phrase, “Say it with cash.”

Think of the markets as speaking with cash. The talking heads may say what they want. Even high ranking financial executives may speak out. However, if the breakevens don’t move then no one is saying it with cash and so ignore them.

He writes

the Dow is a crummily constructed index covering a small and curious sample of companies. If you really wanted to know how the stock prices of that curious sample of companies were moving, you’d really want to see some proper weighting going on. But how many of the people looking at the Dow know, or care, about this weighting? How many know, or care, about the identify of the companies in the index? Are we sure that the S&P is a more accurate measure of market movements? What sort of movements are we interested in anyway?

This can’t be said enough. Sometimes its worth, you know giving the data at least a cursory look. You see this in index construction all the time. Folks will moan to high heaven about how this index is fundamentally flawed.

But, then you take an index which analytically must be overstating the underlying concept you are interested in and one that must be understated. Put them together and you can’t see a difference. Does it stop the moaning? Unfortunately, not.

Some things matter, but most things don’t.

I’ve ignored most of the renewed reproductive controversy but Democracy in America offers me an in, eulogizing Ruth Barcan Marcus EG writes

With regard to abortion, for example, she notes that people marshal a variety of arguments, some of which reference competing claims (such as the right of the fetus to live, or the right of a woman to control her own body), and some of which make prima facie claims (such as that a fetus is not a human, or that it is). She continues:

What all the arguments seem to share is the assumption that there is, despite uncertainty, a resolution without residue; that there is a correct set of metaphysical claims, principles, and priority rankings of principles which will justify the choice. Then, given the belief that one choice is justified, assignment of guilt relative to the overridden alternative is seen as inappropriate, and feelings of guilt or pangs of conscience are viewed as, at best, sentimental. But as one tries to unravel the tangle of arguments, it is clear that to insist there is in every case a solution without residue is false to the moral facts.

Abortion seems to me to be a particularly poor example of a lack of moral resolution. From listening to the discourse from almost every corner its clear that bordering on no one takes the issue seriously and is primarily just posturing.

I have heard no mention of whether or not fetuses or infants for that matter are p-zombies and if so would that matter. I have heard no serious treatment of the difference between the duty to prevent miscarriages and the duty to prevent abortion. I have heard no mention of whether or not all potential existing persons have moral relevance. I have heard no mention of wrongful life. These are trivially basic issues underpinning all this, yet the conversation does not even try to address them. Not fail. Not wave away. They simply don’t try.

Could it be that people don’t actually care about getting the internally consistent answer even supposing there was a internally consistent answer to be had?

Cardiff Garcia writes

The second half of last year was puzzling to anyone trying to understand future trends in US consumption. Or at least it was to us.

Spending climbed more quickly than incomes, the savings rate decreased and consumer credit increased. Yet this decline in the savings rate happened against a backdrop of further declines in US home prices, followed a big fall in equities during the summer, and coincided with below-average consumer confidence — all of which you would expect to push the savings rate up, not down.

And that’s before discussing where we are in the deleveraging cycle, if it even matters, and other mysteries.

A lot of people think this way. I don’t.

I like to think in terms of the natural rate of interest. Then ask, is the Federal Funds rate above or below the natural rate. Above and the economy will tend to grow faster than long run potential. Below and the economy will tend to grow slower than long run potential.

The factors Cardiff named are ones that would tend to push down the natural rate

  • Declines in wealth
  • Declines in confidence

However, they must be set against factors which would tend to raise the natural rate, most important for us today:

  • Increases in the Marginal Productivity of Capital

Lots of folks like the term “Pent-up demand” but it doesn’t sit well with me. Its just not how I see the world. Consumer durables are capital. They are just non-market capital. You use your car to do things. You use your washing machine to do things, etc. In some sense its household production all the way down, but we don’t need to go there today.

So, you are thinking about borrowing or saving some money. This is really a question of portfolio management. You can “save” which is to say invest in the economy wide capital or you can “borrow” which is to say invest in durables.

So, we then return to investing in durables goes up “your car breaks down”; “You have a new baby”, etc you will tend to want shift your portfolio towards durables and so the natural rate of interest rises.

