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

Saturday, October 18, 2014

Is Mankiw's analysis of "crowding out" plausible? Or is the entire notion of a demand-and-supply model of a market for loanable funds model workable at all?


I’m getting ready to teach an MBA-level economics course for entering students who have not had an intro economics sequence as undergraduates (or at least not recently enough).  In the course of doing that, I’m actually reading Greg Mankiw’s introductory economics textbooks (I never used it before).  And in reading it, I have come to a conclusion about the entire discussion of “crowding out” as it appears in his—if not other—economics textbook. 

I won’t quote Mankiw’s entire discussion of “crowding out” in his chapter on “Savings, Investment, and the Financial System,” because it’s way too long.  But it is somewhat odd. He looks at what happens when governments begin to run (or to run larger) budget deficits, in the context of a fairly (perhaps too) simple model of a market for loanable funds:

First, which curve shifts [the demand curve for loanable funds or the supply curve of loanable funds--DAC] when the government starts running a budget deficit?  Recall that national saving…is composed of private saving and public saving.  A change in the government budget balance represents a change in public saving and, thereby, in the supply of loanable funds.  Because the budget deficit does not influence the amount that households and firms [my emphasis] want to borrow…it does not alter the demand for loanable funds.

Mankiw’s conclusion (Figure 4 in Chapter 26 of his textbook shows the result)—an increase in market interest rates and a reduction in the quantity of funds borrowed and lent.  I find this odd.  Governments now run a (larger?) deficit.  To finance that deficit governments have to borrow (more?).  With no change in the amount that households and businesses want to borrow, how can adding additional government borrowing lead to a reduction in borrowing? 

Or suppose we alter his argument slightly.  Suppose I wrote:

Which curve shifts when the household sector starts running a budget deficit (i.e., household consumption spending now exceeds household disposable income)?  This represents a change in private saving, and, thereby, in the supply of loanable funds.  Because the household budget deficit does not influence the amount that firms and governments want to borrow, it does not alter the demand for loanable funds.

Isn’t this exactly the same situation that Mankiw describes, but from the point of view of a different (set of) actor(s) in the economy?  It seems to me that, in Mankiw’s terms, it’s hard to see how the demand curve for loanable funds could shift.  I suppose we could resolve this, empirically, by asking whether the total of household plus business plus government borrowing rises or falls in these cases,

I suspect the problem is similar to the problem that many have with the aggregate demand-aggregate supply model (a problem I still have not resolved for myself:  The demand curve is not independent of the supply curve.  In the market for loanable funds, the household sector, the business sector, and the government sector are actors on both sides of the market—they are all both potential lenders and potential borrowers.  When that is the case, a simple supply-and-demand model becomes inadequate to explain the issue involved, and something different, and perhaps more complex, will be needed.

Saturday, August 30, 2014

Lo, the poor, downtrodden physician

Today (August 30, 2014), the Wall Street Journal published an article titled "Our Ailing Medical System," written b y Dandeep Jauhar, a practicing physician.  If you haven't read it, it's worth your time.  The article is not, really, about our medical system, it's about the changing role of physicians within that system, and how doctors are reacting to it.  Let me give you a taste:

In the past four decades, American doctors have lost the status they used to enjoy.  In the mid-20th century, physicians were the pillars of any community.  If you were smart and sincere and ambitious, at the top of  your class, there was noting nobler or more rewarding that you could aspire to.
Today medicine is just another profession, and doctors have become like everyone else [except they get paid a lot better for it]: insecure, discontented and anxious about the future.

As I read that, and much of what followed, I found myself re-writing it from the point of view of elementary and secondary public school teachers.

Public opinion of doctors shifted distinctly downward too.  Doctors were no longer unquestioningly exalted,  On television, physicians were portrayed as more human--flawed or vulnerable...U.S. doctors spend almost an hour on average each day...dealing with the paperwork of insurance companies...
 
Jauhar points out that, while the average annual income of doctors in the U.S. quintupled in real terms between 1940 and 1970,from $50,000 per year to $250,000 ("...American doctors at midcentury were generally content with their circumstances.  They were prospering under the private fee-for-service model...They weren't subordinated to bureaucratic hierarchy...").  He attributes at least part of that prosperity to the creation of the Medicare and Medicaid systems (both virulently opposed by the AMA, by the way. 

