Comments on economics, mystery fiction, drama, and art.

Monday, April 14, 2014

Gross Investment as a Percent of GDP


Saturday, March 29, 2014

Nate Silver's new venture FiveThirtyEight

I think I have a sense now for what we're going to see at FiveThirtyEight, based on what we've been seeing since its launch, and that's exemplified by two recent posts, one in the sports section, the other in the economics section.

In the first post, Neil Paine delves into player performance data, prompted by the "Wait...he's still in the league?" question.  Using records for all position players active since 1973, he takes data on  player age and three years' worth of wins-above-replacement (WAR) data to estimate a logit model of survival over 5 year periods.  The equation takes the following form:

S[Y(t+5)] = f(WAR(t), WAR(t-1),WAR(t-2), Age(t)]


He provides us with a list of 20 players who in fact have survived from 2009 into the 2014 season, but who had the lowest probabilities of survival (ranging from 3% to 26%).

In the second post, Ben Casselman looks at the declining labor force participation rate and attempts to determine how much of it is a result of the recent recession, how much of it is a consequence of the slow recovery, and how much of it is likely to be permanent.  He presents a chart showing the projections he gets for the 2008-2014 period (which shows a labor force participation rate declining, but generally above the actual LFPR.  In a follow-up post, he elaborates on his conclusion, which is, essentially, that the LFPR has been declining in a way largely related to business cycle factors, not from longer-term changes in the economy.

These are both interesting question, in one way or another, to one group of people or another.  I have professional research interests in career length in MLB, having done research on player career length, looking at whether ethnicity affected career length and (separately) at whether being a union player representative affected career length.  I've also done some work looking at the dramatic drops in teenage labor force participation and at the similarly striking increases in labor force participation of those age 65 and over.  So I found their posts interesting.

And intensely frustrating.

In both cases, we are given very little information about the data sets (more, interestingly, in the baseball piece than in the labor force participation piece, where we know nothing about the time period or the variables used in the analysis).  Neither Paine nor Casselman presents the actual statistical results, either in their posts or in a separate, linked document.  So we know nothing about the statistical properties of their results (e.g., whether anything is statistically significant, what the explanatory power of their analyses are).  We know nothing about the magnitude of the effects of their explanatory variables.  In Casselman's work, we don't know whether he estimated his regression in a way that let him determine whether (or how well) his results work in an out-of-sample period.  In Paine's work, we don't know whether the number of "misses"--players predicted to be out of the game--is larger than our expectations (subjective or statistical), nor does he tell us anything about players projected to survive, but who didn't.

In short, we're supposed to take the very partial, incomplete results presented and trust them.  In my world (academic research), this approach would never be acceptable.  Showing one's work is the essence of the matter in what we do, and it's the essence of why we expect people to accept out conclusions.

If FiveThirtyEight continues to present analysis in this way, I think I'll stop looking, and, when I do, I'll be thinking of it as "analysis" (scare quotes very much intended.

Friday, March 21, 2014

Job Quits and Wage Increases

A post today at FiveThirtyEight ("Want a Raise?  Quit Your Job") proposes, using anectdotal data, that one plausible way for workers to get pay increases is to quit their jobs.  I posted this comment there:

There's a question of causation here. Is wage growth stronger *because* people quit more often, or do people quit more often *when* and *because* wage growth is strong? Even the highlight example here (trucking) is suspect in that respect. Why does Covenant offer those retention benefits? Is it (as I suspect) *because* wage growth in trucking is fairly strong, so it makes sense to try to retain the drivers that have?

(Incidentally, there is older information on quit rates, it's just not showing up on-line. You can find it in print editions of old BLS publications like the Employment and Training Report of the President, which was discontinued some time in the 1980s. It was discontinued, as I recall, because the Reagan administration didn't want to do it.)
And got this response:

Yes, you're right about quits--I meant the JOLTS series specifically. Older data aren't directly comparable, though you can make some adjustments.
Re: causation, it doubtless runs both ways to some degree (people more likely to change jobs when good prospects are available). But even after controlling for occupation/industry, there's evidence is that changing jobs does lead to wage growth.
His argument would be more convincing if he actually, you know, presented the evidence.  And the evidence would be that more rapid wage increases lead changes in quit rates.  His response suggests that we need to disaggregate to the industry and occupation levels, and (frankly) I don't have the time or the energy to do that.  But just looking at aggregate quit rates and aggregate wage increases, and using data from the BLS web site, I get this:

(Click to enlarge.)