What we say in the Great Recession was a massive collateral crunch that kept folks from investing in durables at the rate they would want. As a result the marginal return to durables skyrocketed.

As that collateral crunch easies folks will rush into buying durables because the return is enormous. They will do this even if they are heavily indepted already, just so long as the collateral crunch allows them to do it.

The reason a balance sheet recession can potentially go on for so long is that the collateral crunch is so severe that even though the return to durables is racing into the double digits its hard to get funds.

This crunch, however, rapidly eased in the US economy over 2011 at the same time that the return to durables skyrocketed.

This is what allowed me to – so far – successfully predict that durable consumption would skyrocket.

And, to be clear, I am no optimist. What is, simply is.

I want to write more about this but before I am off to a set of meetings I will answer Dean Baker who asks

Modern Monetary Theory: What’s Modern About It?

The short answer is a floating fiat currency – not a gold standard, not fixed exchange rates.

The short, short of MMT is that it is Market Monetarism in reverse. Just as Scott Sumner insists that people recognize Fiscal is dependent on Monetary. MMT asks the people recognize that Monetary is dependent of Fiscal.

They are both right as far as their mechanisms go, though I find it easier to think in terms of the natural rate of interest.

Though the proponents – in my view – seem to make a bigger deal out of it than is in the theory itself.

An earlier version of this post contained some unfortunate commentary on my part. I apologize for that.

Paul responds

Karl Smith, if I understand him, thinks that I should refrain from pointing out how foolish and destructive foolishly destructive ideas have been, and offer the proponents of these ideas a face-saving exit.

Chris Dillow, via Mark Thoma, explains why this is wrong. Dillow points out that Labour is responding with incredible lameness to the Cameron austerity agenda, even as this agenda fails, because it allowed Cameron to shift the Overton Window, so that only varying degrees of austerity are considered “responsible”

I’m trying to shift that window back, both by relegitimizing Keynes and by delivering ridicule where ridicule is due. And I think I’m making progress.

I appreciate the point. I really do. Where we may part ways is on how successful this strategy has been.

A somewhat separate point though: its still not clear to me why a policy of supermassive tax cuts would not have worked. If we care about people this seems like way to get the most bang. Forget the buck, Treasuries have negative real yields.

At the recessions outset I led with: complete suspension of the payroll tax, 100% depreciation in year 1 and open ended loans to state governments. I still don’t see how this wouldn’t have been better than what we got and more politically palatable.

Looking back I would have done even more. I would have probably lopped 50K off of AGI for singles and 100K for couples. And, I would have written it just like that – which though it might have gone unnoticed by the press, every need based formula based on AGI would suddenly get triggered for people much further up the income scale.

As I see it failure to do push this was just as much a failing of Very Serious Syndrome as anything Paul points to.

Larry Summers said, Temporary, Timely and Targeted. But, that is the completely wrong perspective. It should be overwhelmingly huge, indiscriminately flung and completely open ended.

This is because the loss function is not symmetrical. The goal is not to get the right answer but the optimal outcome. Which means you throw as much as you can, as fast as you can in the general vicinity of the problem.

Ironically,  it was Larry who made this click for me when I heard him repeat the aphorism: If you never miss a flight, you’re getting to the airport too early.

With a loss function this asymmetric if you don’t overwhelmingly expect to look back and think “Man, we spent way too much money” then you aren’t spending nearly enough. 

I predict this graph will make the rounds


I want to make the point that this consistent with my long thesis that we are returning to an environment where productivity gains do not accrue to unskilled labor because they are imbedded in the brains of the innovators.

A factory is really big and hard to keep secret. Computer code less so. When you simply write down the process you want or draw the object you want and the computer translates it for you the seep down will grind to complete halt.

What this chart hides, but I believe is also true is that capital is facing a similar collapse.

At its heart the issue is that Industrialization Really Was Different, and there is no reason to think it will come again.

The reality of this new world is that you cannot simply work hard and make a good living. Nor, should you expect that if you save for your future you can support yourself.

As for now, it is still in the interest of innovators to tap public equity markets and doing so means that they come under some – but not absolute – pressure to pay a dividend.

