SignsOfChaos

Cost.....or price?

2012-01-29T23:22:00.005-06:00

Kevin Drum has an interesting--and in a lot of ways largely correct--post about the declining public support for higher education. He writes, at one point, about support for "low-cost public universities."

What I'd like to do is make everyone realize that there are two issues here. The first is the cost (C)of higher education. This is what the colleges and universities of the U.S. spend (per unit of higher education, however you choose to define that). The other is the price (P) of higher education, which we would generally equate with the tuition and fees paid by students in order to attend higher education.

In general, in the U.S., the cost is higher than the price:

C > P

Why? At private colleges and universities, at least some of the costs are covered by donations (often, not always, by alumni). At public colleges and universities, historically a fairly large fraction of the costs have been covered by state appropriations.

Of late, what has happened in public higher education is that the state appropriation part has declined, often precipitously. But unless the costs are also really declining, the only alternative is a rising price--higher tuition and fees. How large is the decline? According to the Chronicle of Higher Education, the decline in 2012 from the prior year is 7.6%. According to a report issued in 2008 by an organization called "State Higher Education Executive Officers,", in 1980 tuition and fees accounted for 21% of the total budgets of public institutions of higher education. By 2007, that had increased to 40%. And it has continued to rise in the intervening five years; a good guess would be that tuition and fees now account for something like 45% of public higher education budgets in the U.S.

And, yes, the costs of higher education have increased, for a lot of reasons. But what has driven tuition--the price of higher education--up so rapidly has been the declining state appropriation (as a percentage of the total cost of higher education).

So let's be clear. The price has risen because legislatures across the country have decided that higher education is not as significant a state government priority as it was 30, 20, 10, or even 5 years ago. A part of the debt burden now carried by many students is a consequence of the failure of state legislators to provide the same kind of support that those same states were providing when many of those legislators attended the colleges and universities they now decline to support.

If there is a way out of this, it is for voters to punish legislators who have adopted, voted for, and enacted these priorities.

I live in Indiana.

I am not holding my breath.

Tradeable output, balance of payments, and U.S. Defense dspending

2012-01-27T15:42:00.000-06:00

Kevin Drum and Matt Yglesias have a little back-and-forth today about why what matters (as far as the international trade position of the U.S. is concerned) is tradable goods and services, not manufactured goods. And they actually agree. Yglesias goes on to argue that, right now, we really don't have a significant balance of trade problem (which is an arguable position), but I want to make a different point.

We know that the U.S. devotes hugely more resources to defense that any other country in the world; according to this web site, the U.S. accounted for more than 1/3 of worldwide defense spending in 2007 (and I can't think of a reason why that would have declined in the intervening 4-5 years). U.S. defense spending in 2007 was about $2.2 trillion. I think we need to think about all this defense spending a little differently than we have historically.

In 2007, the U.S. exported about $1.65 trillion worth of goods and services, while importing about $2.54 trillion. So the trade deficit was about $0.89 trillion. But think about all that defense spending. What percentage of that is actually the U.S. providing security services to Europe, to Japan and South Korea, to the Middle East, to, in effect, much of the rest of the world? (We're doing that because it's in our self-interest to do so, I grant you, but it means that other countries are enabled to devote fewer resources to the production of defense services than they otherwise would.) And then we give those defense services away--we don't charge anyone for them.

According to this wikipedia article, about 1/7 of all U.S. military personnel are deployed outside the U.S. If we conservatively allocate only 10% of U.S. military spending to providing a "public good" to the rest of the world, then we're "exporting" about $0.22 trillion worth of defense services for which we do not get paid.

Which makes the balance of trade deficit look somewhat smaller.

A reminder, if we needed it, of how much the world has changed

2012-01-27T11:10:00.001-06:00

"Consider that 30 years ago, Seagate introduced the world to the SG-506 with 5 megabytes of storage for $1,500. Today they sell a 4 terabyte drive for less than $450. Where you used to get 0.003333 megabytes per dollar, you know get 9,320 megabytes per dollar in nominal terms."

From Matt Yglesias.

Paul Romer Updates An Old Adage

2012-01-20T17:24:00.001-06:00

"Give someone a fish, you feed them for a day.
Teach someone to fish, you destroy another aquatic ecosystem."

From his paper "Process, Responsibility, and Myron’s Law," presented at the International Monetary Funds recent conference on "Macro and Growth Policies in the Wake of the Crisis" (you can view a video here.)

"Myron's Law," according to Romer, was formulated by Myron Scholes (of the Black-Scholes formula for pricing complex financial instruments, and it says: "Asymptotically, any finite tax code collects zero revenue."

The November Employment Situation

2011-12-02T14:02:00.000-06:00

A nice gain in establishment employment and encouraging revisions upward for September and October. And a significant decline in the unemployment rate. But that decline is mostly a result of declining labor force participation. Brad DeLong does the analysis for me, so I don't have to.

"Liquidation Cycles"

2011-11-25T12:15:00.003-06:00

Brad DeLong has posted a link to an older paper of his, " 'Liquidation Cycles' and the Great Depression," in which he develops a reasonably coherent model of an economy in which austerity can be a rational response to a downturn. He even suggests that a couple of the business cycles in the U.S. in the 19th century might have been rational liquidations of railroad positions. It's well worth reading. And here's the comment I posted on DeLong's blog:

"This is a perfectly persuasive rational reconstruction, I think, of the liquidationist thesis. What strikes me is how much of the model I see echoed in (for example) Tyler Cowen's zero-marginal-product arguments (although he focuses on ZMP of labor, rather than ZMP of capital).