The rate of wage increases has been increasing since mid-2012, but the quit rate has barely budged.  Over the 2010 to 2014 period, the correlation between the rate at which wages are increasing and the quit rate is 0.35, which is statistically significant, but not large.  And given the likelihood that at least some of the relationship comes from the causal effect of faster wage increases on quits, the ability of rising quit rates to explain  faster wage increases seems to me to be likely to be really small.  Unless, that is, I see some evidence to the contrary, rather than assertions of a relationship.

Thursday, March 13, 2014

Annual Real GDP, 1929-2013

(Click to enlarge)

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Sunday, March 09, 2014

What would make me a whole lot happier about the monthly jobs report

The (employer-based) employment change was +175,000 for February 2014, compared with January 2014.  More importantly, the 12-month period (February 2013 to February 2014) shows a gain of 2.16 million jobs.  Employment has been growing, on a 12-month basis, at about 1.5% to 1.8%, since September 2011.  This is a good, but not great, rate of employment growth.  It's "not great" especially coming out of a recession.  Coming out of the recession of the early 1980s, 12-month employment growth rates were above 2.5% beginning in September 1983 through November 1985.  And, from late 1983 to late 1984, annual growth rates in employment were above 4%.  Coming out of the "Great Recession," there are only two 12-month periods with an employment growth rate above 2%, and nothing above 2.17%.  (Even the tepid recovery from the 2001 recession saw six months with annual growth rates above 2%. And the average 12-month growth rate in employment since 1948 has been 1.72%.)


(Click to enlarge.)

So it's hard to work up much enthusiasm about the recovery based on growth in establishment employment.  However, the unemployment rate has dropped quite significantly, and in February was 6.7% (up slightly from 6.5% in January).  But what I'd really like to see, in addition to somewhat more robust employment growth, is some positive news about labor force participation.


(Click to enlarge.)

Despite a fractional increase in labor force participation in  January and February (up to 63.0%, from 62.8% in December), labor force participation has consistently declined during the recovery.  In fact, the 12-month percentage change in labor force participation has been negative since August 2008.  That's before the beginning of the recovery (June 200), according to the NBER Business Cycle Datng Committee.  That is, in more than four and a half years of recovery, the labor force participation has not once grown on a year-over-year basis.  This is, since monthly data on labor force participation have been available (1948), the first recovery ever during which labor force participation has not increased.

So what would make me a whole lot happier?  Not just growth in the labor force, but an increase in the labor force participation rate, which is, as of February, three percentage points below its level at the beginning of the recession.

(All data from the Bureau of Labor Statistics.)







Friday, February 21, 2014

Yet more things I read but don't understand how anyone could write

Another quotation from the ongoing thread on the history of thought listserv:

Several students also tend to ask me why not many economists, including our textbook authors, appear to be aware of the classical macroeconomic principles, including definitions of such terms as saving, capital, investment, and money, that I explain to them and they can clearly understand. 

I assume that the writer means "aren't aware of the classical definitions of saving, capital investment, and money."  While he might not like the definitions of these terms commonly used in introductory economics classes, they exist. But let's start with trying to get some understanding of the "classical" meanings of these terms.  For this, I'm using Mark Blaug's Economic Theory in Retrospect, 5th Edition (1996). 

"All of this is disguised by the fact that the classical economists almost never used the word "investment" and spoke of "saving" to denote, not the process, but rather the result of saving, that is, the actual resources saved:  with them "saving" already implies the conversion by way of investment into additional capital equipment.  This suggests that saving is actually identified with investment, but this cannot be what they had in mind..." (p. 157)
Let's break off here and ask what's going on.  Essentially, for classical economists, income earned by  workers ("wages") was all spent on consumption.  "Saving" came entirely from capital income, and, almost by definition, those who earned income from capital refrained from consumption spending in order to add to some stock of capital.  Thus, the conversion of resources from income to capital  occurs as saving.  Which leads us inevitably to the question of what the classical economists meant by capital.  Beginning with Ricardo (well, with Quesnay and the Physiocrats, actually), we find a distinction between "fixed capital" and "circulating capital." 

Based on Blaug's discussion (on pp. 26 and 27), fixed capital appears as "buildings, implements," and "permanent...improvements," while circulating capital seems to be payments for what we would now call "variable resources:"  wages, seed and fertilizer in an agricultural economy, purchased consumable inputs, and so forth.  So in money terms, we would take the classical definition of "capital" to be both what we would today consider to be capital plus what we would today consider to be variable costs.  So "investment" would be any addition to capital, "fixed" or "circulating"--that is, any use of income for continued operation of production.