However, I have a hard time believing this will not come to an end. The money available in private pools will be sufficiently large that innovators can strike side deals that let them walk away with almost all the profits.

Savers will get nothing.

Scott Sumner writes

People who read economics blogs live in a sort of bubble, where there is widespread understanding of the failure of monetary policy.  But out in the real world things are very different.  Ever since NGDP collapsed in 2008, the profession has largely ignored monetary policy.  In the previous post I pointed out that our profession was to blame for the severe recession.  Every day that goes by brings more and more evidence supporting that sad conclusion.

The bubble is getting thicker by the day. This morning I was walking a dog and my podcast player qued Bill Gross’s Feb, investment outlook. I remember reading it at the time and finding it confused, but in a well-I-think-you-are-just-missing-this-one-thing sort of way.

I listened to it today and simply could not believe what I was hearing.

The most awesome – in the original meaning of the word – part:

What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.” 

Which is akin to saying, “No wonder no one shops here. Everything is on sale!”

I am not even sure where to start.

But, maybe this will help. So, presumably Bill Gross is not saying that no private investor holds long dated securities. If so, then someone is willing to buy them at almost no yield. Which means someone could sell more of them at almost no yield plus a tiny amount.

Which means that you could fund a 30 year project on the cheap.

Superfluousness notwithstanding, prices are low because more people want to save than to lend. It is not that more people wish to save than to lend because prices are low.

All that having been said, I do appreciate Gross’s attempt to weave both elegant prose and metaphysical considerations into financial analysis.

When you ask the average person why wages are so much higher today than the were 100 years ago, or why they are so much higher in developed countries than in developing ones, marginal product of labor is woefully neglected, and unions, regulations, and society’s general beneficence are woefully exaggerated.

Some people think that the subtler truth is that unions have had more of a positive impact on wages than the average economically literate person, and economists in general, believes. Thus despite marginal product of labor being the massively unsung hero of the story with respect to what the average person thinks, they feel it necessary to emphasize the larger role they think their minor hero deserves. But when you’re offering a quote to a journalist, or writing for public consumption, you educate readers far more if you emphasize the role of marginal product.

This is why, despite being unable to answer the question “who am I to lecture David Autor?”, I have to say he is negligent in his duties in what he appears to have said to this New York Times article about rising Chinese wages:

“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.”

“But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”

Here it is consumers’ generous willingness to bear higher prices that is the hero. But is the story of economic development really one of consumers bearing higher prices which allows wages to rise? Or is it about increased marginal productivity of labor that generates higher wages for workers without necessarily leading to higher consumer prices whatsoever?

The way capitalism is supposed to work is not consumer generosity leading to higher wages, but instead more productivity doing so. After all, consumers can’t tolerate higher prices for everything they buy without buying less of some things, which means some laborer somewhere producing less.

Marginal product of labor, not consumer beneficence, is the hero of this story.

Via Cowen’s law someone has already modeled this, but a simplistic answer to the Hysteresis puzzle this:

Declines in AD –> Declines in durable and housing purchasing –> Suboptimal House Production Arrangements [Too Labor Intensive]

Release of AD constraint –> Market Labor Demand must compete against Household production that is labor heavy –> Total [Market + Household]Demand for labor is higher than if no AD shock –> Inflation occurs at higher levels of unemployment.

The real life analogs:

  • “How am I supposed to take this job 30 miles away when we only have one car”
  • “Now we can finally get married and get a place of our own” 
  • “No one has opened a daycare here in 5 years. I don’t know how we’ll take all these kids”


I want to do a big breakout of the Pew Youth survey but I think the big message is that the Great Recession was an example of “Growth, Interrupted” that is young people en mass simply failed to take on the trappings of adult life.

If they all try to at once, there is not enough household capital to support them.

Its also worth pointing out that the Great Depression/WWII was followed by a baby boom. A literal bounce back from “Growth, Interrupted.”