"What also strikes me, though, is that the liquidationists, who are (alas!) still with us are likely to argue that the liquidation was not allowed to procede, that the election of Roosevelt in the US and the abandonment of the gold standard in the US and England (and elsewhere) prevented the adjustments from occurring, that, far from having demonstrated that the collapse was deep enough to prove the liquidationists wrong, you [DeLong] have simply proved that they were right--standing in the way of liquidation only prolonged the agony.

"Of course, that argument also means that WWII was simply a barrier to the necessary adjustments as well. But in Germany and in Japan (indeed in Europe as a whole) the redundant capital was destroyed by the war, thus clearing the way for the adjustment to procede beginning in 1945.

"I'm actually serious--I expect this response, because, at its core, the liguidationist argument is not (I think) about economics, but about a morality that contends that 'no good will come of this...' "

The new European Gold Standard

2011-10-24T09:31:00.001-06:00

Seems to be having consequences very much like the old European Gold Standard, according to Paul Krugman:

"The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.

"Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap."

Re-reading "On Keynesian Economics and the Economics of Keynes"

2011-10-08T14:19:00.000-06:00

I am re-reading Axel Leijonhufvud's On Keynesian Economics and the Economics of Keynes, for the first time in some years. I continue to find passages that provide significant insights into the theoretical debates of today. As, for example, this, on pp. 79-80

"Much of modern monetary theory deals with money as just one of the goods in a general equilibrium model. It is now clear that in general competitive equilibrium all goods are perfectly liquid. All transactors face perfectly elastic demand functions; the full value of any good can be instantly realized. Money has no special status [my emphasis], and in a model which deals only with situations characterized by exchange equilibrium, money is (at most) "just another good." In the present work, we deal with short-run disequilibrium processes. In the analysys of such processes, money--and "liquidity" generally--is of particular interest. (The Keynesian problem, after all, is to show how it can be that all of the "false quantities" produced are too small.) Hence our emphasis on aggregate demand in money terms. Most Keynesians prefer to deal with income-expenditure models in real terms, i.e., with nominal magnitudes entirely absent from the so-called "real sector" and, correspondingly, with the excess demand for moeny stated in terms of real balances. This procedure of dividing through "on both sides" with the GDP-deflator is usually regarded as purely a matter of convenience, to be justified by reference to accepted postulates of "rational behavior," i.e., "absence of money illusion." When communication is far from perfect, however, it is not at all clear that individual "rationality" implies the kind of invariance propositions for the system as a whole that these models imply. "Absence of money illusion" has become one of the great fudge-phrases of economic theory--a "real veil," in effect, behind which some of the most basic and subtel issues of monetary theory lie concealed."

(In a footnote, he refers to adjusting to real terms using a price index as, in effect, "cancelling...the means of payment function of money..."

The entire work is amazing, and still extremely relevant.

Could We PLEASE Have Some Good News?

2011-09-02T13:50:00.002-06:00

So the Employment Report for August is out, and everyone is focusing on the zero net increase in establishment employment between July and August. That's depressing enough, but month-to-month changes are (a) volatile and (b) subject to fairly large revisions. I have a tendence to look at year-over-year changes. So, in the diagram here (click the diagram for a larger view), I've shown the 12-month growth rates in employment, for both measures of employment, and the 1990 - 2007 average annual growth.

What's depressing here is that, since the "recovery" began, there has not been a single 12-month period during which employment has grown at or above the average for the 1990 to 2007 period. In this "recovery," employment growth has never even approached rapid. This is extradordinary. The US economy has never had a recovery from a recession in which this has been true. At least since 1948 (when we began the household survey) and not since the establishment survey began in 1939, for establishment employment numbers. In short, as recoveries go, this is unprecedentedly awful.

Meanwhile, the employment-population ratio has not budged. It's still just barely above 58%, down from its recent peak (in 2000) of around 64.5%. The employment-population ratio has not been this low since August 1983, just before employment began to grow quite rapidly as we recovered from that recession (by August 1984, the employment-population ratio was back up to 59.6%). In this "recovery," the employment-population ratio has not shown any upward trend at all (click the diagram for a larger view).

And our current policy response, both from the Federal Reserve and from the Obama Administration, appears to be hope that things will improve.

Hope is not a plan.

Fiscal policy does/doesn't work?

2011-08-16T09:54:00.000-06:00

The correct answer is "We have effectively not tried to generate any fiscal stimulus." I out-source the evidence to Richard Green, who concludes: "I hope I am wrong about this, but it is hard to see how this leads to a recovery in jobs any time soon."

Sticky wages?

2011-08-16T08:21:00.002-06:00

A major back-and-forth has kicked up in the econ blogosphere, initiated by a post by Tyler Cowen at Marginal Revolution (for example, here, and here, and here, and here, and here, and here, and here).