How does all that compare to the situation of public school teachers?  Let's begin with income.  according to one source, annual salaries for public school teachers were around $1,500 per year in 1940/41; in 1970, the average was around $9,300 per year, and around $53,000 in 2008.  Making the same inflation adjustment as Jauhar makes for physicians, we get:

1940:  $23,300
1970:  $52,500
2012:  $51,700 (most recent data I could find)


So the 30 years between 1940 and 1970 were also good times, in terms of earnings, for public school teachers.  Sort of.  Doctors earned a bit more than twice as much as teachers in 1940--but almost 5 times as much in 1970.  And while the earnings of doctors, on average, has continued to rise (not for GPs, but overall), teachers' earnings have stagnated in the succeeding 40+ years.  Some how this does not induce me to feel much sympathy for doctors.

Meanwhile, control of the curriculum has been largely removed from the control of teachers and assumed by boards of education (often subject to quite severe political pressure, as the hysteria over the "Common Core" curriculum indicates).  Students are increasingly subjected to high-stakes testing, and the tests are also outside the control of the schools, and the teachers, entirely.  public school teachers have, increasingly, become subject to almost complete outside control of curriculum decisions, of student assessment systems.  And the prestige of teachers has been continually assaulted (not least by such publications as the Wall Street Journal).  Job security is under attack across the country (see the recent actions against teacher tenure in California) and teacher pensions are now increasingly regarded as unearned and undeserved.

Jauhar calls for actions to restore the independence and professional status of doctors (and it's not clear, to me, that there's a real problem here).  I can't take this nearly as seriously as I take what is happening in public education.  And the next time the Wall Street Journal wants to come to the aid of a profession, I have a suggestion for them.
 

Thursday, July 24, 2014

Predictions that don't pan out.

A friend posted (on her Facebook page) two pages from Time magazine in 1953, because of the Kraft Credit Union ad.  On the facing page was an essay ("Asking for More Inflation") by Henry Hazlitt, an economist who has had quite a following.

I'm finding myself amused by the way the essay begins: "In the issue of March 2, I wrote here:  'We shall soon learn whether the American people really want to halt inflation, and whether they are willing to pay the price.' "


Being the kind of guy I am, I looked up the numbers. From March 1952 to March, 1953, the rate of inflation as measured by the Consumer Price Index was, um, 1.4%. For subsequent months:

4/52-4/53: 0..8%
5/53-5/53: 1.1%
6/52-6/53: 1.1%
7/52-7/53: 0.4%
8/52-8/53: 0.7%
9/52-9/53: 0.8%
10/52-10/53: 1.1%
11/52-11/53: 0.7%
12/52-12/53: 0.8%

It didn't get any faster (in fact it was slower) in 1954 and 1955...

Uh...there was an inflation problem?
(Hazlitt was a crank.)

Friday, July 04, 2014

Thinking about "Price Stability"

I read recently James Grant's essay in the Wall Street Journal, in praise of the gold standard (in what purported to be a book review).  Among other things, he argued that prices are more stable under the gold standard than under a fiat money standard.  And he used the sort of evidence often used when making the argument for price stability under the gold standard.  In the US, between 1774 and 1933, inflation as measured by the CPI (retrospectively estimated for years before 1913) averaged 0.3% per year.  But from 1933 to 2013, inflation averaged 3.3%.  (One gets similar results using the GDP deflator--from 1790 to 1033, inflation averaged 0.4%; from 1933-2013, it averaged 3.4%).  Clearly, then, prices were more stable when the US was on a gold standard.

Well, not so fast.  To measure stability of prices, we need to account both for price increases and for price decreases.  If the CPI doubles from year 1 to year 2, and then falls by 50% from year 2 to year 3, we will measure zero inflation between years 1 and 3.  But I don't think anyone would suggest that prices were stable.

So, I calculated the absolute value of the year-to-year changes n the CPI (1774-2013) and in the PCE Deflator (1790-2013), and then calculated the mean absolute percentage changes in these price indexes for the 1774-1933 (1790-1933) and 1933-2013 periods.  I also calculated the standard deviation of the absolute percentage changes.  The table below shows what I found.




 

CPI

PCE

Mean Annual Absolute % Change,
1790-1933 (1790-1933)
Standard Deviation, 1774-1933 (1790-1933)

Mean Annual Absolute % Change,
1933-2013
Standard Deviation, 1933-2013

4.8%

5.5%

 
3.8%

3.1%

4.4%

4.6%

 
3.5%

2.6%

What happened, obviously, in the earlier period is that price increases (inflation) were offset by price decreases (deflation), while in the later period, the economy has mostly experienced inflation.

