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

Monday, November 24, 2014

Don't believe everything you read on the internet

One of the things I've now seen several times on people's Facebook posts is this:

(Click to enlarge.)
I've tried to ignore it, but I have finally snapped.

Let's assume we have a standard student loan in which interest is deferred, so we begin with a balance of $26,400.  Let's suppose we plan to pay that loan off in 23 years with total payments of $32,700--or about $119 per month.  For that to work, the interest rate on the loan would have to be less than 2% per year.  (Almost any loan calculator will let you figure this out.)

Or, suppose the payment is $119 a month for 23 years.  What interest rate would it take to have an outstanding balance of $45 K after making every payment on time and in full?  About 7% per year.  The initial monthly interest charge would be about  $150 per month.  So the unpaid balance would increase each month.

The thing is--you would know this, because it would be a part of the federally required disclosures.  So for this to happen, you would have to have agreed to it when you took out the loan. 

The other thing is--who would even want to offer you such a loan?

Finally, what monthly payment would actually pay the loan off in 23 years, with a 7% APR?


UPDATE:   I thought I'd say a word or two about how I think Higher ed should be financed.
And the answer is *NOT* student debt.
Across the US, state support for public higher education has declined precipitously in the last 25-30 years. Both for private higher ed and for public, tuition has gone up enormously (community colleges, not so much). At the publics, the tuition has essentially substituted for declining public support. At the privates, it has paid for a lot of things I personally find superfluous to their function. (To pick on my undergrad institution, it has recently spent a huge amount of money rebuilding its athletic facilities and is currently building a dining hall which, in the drawings that have been published reminds me of nothing so much as the hall at Hogwarts.)
A number of people who write about this point out that, on average, people who complete a 4-year degree earn a lot more than do people who do not. That's true. It's also true that the primary reason for that is not (particularly) rising earnings for college grads, but falling earnings for the others.
So what do I think we should do? (I'm about to say *WHAT* we should do, not *HOW* it can be accomplished.)
1. For the publics, reverse the trend toward lower public support.
2. For all higher ed, increase federal grants--not loans--especially needs-based grants.
3. We have already seen experiments with debt forgiveness (in public health, for example) for people who work in certain types of jobs upon graduation. So expand that, and guarantee that there will be jobs available.
4. Improve opportunities for people who do not want to attend college:
.....a. Expand apprenticeship opportunities, with federal funding if necessary.
.....b, Expand skills training outside employment, and fund it.
That's a start. An end to debt-based financing of post-secondary education should be something to push for.

Saturday, November 15, 2014

What do people know--or think--about what's happening in the economy?

We've been having a conversation about a recent survey (reported here) which finds an average response to this question:

What do you think the current unemployment rate is?  (The unemployment rate is the percentage of people who are unemployed and are actively seeking work.)
Apparently, the average of the responses was 32%, at a time when the actual unemployment rate (as reported by the Bureau of Labor Statistics) was 6.1%.  (Unfortunately, I can't find a time-series of responses to that survey, or t a similar one). 

Made me think, though.  What about something else?  What about inflation expectations?  As it happens, the OECD has done a survey since January 1978 asking people what they expect the rate of inflation to be for the next year.  And, of course, for most of that period, we can calculate the actual rate of inflation for the 12 months following each monthly period.  How'd people do?

(Click to enlarge.)

I must say I think that's actually a pretty good result.  While people who responded to the survey fairly consistently expect inflation to be faster than it actually has been, expectations forecast actual inflation quite well.  The correlation between expectations and actual over this period is 0.80, which is quite strong.

So maybe there's something special about unemployment that throws people off...or maybe respondents would do better if he survey were conducted regularly...

Tuesday, November 11, 2014

November 11

I have generally avoided saying anything about Veterans' Day, not because I don't recognize what people who have served in the military have done, but because I believe, generally, that most wars represent a failure of the political leadership of the nations involved.  And because of the very real human cost of those wars.  We tend to remember the cost to people in our own countries, but to forget--or ignore--the costs--deaths, injuries, destruction--suffered by people in other countries.  Even other countries that were on the wrong side of the war (Germany in World War II).  Here's the casualty data for America's largest wars; note that the Indian wars are not included, and we have no estimates of native American deaths/casualties in those.

War           Deaths   Wounded  Deaths per      100,000 Population Casualties    per 100,000 population
American Revolutionary War25,00025,0001,0002,000
War of 181215,0004,500188244
Mexican–American War13,2834,2006282
American Civil War625,000500,0001,9883,578
Philippine–American War4,1962,900610
World War I116,516204,000113310
World War II405,399671,000304807
Korean War36,51692,0002485
Vietnam War58,209153,00032118
War on Terror6,71751,000220

In many ways, the US has been fortunate, in that there has not been a war fought here in 150 years (and, yes, I am aware of what some people think about the "war" on "terror"). 

And, when I think about this, I always think of Phil Ochs' song "I Ain't Marching Anymore":

'It's always the old who lead us to the wars,
Always the young to fall.
Now look at all we've won with the sabre and the gun
Tell me was it worth it all..."

Mostly, it has not been.

Monday, October 27, 2014

We all know this of course,

...but it's always good to be reminded.  Bill James writes:

It's never safe to generalize from a sample of one.

The entire exchange:

Gregg Jefferies did an extraordinary amount of practice as a teenager, and he also peaked at an early age. To what extent are those related, if at all?
Asked by: 110phil
Answered: 10/27/2014
Paul McCartney did an extraordinary amount of singin' and guitar playin' as a teenager--and it still touring today. It's never safe to generalize from a sample of one.  

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.)