What's interesting to me it that there is actual research on the question of wage stickiness, as I commented on Cowen's post:

There is, as it turns out, some actual research on this issue in the job search literature. The bottom line is that reservation wages appear to fall relatively quickly with duration of unemployment. One common conclusion is that wage stickiness comes from the behavior of *employers.* Some citations:

“Reservation Wages, Offer Wages, and Unemployment Duration–Some New Empirical Evidence”
http://ideas.repec.org/p/kie/kieliw/1095.html
The authors conclude that offer wages fall faster than do reservation wages (not that reservations wages do not fall).

“The Relationship Between Unemployment Spells and Reservation Wages as a Test of Search Theory,” by Stephen R. G. Jones, QJE, V. 104, N. 4, 1988.
“…the main finding is that reservation wages play a significant role in the determination of duration.”

“Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages,” by C. A. Pissarides, AER, V. 75, N. 4, 1985.

“Efficiency Wage Models and Unemployment,: by J. L. Yellen, AER, V. 72, N2., 1984.
The stickiness of wages is attributed to the reluctance of *employers* to reduce wages.

“Unemployment, Wage-Setting, and Insider-Oursider Relationships,” by A. Lindbeck, AER V. 76, N. 2, 1986.
The stickiness of wages is again attributed to the reluctance of *employers* to reduce wages.

“Wage Dynamics: Reconciling Theory and Evidence,” by O. Blanchard and L. Katz, http://www.nber.org/papers/w6924 1999.
“In this paper, we ask whether one can reconcile the empirical evidence with theoretical wage relations. We reach three main conclusions. First, we derive the condition under which the two can indeed be reconciled. We show the constraints that such a condition imposes on the determinants of workers’ reservation wages as well as the relative importance of workers’ outside options as opposed to match specific productivity in wage determination. Second, in the light of this condition, we reinterpret the presence of an “error correction” term in macroeconomic wage relations for most European economies but not in the United States. Third, we show that whether this condition holds or not has important implications for the effects of a number of variables — from real interest rates to oil prices to payroll taxes — on the natural rate of unemployment.”

“An Empirical Test Job-Search Model, with a Test of the Constant Reservation-Wage Hypothesis,” N. Keifer and G. Neumann, JPE, V. 87, N. 1m 1979.
“Reservation wages are found to decline significantly with duration.”

“An Econometric Analysis of Reservation Wages,” by T. Lancaster and A. Chesher, Econometrica, V. 51, N. 6, 1983. Their table A-IV clearly shows reservation wages falling with duration of unemployment, from 21.28 pounds per week for durations less than 13 weeks to 17,74 pounds per week for durations exceeding 52 weeks,

Interestingly the research shows that unemployed workers reduce their reservation wages fairly rapidly and by fairly large amounts. Why, then, the debate? Well, because wages are sticky, but they are apparently sticky because of employer behavior. How can this be?

Consider how job search works. A worker seeking a job makes contact with an employer (fills out an application, interviews, and so on). The employer decides whether to make an offer to the applicant, including terms (compensation, etc.) of employment. The applicant decides whether to take the offer. (And, also from the job-search literature--almost all "first-offers" to applicants are accepted.) If the employer does not make an offer, how common is it for the applicant to say, "Well, how about I work for 10% less than what you're currently paying people"?

Here's my take on why that doesn't happen: This is a signaling problem. If the prevailing wage (which, incidentally, needs to be seen as including all the costs of employing an additional worker, not just the direct compensation of that worker) is currently $x, then offering to work for $(x – a) signals the employer that you, the applicant, do not believe that your productivity is worth $x. Which does not mean that the employer should accept that your productivity is worth at least $(x – a). I would suggest that such a signal reduces the probability of an employer accepting your offer to work. So applicants have little or no incentive to offer to work at below-prevailing wages.

But, then, why don't employers reduce their wage offers? Here the standard response ranges from morale issues (cutting everyone's wages may lead to increased turnover and/or reduced effort and productivity--an "efficiency wage" argument) to salience issues (reducing wages only for new hires is a trivial reduction in employment costs, compared with the cost of continuing workers). There may even be legal issues ("equal-pay for equal-work" considerations).

So sticky (downward) wages appear to be real, but a reality based on employer behavior; the willingness of job-seekers to reduce their reservation wages is just too well documented.

How things are going in Northwest Indiana

2011-08-03T16:34:00.000-06:00

It's my luck to live and work in northwest Indiana, and so I have an inordinate interest in economic conditions in northwest Indiana, which can, I'm sorry to say, be depressing. As, for example, this:

Between June 1990 and June 2011, Household Employment in Northwest Indiana fell at an average annual rate of 0.13%, while Establishment Employment also fell, at an average annual rate of 0.09%.

But this is not quite fair, as employment had declined significantly from its cyclical peak (in, as it happens, June 2008)—Household Employment and Establishment Employment are both down by 9.6%

So, let’s look at average annual growth in employment from June 1990 to June 2008:
Household Employment: +0.46%
Establishment Employment: +0.41%

In both cases, that’s a total increase of about 7.7% over 18 years…By contrast, total Establishment Employment grew between June 1990 and June 2011, at the following average annual rates in:

Indiana: +0.90%
US: +1.25%

(My excuse for starting with 1990 data is that earlier data are not available for northwest Indiana...Also, I should note that the household and establishment data for NWI are on a slightly different geographic basis.)

Well, we have an agreement

2011-07-31T20:56:00.003-06:00

And I don't mean that in a favorable way.