But the year-to-year changes were, in general, larger before 1933 and smaller after 1933.  Furthermore, the variation in the year-to-year changes were also larger before 1933 and smaller after 1933. 

I would suggest that the price stability question probably ought to be scored as a "win" for the fiat money period.

(Data from the Economic History Association's web site.)

Friday, June 27, 2014

Why It's Important to Consider Volatility of Prices When Thinking About Measuring the Rate of Inflation--In One Graph

When we teach introductory macroeconomics, we frequently talk about the importance of trying to keep in mind that some prices are (much) more volatile than are others.  Indeed, the Bureau of Labor Statistics publishes what is often called the "core" CPI measure of the rate of inflation, based on the CPI excluding energy and food prices.  But it can be hard for people to "get" why excluding extremely volatile prices can be important.

Here's one graph that, I think, does it.  The black line is the 12-month percentage rate of change in the CPI (all goods, including gasoline) and the 12-month percentage rate of change in the price of gasoline.

 

(Click to enlarge.)

Keep in mind that the price of gasoline is included in the CPI, so the increases or decreases in gasoline prices are already a part of the rate of inflation as measured by the CPI.  Also, by using 12-month rates of change, rather than monthly rates of change, I have already damped somewhat the volatility of gasoline prices.  (The monthly percentage changes are something to behold...)

And it's true that during the 1967 to 2014 period gasoline prices increased at a faster annual average rate (5.3%) than did prices in general (4.3%), it's also true that the extraordinary volatility of gasoline price changes would give us, by themselves, a misleading idea of that is going on.

(Data from FRED.)

Monday, June 23, 2014

The "De-mall-ification" of America

This article (from Slate) and the accompanying photographs are extremely interesting.  The discussion of the decline of the stand-alone, enclosed shopping mall evokes a number of thoughts.

First, the initial "take" of many urban economists was that such malls were contributing to the decline of older urban shopping districts, either in central business districts or in neighborhoods. 

Second, suburban shopping malls began to die, at least piecemeal, a long time ago.  In Indianapolis, where I live, the first suburban mall--Eastgate, about 7.5 miles east of the city center (it opened in 1957)--was eclipsed by Washington Square (opening in 1974, about 2.5 miles further east) and shuttered by the late 1980s.  Lafayette Square Mall, about 9 miles northwest of the city center, opened in 1968, and is now essentially empty (and has been for more than a decade), a sea of concrete surrounding the few remaining stores.  Glendale, a near-suburban mall, about 8 miles north-northeast of the center, had undergone a number of transformations, from open-air to enclosed to essentially re-built with a free-standing Target, a Macy's, and maybe a half-dozen other stores.  Near its end (in the early 2000s), there were about a dozen remaining businesses.

Third, central cities have been restructured (I'm not sure I want so say revived) by the construction of "vertical" malls (such as Water Tower Place in Chicago) and adaptations of old downtown stores into malls (such as Circle City Center, in Indianapolis).

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References:
--- "Birth, Death, and Shopping:  The Rise and Fall of the Shopping Mall," The Economist, December 2007.
 
Amie Dickinson and Murray D. Rice, "Retail Development and Downtown Change:  Shopping Mall Impacts on Port Huron, Michigan," Applied Research in Economic Development, V. 7, N. 2010, pp. 2-13.
 
Kenneth T. Jackson, "All the World's a Mall: Reflections on the Social and Economic Consequences of the American Shopping Center," The American Historical Review, Vol. 101, No. 4 (Oct., 1996), pp. 1111-1121.
 
Michael Fix, "Addressing the Issue of the Economic Impact of Regional Malls in Legal Proceedings," Journal of Urban and Contemporary Lay:  Urban Law Annual, V. 20, 1980, pp. 101-133.
 
Kent A. Robertson, "Downtown Development Strategies in the United States:  An End-of-the-Century Assessment," Journal of the American Planning Association, V. 61, N. 4, 1995. pp. 429-437.
 

Thursday, June 19, 2014

I'm a Profit Center!

I'm continuing to teach a little bit in my retirement, and the third iteration of an intro econ class for MBA students starts June 24.  I have 20 students, who each paid something like $4K each in tuition for the course.  I'm being paid $3K to teach it.  So, I am, in fact, a profit center!  (Maybe I should give my lecture on the theory of the optimal bribe and see whether I can extract any additional consumer surplus from them.)  (It'd be better to extract some surplus from the university, but I can't quite figure out how to do that.)