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

Monday, December 15, 2014

Words of wisdom from the masters

As I was reading something light, purely for entertainment, I ran across this quotation from the writings of one of the major thinkers of the past 300 years:
"...the government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatsoever..."
That's Adam Smith, folks.
(From Arthur Herman's "How the Scots Invented the Modern World.")

Saturday, December 06, 2014

Recession and Recovery, 2001 and 2007: Employment

In a blog post today, Kevin Drum compares the recoveries from the 2001 and 2007 recessions, and concludes "The Obama recovery isn't just a little bit better than the Bush recovery. It's miles better."  Part of the reason for the "miles better conclusion" is that, after the 2001 recession, government employment grew quite strongly (+4.0% in the 5 and a half years following the trough in November 2001.  But after the 2007 recession, government employment has declined--down by 2.8% since the trough of the recession (June 2009).

So let me begin by telling you where I wind up on this:  Any way one wishes to look at it, the recoveries from the two most recent recessions has been anemic, at least in terms of employment.

Drum looks at the rate of change of employment as a percentage of the labor force.  I thought it made more sense to look simply at the rate of growth of employment, and so here's that chart:

(Click to enlarge.)

The blue line shows the descent into and recovery from the 2001 recession; the burgundy line is the 2007-2009 recession.  The horizontal axis measures months before and after the trough (the trough is at zero on the axis.

Two things do stand out. 

(1)  The 2007-2009 recession was more severe, in terms of employment loss.

(2)  The average annual rate of growth has been fractionally faster in the recovery from the 2007-2009 recession--1.25% per year, compared with 0.9% per year following the 2001 trough.

So, yes, this recovery has been somewhat better.  I wouldn't call it "miles" better.  And, compared with earlier recessions (e.g., the 1982-1983 recession. when employment grew at a 3.1% per year average annual rate in the 5.5 years following the trough). 

Any way one wishes to look at it, the recoveries from the two most recent recessions has been anemic, at least in terms of employment.

(All data from

Thursday, December 04, 2014

Digital Services, Real GDP Per Capita, and Economic Well-Being

I’m trying to think clearly about economic well-being in the digital world.  I’m doing this in the context of thinking about teaching macro and about the use of real GDP per capita as a measure of economic well-being.  So these are hardly complete thoughts about the matter.  I’m stumbling around with the issue.
One of our primary measures of economic well-being is Real Gross Domestic Product per capita.  The following table presents data on RGDPpc for all the countries with a population of 50 million or more, based on the data found here.  (These countries account for about 75% both of world GDP and world population, as reported in the dataset.)



United States
United Kingdom
Burma Myanmar
Republic of Congo (Brazzaville)

$   700
$   400
$   200
Leaving aside the question of how well these data actually reflect economic well-being in these 24 countries (a ratio of about 250-to-1, comparing the US to Congo), there is, it seems to me, another significant difference, which I think I’ll call the digital divide.  One convenient measure of this (maybe) is Facebook usage.  Not surprisingly, 8 of the 10 countries with the largest number of FB users are also in the 10 countries with the highest RGDPpc (Russia and Turkey are in the high-income group; Indonesia and India are in the large-user base group). 
The question this raises for me is how services like FB are valued in the official statistics from which we calculate GDP (and GDPpc).  Users pay, directly, little or nothing for using many digital services (FB, reservation services such as Expedia, and so on).  Yet these services do apparently add value in the economy and thus contribute to economic well-being.
Although I can’t find anything completely definitive, it appears that digital services contribute to GDP mostly as intermediate services provided to businesses (or individuals) who advertise on their sited.  So, for example, Facebook reports $7.872 billion in revenue in 2013, of which $6.986 billion was from advertising, and 757 million worldwide users (by one metric; over 1.2 billion by another, but I suspect there’s some double-counting here).  That’s revenue of a little over $10 per user.  But essentially none of that revenue comes from users.
I don’t know how one might calculate the use-value of FB to a typical user, but surely it’s more than $10 per year.  My household has 2 FB accounts, and between us, we probably spend 2-3 hours a day on FB.  Call it 800 hours a year.  If we value our time on FB at $0.25 per hour (which I suspect is low; my alternative uses of time—like writing blog posts—are worth more to me than that), that’s $100 per year each, or more than 10 times as much contribution to GDP as can possibly be attributed to FB in its provision of advertising services (an intermediate, not a final, good). 
What, for the US, would that amount to?  With about 151 million users, we might attribute $3 billion (a disproportionate share) of FB’s revenue to its US member base.  But at $100 a year, users might value their time on FB at $15 billion a year.  A conservative guess, then, might be that digital services in the US are contribution in the range of $100 to $200 billion a year to GDP, which might be counted currently as between 10% and 20% of that.
This is not particularly large, in per capita terms—perhaps between $300 and $600 per capita in the US (between 0.6% and 1.2% of measured RGDPpc), of which our official measures might be capturing between $30 and $60.  Still, as the range of unpriced digital services expands, the gap between RGDPpc as a easure of economic well-being, and actual economic well-being, is only likely to grow.

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.