Although I'll wait until we see the details, all the early reports indicate that what we have is an agreement that does three, maybe four, things:

1. Raises the debt ceiling (although I've seen nothing that says by how much.

2. Makes an average of about $200 million per year in federal government spending cuts over the next decade.

3. Adds no additional revenue.

4. Makes it likely that we will have to revisit this entire issue in the relatively near future.

Or make that five things: Blackmail has, in fact, paid off.

It's the spending cuts that probably hurt the most. The Bureau of Economic Analysis (Department of Commerce) just released preliminary second quarter GDP data. They show GDP growth in the second quarter at an annualized 1.3% per year, which is not enough even to maintain the current unemployment level, let alone lead to a decline in unemployment. And, the revisions to the GDP estimates for the past couple of years were all downward--meaning that even the tepid recovery we though we were having was even worse than we thought.

And now we're going to cut federal government spending by $200 billion a year. In an economy in which nominal GDP seems to be right around $15,000 billion on an annual basis right now, that's not a lot, only 1.3%...but that's enough that it would more than wipe out the growth in GDP during the second quarter (growth in nominal GDP from the first quarter to the second quarter, annualized, was about $132 billion). Macroeconomic Advisers has apparently forecast a 3.1% increase in real GDP for the next four quarters; this spending reduction would cut that in half. That'll be helpful.

There were alternatives. Any number of people suggested ways to avoid this capitulation, from invoking an admittedly controversial interpretation of the 14th Amendment to the Constitution, to arguing that by passing a set of spending acts that required a budget deficit tacitly authorized additional borrowing, to overdrafts at the Fed to the "platinum coin" ploy. But the administration ruled out everything except a budget deal.

And so it goes. Another compromise that looks more, at this point, like a surrender.

UPDATE: It's even worse than I thought. The Huffington Post reports that the debt ceiling will increase by $900 billion. Since the budget deficit is currently running something more than $1,000 billion a year, we appear to have a ten-month window before we're back in the room, negotiating with blackmailers.

The Debt Ceiling Crisis

2011-07-29T11:23:00.000-06:00

Houston, we have a problem.

The problem is that the Republican Party in Congress refuses to agree to any reasonable solution to raising the debt ceiling.

The problem is that Congress--including the Republican members of both houses--has authorized spending that exceeds the tax revenue that will be collected.

The problem is not the spending side of the equation.

Between 1947 and 2007, federal government expenditures (at all levels, including transfer payments and interest payments) averaged about 21% of GDP, while government recepts averaged about 19%. Since 2007, federal government spending has, in fact, increased to about 25% (from about 20%). But that increase has been entirely a consequence of the recession, as real federal spending has increased by only about 6% while real GDP has remained almost unchanged. Had real GDP grown at its long-term rate of about 3% per year, federal government spending as a percent of GDP would have declined since 2007, not even taking into account the share of spending that is in response to the recession.

Meanwhile federal government receipts as a percent of GDP have declined from about 19% to about 16%; again, this is almost entirely a result of the recession. Federal government tax revenues are nearly 12% below their 2007 levels. Absent the recession, the current budget deficit would be less than half its current level. And we would not be having this debate. Indeed, absent the recession and the tax cuts enacted in 2002-2004, we would have a budget surplus of about 2% of GDP.

We have higher than normal (and higher than expected) spending, because of the recession, We have lower-than-normal revenues, because of the recession and because of the tax cuts enacted in 2002-2004, revenues that are lower than they would be without the recession.

None of the current problem is a long-term issue.

But the country's finances are being held hostage.

The responsibility is not shared. The responsibility is wholly that of the Republican members of Congress, who, offered a deal to reduce federal spending significantly below its long-term level, without additional tax revenue, said "No."

Even if, by doing so, the nation's credit and economic well-being suffer.

Labor Market Rigidities and Unemployment

2011-07-27T12:24:00.003-06:00

Murat Tasci and Mary Zenker have written an interesting Economic Commentary for the Cleveland Fed, looking at the relationship between labor market rigidities and the response of unemployment rates during the recent recession. They focused on OECD countries. What they found, using the OECD index of "Overall Strictness of Employment Protection" as their measure of labor market rigidity, is this: In the OECD, countries with more strict employment protection experienced smaller increases in their unemployment rates during the "Great Recession", while countries with less strict employment protection (notably the U.S.) experieced larger increases in unemplyment rates. However, in non-recessionary periods, countries with less strict employment protection tended to have lower unemployment rates than did countries with more strict employment protection.

For example, the unemployment rate in the U.S. (least strict protection) rose by more than 4 percentage points during the recessions, while in France (4th most restrictive) saw an unemployment rate increase of less than 2 percentage points. Both had total GDP declines during the recession of about 4% to 4.5%. However, the unemployment rate in France was consistently 2 - 3 percentage points higher than in the US from the trough of the previous recession (in 2001).

What I find interesting, but unable to do much with (because finding the relevant data for France, or other countries, is apparently more difficult than it is for the U.S.), is that Tasci & Zenker say nothing about the labor market rigidity often cited as a major contributor to flexibility in labor markets--wage rigidity (or its converse, wage flexibility). We would expect countries with more flexible wages to display smaller increases in unemployment during recessions (although our expectations about average levels of the unemployment rate are less clear). So what can we say about wage flexibility?