Finally, money in classical economics.  Again, let's at least start with Ricardo.  Blaug tells us:

Ricardo is a "metallist" and naturally expounds a labour theory of the value of the monetary metal...Given unhampered  coinage and the possibility of melting coins, the quantity of money in the long run is indeed governed by the cost of producing gold... (p. 127)

But, as Blaug acknowledges in his discussion of the "bullionist" controversy, other classical economists would include paper currency and small non-precious metal (e.g., copper) coin that are convertible on demand into gold as money (in addition to gold and silver coin) (pp. 127-128).  (The argument for paper currency was the difficulty in providing "small" denomination coins.)  So let us say that classical economists regarded money as (a) gold and (possibly) silver coin and (b) convertible paper currency and "token" coins. 

So now we have at least a beginning of what classical economists might mean by saving, investment, capital, and money.

What will we find in most contemporary economics textbooks?  The definitions are not quite the same.

"Saving" is derived from the equations defining the uses of income and the categories of expenditures.  The expenditure equation is (in a closed economy, with neither exports nor imports):
Y = C + I + G
Where Y = the total value of production of goods and services for final use, C is consumption, I is Investment (to which we will return), and G is government purchases of goods and services (for final use).

The uses-of-income equation is

Y = C + S + T

Where S is saving and T is taxes.  Combining these two equations, we get: 

C + I + G = C + S + T , or
I + G = S + T, so
S = I + (G - T)
And, if governments do not run deficits, S = I.  But this looks very much like the classical conclusion.  In both cases, however, it is an ex post equality.  That is, it need not be the case, either in classical or in contemporary economic thinking, that planned S and planned I must be equal.  So, so far, this looks like correspondence. 

But an important difference today is that we do not think saving is confined to those who receive income from property, and we do not think that there is a more-of-less automatic transference of saving into capital.  Today, we regard saving as (mostly) the accumulation of financial assets that give savers a claim on resources or goods and services at an undefined time in the future.  Savings can consist of holdings of money, of deposits, of ownership of binds or shares of stock.  To a classical economist, however, holdings of money (however defined) were not saving--they thought of this as hoarding.  And hoarding was recognized as a problem in that it could reduce current spending on current production.

In addition, we currently think that saving is, to a large degree, undertaken by one group (households) and investment is undertaken by another (firms).  So there must be some process, and probably some set of institutions, that allows the savings of households to be channeled to firms to be spent on new capital goods.  (Yes, businesses also save.  But that does not solve the problem.  Apple saves, for example, and is sitting on a multibillion stash of financial assets.  So some of Apple's savings also have to be channeled to other firms.)  Hence the large role played by financial intermediaries in our economy.

Contemporary economic thought also has a very different conception of capital--it is very much more like the classical concept of fixed capital.  That is, capital is a resource that is re-usable in production and depreciates.  So there's a difference.

Finally, money.  We do not regard gold coin as money these days.  First of all, very few of us have any gold coin, much less use gold coin to make purchases.  Secondly, we do not define our paper currency (or our token coins) as bearing a fixed relation to gold.  Third, we now use bank deposits for many transactions, and regard the balances in those bank deposits as a medium of exchange. 

For the classical economists, money was defined more as a unit of account (e.g., in the U.S., $1 was defined as a fixed weight of gold or silver.  $1 meant 0.0484 ounces of gold (or, if you like, 1.369 grams of gold), or, in silver, 15 times as much (0.726 ounces or 20.537 grams of silver).  For us, $1 is $1, and has no fixed meaning--or value.

So it is possible, I suppose, to approach capital, saving, investment, and money as classical economists did.  And I suspect that most economists are at least aware of the differences in how we use these categories analytically today.  But it's not clear to me that using the conceptual categories as they were used by classical economists would improve our ability to analyze our economy.  We have different institutions and practices, for one thing.  We no longer think saving is confined to recipients of capital income.  We no longer regard only precious metals (or token coins and currency convertible into precious metals) as money.  So why would we want to teach or use those definitions?  How would it make understanding the contemporary economy easier for our students?

That's what baffles me.
 
 

 






Monday, February 17, 2014

Scary chart of the day (broadband edition)


(Click to enlarge.)

Which I found in Felix Salmon's very interesting discussion of the proposed Comcast acquisition of Time-Warner cable.