Tyler writes

I have noticed that right-wing public intellectuals are skeptical of more expansionary monetary policy for a few reasons:

1. There is a widespread belief that inflation helped cause the initial mess (not to mention centuries of other macroeconomic problems, plus the problems from the 1970s, plus the collapse of Zimbabwe), and that therefore inflation cannot be part of a preferred solution.  It feels like a move in the wrong direction, and like an affiliation with ideas that are dangerous.  I recall being fourteen years of age, being lectured about Andrew Dickson White’s work on assignats in Revolutionary France, and being bored because I already had heard the story.

2. There is a widespread belief that we have beat a lot of problems by “getting tough” with them.  Reagan got tough with the Soviet Union, soon enough we need to get tough with government spending, and perhaps therefore we also need to be “tough on inflation.”  The “turning on the spigot” metaphor feels like a move in the wrong direction.  Tough guys turn off spigots.

3. There is a widespread belief that central bank discretion always will be abused (by no means is this view totally implausible).  “Expansionary” monetary policy feels “more discretionary” than does “tight” monetary policy.  Run those two words through your mind: “expansionary,” and “tight.”  Which one sounds and feels more like “discretion”?  To ask such a question is to answer it.

Within these frameworks of beliefs, expansionary monetary policy just doesn’t feel right.

My tendency is to wave away (1) and (2) because I cannot place them in a narrative.

Suppose I have this disposition. What do I say when I read Scott Sumner?

This is important because people are constantly saying things, particularly when you address them. Rarely do you present someone with a hypothesis about some controversial policy issue, and they just stand there in silence.

So something must be happening in their mind. But, what? If I start from these points, were do I go next?

(3) more so. Because people have a hard time turning around the concept of a level target. If you present it to them they say something that assumes that you did not suggest a level target, like “So we should maximize NGDP” and then keep being confused when you return to the level.

That is an interaction that I can narrate.

Robin Hanson passes along the following

It’s typically the son or daughter who has been physically closest to an elderly parent’s pain who is the most willing to let go. Sometimes an estranged family member is “flying in next week to get all this straightened out.” This is usually the person who knows the least about her struggling parent’s health. … With unrealistic expectations of our ability to prolong life, with death as an unfamiliar and unnatural event, and without a realistic, tactile sense of how much a worn-out elderly patient is suffering, it’s easy for patients and families to keep insisting on more tests, more medications, more procedures. …

More here

Will says

I’ve been diagnosed with a fairly serious case of "adult ADHD," but I am convinced that this is mostly a hand-waving, pseudo-scientific way of saying that my constitution leaves me ill-suited to perform certain tasks under certain conditions. And it turns out that many of the opportunities available to people with my interests and education require performing those tasks under those conditions. This mismatch between these opportunities and my–what’s the gee-whiz word?–my neurotype is the problem, not my neurotype per se. There is nothing really wrong with me. Kureishi is right to suggest that the inability to tango or read music or speak Russian isn’t a condition, or a failure of development, or an illness. If you find yourself needing to tango or read music or speak Russian, then it’s a problem. The problem goes away if one removes from one’s life the need to do what one can’t do, or can’t do without too much pain. Drugs that make hard things easier can help. But reshaping one’s life to work with rather than against the grain of one’s constitution can help even more.

This always true though. A disease is a disease if you don’t like it. I always like Byron’s quote here.

I look pale. I should like to die of consumption . . . because all the ladies would say, look at that poor Byron. Look how interesting he looks in dying

You can say well X kills you, but ultimately the byproducts of metabolism itself kill you. This is why you can die while your offspring – who are but parts of you – can still live. They have not accumulated metabolic byproducts.

And, since metabolism itself leads to death and disability, what sense is there in trying to separate the morbid from the vital.

Scott writes

. . . most people are excessively impressed by unconditional forecasts.  When dealing with business cycles and financial markets only conditional forecasts matter.  People win the lottery every day.  I’m no more impressed by an economist making an unconditional prediction that turns out correct than I would be if my plumber won the lottery.

I take it Scott’s point is that since knowledge takes the form X given Y, if you simply guess X and get it right you must have gotten lucky on Y.

Which is fine, but getting the right answer is still information. Unless X is actually more likely under not-Y then correctly getting the unconditional conveys the same basic information as the conditional forecast, its just attenuated by the fact that X has some probability on not-Y.

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