All I can (easily) find are quarterly data for the U.S. on "Usual Median Weekly Wages" in current dollars (at www.bls.gov). And, relative to trend, U.S. wages appear both to be reasonably flexible (the mean percentage point change in actual relative to trend for the 1979 to 2011 period is 2.2 percentage points. And this is quarterly data, not annual data. Furthermore, wages do not appear to behave particularly counter-cyclically (in the U.S.), so this does not appear to be a source of added flexibility for the U.S. economy. (Real wage flexibility apears roughly similar to nominal wage flexibility, with an absolute mean quarterly deviation from trend of 2.4 percentage points. Again, the pattern does not appear to be counter-cyclical.)

Ignoring wage flexibility seems to me to be a clear (and unforced) error, but one that I cannot easily try to adjust for.

The forbidden internet

2011-07-12T14:11:00.001-06:00

So I just clicked on an economics-oriented blog, and got this message:

Forbidden

You do not have permission to access this document.

I guess that tells me where I stand.

An investment opportunity?

2011-07-11T13:27:00.001-06:00

The Treasury has been able to borrow at essentially a zero interest rate since September 2008. The most recent sale of 4-Week T-bills (July 7) required an interest rate of 0.03%. And that’s an annual rate. Someone buying $100 Million (redemption value) of T-bills paid $99,997,692 for them. That buyer will receive in interest payment of $2,308. On $100 Million worth of T-bills. During the 2001 recession, $100 Million in 4-Week T-bills would have yielded about $260,000 in interest…

Personally, I think the Treasury should start using the proceeds from the sale of T-bills to buy AAA corporate bonds. The profit opportunities are breathtaking.

I thought I had written the last of these...Another Employment Situation report

2011-07-08T09:41:00.003-06:00

The Bureau of Labor Statistics released its Employment Situation Report for June 2011 today. I thought--I hoped--I had written my last set of comments on this subject, at least for a while. But this is not good. Not good at all.

Many of the comments I have seen are focuses on the monthly changes, and they are discouraging. A net 18,000 increase in jobs (+57,000 private, -39,000 government). But a single bad month is not something to get too worrier about. So I decided to look at the change since June 2010, and the change since the "official" end of the recession, conveniently two full years, June 2009.

Total employment in the last year has increased by 0.8%. In the two years since the end of the recession, growth in total employment has been 0.4%--only 0.2% per year (total employment actually fell, by 0.4%, in the first year after the "end" of the recession.) Simply to keep up with employment growth, we'd need employment growth of more like 1.3% to 1.5% per year. To return to pre-recession levels in anything like a reasonable amount of time, we'd need growth like that coming our of the 1982-3 recession--when employment growth averaged about 3% per year for 6 years...when employment growth in the first couple of years pushed 5% per year. The economy is not just "running in place;" it's falling further and further behind.

That might be acceptable if private sector employment were booming. But it's not, it has grown just 1.6% in the past year and only 0.9% over the past two years (falling, obviously, between 2009 and 2010). Again, the contrast with the mid-1980s is instructive--private sector employment grew by more than 3% per year over a six-year period.

And even that might be acceptable, except that public sector, particularly state and local, employment has actually declined. State employment is down by 1.5% and local government b7 2.9% over the past two years. Federal government employment has increased, by 0.6%--16,000 jobs--since 2009.

The economy is growing so slowly, overall, and both in the private sector and in the public sector, that we are not even keeping pace with population growth and we are making even less progress in returning to our pre-recession levels of employment.

The employment-population ratio, which was 63% in June 2007 (before the official beginning of the recession, in December 2007), and which had declined to 59.4% in June 2009 (the official trough of this business cycle), has continued to fall in what is officially the recovery, and now is at 58.2%. By contrast, the employment population ratio rose from 63.9% in 1983 to 66.5% in 1989, rising every year.

As a result, people are dropping out of, or not entering the labor force. The labor force participation rate, which was 66% before the recession is now 64.1% and falling; it is lower now than it has been since 1982.

And the slow growth in employment has kept the unemployment rate from falling very much during the "recovery," even though the labor force is shrinking. Coming out of the recession in the 1980s, the unemployment rate fell from 10.1% in June 1983 to 7.2% in June 1984. Not this time. In June 2009, at the trough, the unemployment rate was 9.5%. June 2010, one year later? 9.5%. June 2011, two years later? 9.2%.

But maybe that's all a result of harder times for part-time workers. Well, no. For full-time workers, the unemployment rate, which was 10.3% in June 2009, is still 9.8%. In the 1980s? Down from 10.2% to 7.1%.

How about wages? Nominal wages have risen since the trough, by a whopping 4.5%--remember, that's over two years. But prices have risen (slightly) faster, so real wages have increased more slowly, by 1.3%, in the two years since the trough of the recession--and have declined in the past year. During the recovery.

I'm too depressed to continue. Me and what passes for a recovery.

The stalemate about the federal government's "debt limit"

2011-06-29T14:42:00.002-06:00

I think I want to make this argument:

1) Congress passed a budget in which authorized expenditures exceed expected revenues.

2) That expected deficit would cause the federal government's debt to exceed the statutory "debt ceiling."

3) Congress has therefore (pretty much) explicitly authorized the Administration to exceed the statutory "debt ceiling," and to do so without limit.

Am I missing something?

