Jane Jacobs would love this

In which Timothy Lee proposes that urban freeways should be torn down and replaced by surface streets...a point of view that I tend to agree with, actually.

Interest Rates and Privater, Non-Residential Fixed nvestment

In a very interesting post, Robert Waldman writes:

In a recent post, I noted that actual non-residential fixed capital investment doesn’t show the pattern one would expect based on optimizing models at all. Ugh that sentence was convoluted and so is the post it describes. In fact, the puzzling pattern is really very simple. Non residential fixed capital investment (nrfinv) is high when interest rates are high. 

 And

This correlation is strange for two reasons. First the sign is surprising. Other things equal, one would expect high interest rates to cause low investment. note the brick red curve in the graph is the Federal Funds rate — a policy instrument. Second the interest rates are nominal [but the investment data are real---inflation-adjusted: DC]. Sooner or later, I will try to understand what was going on.

This rather intrigued me, so using data from FRED,  I put together a data set including the following data:
Real Private Non-Residential Fixed Investment (PNRFI)
Real GDP (and the average annual rate of growth of RGDP over the subsequent 2 years) (RGDP and GrRGDP)
Real Moody's AAA corporate bond rate (RAAARate)
(Details of how I calculated all this if anyone is interested enough to ask)

This gave me 255 usable quarterly observations.  I regressed RPNRFI on GrRGDP and RAAARate.  The resulting regression is shown in the following table:

Variable	Coefficient	T-statistic
Constant GrRGDP RAAARate	+847.4 -69.6 +48.7	+10.88 -4.09 +5.41
R2 F D-W	0.422 23.35 0.018

Even adjusting nominal interest rates to real interest rates, I find, essentially the same thing Waldmann found.  (The D-W--Durbin-Watson--statistic indicate that there is serial correlation in RPNRFI.)  The simplest explanation for this is that the changes in the real interest rate are a result of shifts in the demand for funds to purchase new capital equipment.  The argument that high real interest rates will be associated with reduced investment assumes that the demand for funds curve is unchanged, and that changes in interest rates move the economy along that curve. 

This is, in a sense, a very Keynesian result--that changes in investment are a result of changes in expectations of future profits, much more than simply being a response to rising or falling interest rates.
*************************************************
Addendum.  I played with some alternative specifications.  In every case, the D-W statistic continued to show autocorrelation.  In most of the alternatives, the coefficient on the GDP variable was positive.  And the coefficient on the real interest rate was always positive.  Here's one example.  In this instance, I computed the percentage change in PRNRFI from 8 quarters prior, the percentage change in RGDP from 8 quarters prior, and the actual change in the RAAARate from 8 quarters prior.

Variable	Coefficient	T-statistic
Constant %ChRGDP ChRAAARate	-3.64 +1.84 +0.22	-4.03 +15.78 +1.63
R2 F DW	0.497 124.5 0.209

Note:  I was unable to figure out how to post this in the comments on Waldmann's blog.

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.")

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 www.bls.gov.)

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.)

Country	RGDPpc
United States Japan Germany France United Kingdom Italy Russia Brazil Turkey Mexico China Thailand Iran Indonesia Egypt Nigeria Philippines Burma Myanmar India Vietnam Pakistan Bangladesh Ethopia Republic of Congo (Brazzaville)	$51,000 $45,100 $43,300 $39,900 $37,800 $32,200 $12,100 $11.500 $10,800 $9,900 $5.900 $5,500 $5,300 $3.600 $2,700 $2,600 $2.300 $2.200 $1,700 $1,500 $1,100 $   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.