A Baseball Post

2011-06-25T09:29:00.003-06:00

This week, Jim Riggleman, the now former manager of the Washington Nationals, resigned because the team refused even to discuss a contract extension. Over his managerial career, Riggleman's teams have had a combined .445 winning percentage (in 1,486 games). At the very least, this record does not leap out at me saying that this is a man who should have a long-term contract. [For comparison purposes, though, it's worth noting that at a similar point in his career, Joe Torre had managed his teams to a cumulative .466 winning percentage (in 1,574 games).]

Can we get any kind of a "handle" on how Riggleman has done as a manager, compared with what we might call our expectations? That is, how well has he done in his full seasons as a manager, compared to how we might expect a team with the talent available to him to have done? And how does he stack up is we compare him, on this scale, to Torre?

Bill James created a simple measure of a team's expected winning percentage, which he calls the "Pythagorean" winning percentage, equal to [(RS)^2]/[(RS)^2 + (RA)^2], where RS is a team's runs scored and RA is a team's runs allowed, and the operator (^2) indicates we are squaring that value. A team, then, scoring and allowing the same number of runs has an expected winning percentage of .500; a team scoring 600 and allowing 700 has an expected winning percentage of about .425. A team scoring 700 and allowing 600 has an expected wining percentage of about .575.

How did Riggleman do with his full-season teams? In six full-year managerial seasons, his teams exceeded expectations twice (by a total of 7.7 games) and were below expectations 4 times (by a total of 20.8 games; a lot of that came in his first full season, with San Diego, when the team finished 11.7 games below expectations). In those six full seasons, then, he managed four teams with an expected winning percentage of .458 to an actual performance of .423. In the two years his teams exceeded expectations, he got a .485 wining percentage out of teams whose RS and RA would have predicted a .461 record. Overall, his teams won at a .443 clip against an expected .459. This is, in fact, not a stellar record.

What about Torre, through the same part of his career? Torre managed 8 full seasons, and his teams finished below expectations 5 times (367-443, .453) and above expectations 3 times (253-233, .521). Overall, Torre's teams finished 620-676, .478 against an expected 630-666, .486. Riggleman's record was a little, but not a lot, worse than Torre's at that point in their managerial careers. Had his winning percentage been only .008 below expectations, his teams would have won 7 more games in 6 years. The real difference is that Torre managed teams with an (average) expected record of 79-83, while Riggleman's had an (average) expected record of 74-88, five games per year worse.

But there's an additional point. Really bad teams--teams with an expected winning percentage below .450--tend to underperform their expectations (between 2006 and 2010, 19 teams had expected records of 73-89 or worse; 15 of them won fewer games than their RS/RA nnumbers would lead us to expect). Two of Riggleman's full-season jobs were with teams expected to finish below .450 (two right at.450). With those two teams, one finished 2 wins worse than expected and the other finished 2.6 wins better than expected. Torre's first three teams (the Mets, 1978 - 1980) all had expected records worse than .450, and all under-performed that, by 11.5 games (3.8 per year).

Or maybe two additional points, With teams expected to have losing records, but to finish .450 or better (Rigglleman has had 3 such teams, Torre only 1), Riggleman's teams finished an average of 8 wins below expectations and Torre's 1 such team was 2 wins above expectations. Riggleman had only one team that more RS than RA, and he brought it home 5 games above expectations. Torre had 3 such teams; 2 did an average of nearly 3 games better than expectations and 1 did 5 games worse than expectations.

So Riggleman did better than expected, and Torre worse, with really bad teams. Riggleman did worse than expected with moderately bad teams, and, the one time he had a good team, considerably better than expected. Torre about met expectations, overall, when he had moderately bad or good teams. (All of this comes with very small samples and is almost certainly not statistically significant.)

Two managers, both of whom had not very good records with not very good teams through about 1,500 games. One is now almost a lock to make the Hall of Fame as a manager. The other? Getting another managerial job may be a really, really unlikely event.

How fast does employment growth need to be in order to simply maintain the current employment-population ratio?

2011-06-06T09:04:00.003-06:00

In the "recovery" from the Great Recession (which began in December 2007 and reached its trough--the recovery officially began--in June 2009), the employment-population ratio more-or-less continuously declined from December 2007 (62.7%) to December 2009 (58.2%), and has stabilized since (at about 58.4%). If the current employment-population ratio had regained its pre-recession level, employment (as measured by the BLS househld survey) would have been 150,049,000 in March 2011, instead of 139,779,000; we are about 10 million jobs below where we would have been had we simply returned, over the past roughly two years since the recovery began.

If household employment had grown at its long-term trend (about 0.19% per month) since December 2007 (about 139,750,00), it would have reached about 158,250,000 by March 2011--about 18.5 million above the actual level.

Establishment employment--which was about 138 million in December 2007--had continued to grow at its long-term trent (about 0.21% per month), it would have reached about 150 million by March 2011. It was actually just about 131 million--a deficit of about 19 million jobs.

So the economy is currently somewhere between 10 million and 20 million jobs below where it would have been had we simply continued to grow at something approaching our historical rate.

What about going forward? Suppose we conclude that the old employment-population ratio was too high to be sustainable, that what is sustanable is the current--58.4% EPR (not the 62.7% EPR of December 2007, not the peak EPR of 63.4% of December 2006). How fast would employment have to grow in order to "keep up" with population growt, simply to maintain an employment population ratio of 58.4%?

The US working-age population (age 16 and over) has grown at an average (compound) monthly rate of 0.178% since 1976. So if population growth continued at that rate, employment as measured by the household survey would also have to grow at a monthly rate of 0.178%--or at about 250,000 jobs per month now, rising to about 260,000 jobs per monmh by the end of 2012. If we use the establishment measure of jobs instead, we would need to add about 235,000 jobs per month now (rising to about 240,000 by the end of 2012).

Since the official end of the recession--since the June 2009 trough--household employment growth has exceeded 250,00 only seven times (and has averaged only 107,000--less than half the employment growth we "need"). Establshment growth has exceeded 240,000 twice (and has exceeded 230,000 on two other occasions), averaging 101,000.

It is no wonder that the employment-population ratio has declined since the recovery began, and it is no wonder that the unemployment rate has declined only modestly (and that decline is, essentially, a result of much slower than normal growth in the labor force during a recession), from 9.% to 9.1%. [By contrast, in the year-and-a-half following the trough of the 1982 recession (November 1982), the unemployment rate fell from 10.8% to 7.4%.]

The real difficulty is that the economy seems unlikely to grow fast enough in the coming years to do much to move us back to our pre-recession employment picture. To get much in the way of rapid employment growth and rapid declines in the unemployment rate and even a modest increase in the emplopyment-population ratio will require annual GDP growth of around 5%. The current consensus forecasts are around 3%--or long-term-trend growth.

It looks like a bleak several years going forward.

(All data may be found on the BLS web site, www.bls.gov).

On libertarianism, the Pauls (Ron and Rand), and the "employment-at-will" doctrine

2011-05-16T08:46:00.008-06:00

Ron Paul's comments (and Rand's) on the appropriate role of the state--that it has no appropritate role, essentially, has been all over the web lately (here, here, here), in an interview with Chris Matthews in which Ron Paul comments on why he does not thing the Civil Rights Act of 1964 (and especially the "public accomodations" provisions of the act) should be law. Essentially, he sees requiring someone to sell to or provide a product or service to someone (in return for payment) should be a matter of choice by the seller or provider, and that no govrnment ought to have the authority to compel a seller to sell to all willing buyers.

When I started thinking about this, it occurred to me to wonder how he would respond to this situation: A restaurant owner refuses to serve African-Americans who wish to eat at his restaurant and are fully able and willing to pay for the meals. They respond by setting up an informational picket line, informing other prospective diners of the owner's actions. I would argue that, to be consistent he must support their right to picket (peacefully, of course) in such a situation.

And then I began thinking about the "employment-at-will" doctrine. Very simply, the "employment-at-will" doctrine holds that the job is the property of the employer, and that an employer may hire whomever the employer chooses, using any criteria the employer decides to use (including different criteria for different applicants). That the employer may retain or promote or discharge (at any time) any employee for any reason. And, of course, that an employee may quit for any reason, at any time. That is, taking the "employment-at-will" doctrine seriously, all anti-discrimination employment legislation is inappropriate.

Oddly enough, to economists who believe that markets work perfectly all the time, such a position makes a lot of sense. Simply, if there are enough non-discriminatory employers, and if labor markets are, overall, competitive, then the result of discrimination will be firms that are segregated by employment practices into three groups--those employing only workers from the "majority" group, those employing only workers from the minority groups, and those with mixed work forces. But all three types of firm will provide the same pay and benefits and working conditions.

It is, however, possible to interpret the 20th century as a time in which the "employment-at-will" doctrine has been continuously restricted. Consider almost all the important federal legiclation dealing with employment conditions:

The National Labor Relations (Wagner) Act (as amended; now the Labor-Management Relations Act) requires employers to bargain collectively with the chosen representative of their workers.

The Fair Labor Standards Act requires employers to pay a specified minimum wage and to pay overtime premiums to certain classes of workers.

The Civil Rights Act of 1964, in addition to its "public accomodations" provisions, prohibits (in Title VII) the use of race, gender, ethnicity, religion, or national origin in making employment decisions.

The Occupational Safety and Health Act requires that workplaces meet specified safety standards.

And that's just to mention the major legislation that occurs to me as I type.

In a world governed strictly by the "employment-at-will" doctrine, none of these laws would survive. So, again to be consistent, the Pauls would logically have to object to legislation and policies designed to eliminate discriminatory hiring practices, to protect the rights of workers to unionize(by requiring employers to bargain), to establish rules governine wages and overtime, or to oversee working conditions.

Why would a world in which the "employment-at-will" doctrine is strictly applied be a world none of us would want to live in?

First, the outcomes these laws and policies are designed to prevent are likely to be widely regarded as undesireable outcomes.

Second, labor markets are probably not sufficiently competitive to achieve these outcomes without government intervention. In many, if not most, labor markets, bargaining power is concentrated in the hands of employers(see Alan Manning, Monopsony in Motion: Imperfect Competition in Labor Markets, Princeton University Press, 2005).

Third, only if the "employment-at-will" doctrine creates benefits large enough to offset its disadvantages would we, in a utilitarian world (and most economists are at least quasi-utilitarians), even entertain it as a principle governing labor and employment relations.

So we have, as a society, slowly and imperfectly, hemmed in the "employment-at-will" doctrine, trying to deal with its imperfect outcomes, and protecting workers who have insufficient bargaining power to protect themselves without the assistance of government.

bin Laden

2011-05-01T22:06:00.005-06:00

So apparently Osama bin Laden has died, apparently violently. My reaction is to feel sad.

Sad, because I'm sure there's going to be a lot of triumphalism about this, a lot of "Isn't it about time." Because after 10 years we managed to kill a man who thought living in a cave was the best thing he could do.

But mostly sad because...Well, every time I thought about bin Laden (which has not been often, frankly), the connection I made was between bin Laden and Gandhi. Which I'm sure will make a lot of people wonder about me, but that's OK. The connection is that they both felt that they, and their countries, had to turn their backs on the modern world to avoid being corrupted. That they looked around themselves and saw, not progress and opportunity and a way out of poverty and oppression and desperation, but corrupting choices at every turn. And, ultimately, because they did not trust their own people to choose wisely.

Gandhi opposed the modern world peacefully, and bin Laden opposed it violently, but they both saw the only path to a better future in the past. And that, ultimately, is what makes me sad. Had their ideas won out, the world would have become a worse place to live, not because of the violence (in bin Laden's case), but because it would have been choosing poverty over progress, consigning millions, perhaps billions, of people to a worse life.

Do we need to worry about whether the relationship between the core rate of inflation and the headline rate of inflation has changed?

2011-04-14T14:13:00.018-06:00

Well, that's a long title for a blog post.

James Bullard, the President of the St. Louis Federal Reserve Bank, writing in the Bank's The Regional Economist, suggests that we might have reason to be worrying about reliance on core measures of inflation:

Since June 2010, the two measures have been diverging slowly, with core inflation below headline...during times of continuous increases in the relative price of energy, perhaps core PCE [inflation--DAC] is a misleading indicator of underlying inflation trends. This implies that core PCE may not be a good predictor of future headline inflation after all. Under these circumstances, headline PCE inflation should probably have more weight in policymaning decisions than core PCE inflation.

So I decided to take a look; unfortunately, I continue to have trouble pasting Excel charts into Blogspot, so I'll just have to relate what I see when I graph core inflation and headline inflation. (I calculated the rate of inflation as the percentage change in the monthly all-item or core PCE from 12 months earlier.)

And I'm not seeing the problem. The headline rate of inflation, as measured by the all-item PCE, has become more volative since about 2005. And that volatility suggests that food and energy prices have also become more volatile recently. It is accurate to say that inflation measured by the all-item PCE did in fact exceed inflation as measured by the core PCE early in 2010 (when oil prices were rising), but the opposite was true in 2009 (when oil prices were falling). Isn't this what we'd expect? Wouldn't we be surprised if this did not happen? (Incidentally, I also looked at this using the all-item and core CPI, and the results are the same.)

What Mr. Bullard suggests might be a reason for decreasing our reliance on inflation measured by core price indexes to forecast future headline inflation is in fact a feature, not a bug, of using core measures of inflation. For now, I see nothing to be concerned about.

A birthday present to me, 12 years before I was born

2011-02-04T20:38:00.002-06:00

According to James Galbraith (in an email to Brad Delong), "The General Theory of Employment, Interest and Money was published on February 4, 1936." In other words, on my birthday minus 12 years.

I'm an economist, not a political scientist...

2011-01-28T20:23:00.002-06:00

I'm an economist, not a political scientist, so I find it hard to know what to make of headlines like this one

Mubarak calls on cabinet to resign

which is how AOL's news feed has been playing its coverage of the upheaval in Egypt. I mean, Mubarak is a dictator, right? He appointed that cabinet. They serve entirely at his pleasure. So calling on them to resign seems like a silly thing to do. If a new cabinet would make a difference (which I doubt), fire them.

UPDATE: The headline now reads: Amid massive protests, Egypt leader fires cabinet.

On Say's Law of Markets

2011-01-25T10:34:00.003-06:00

Brad DeLong has an extended post about Say's Law, and despite my efforts (and apparently being logged in to TypePad), I can't get this comment to post. So I'll put it here:

All this (DeLong's post) makes me recall a paper I wrote for my grad history of thought class back in 1971 (when history of thought was still required for a PhD). It spun off somewhing Joseph Schumpeter wrote in his History of Economic Analysis (which, as I have a copy on my bookshelf, I can quote, from p. 624-625):

"So it gets down to this. A man by the name of J.B. Say had discovered a theorem of considerable interest from a theoretical point of view, that, though rooted in the tradition of Cantillon and Turgot, was novel in the sense that it had never been stated in so many words. He hardly understood his discovery and not only expressed it faultily but also misused it for the things that really mattered to him..."

So JAS had to explain it for him. Which he did not actually succeed at doing. (An aside. Given Schumpeter's conclusion, in what sense could Say be said to have discovered Say's Law of Markets, or at least the Law as interpreted by Schumpeter?)

In any event, this inspired me back then to read and re-read what Say actually wrote. And my conclusions, back in 1971, were that Say intended his Law of Markets in a long-run equilibrium sense. That the long-run growth of an economy was determined by what we would now call the determinants of aggregate supply. That given appropriate institutional arrangements and policies, a lack of demand could never be a barrier to long-run growth--we could always create the demand. That while all this was true in the long-run (in the long-run, there could be no "general gluts"), it need not be true in the immediate here-and-now, in the short-run.

Made sense to me 40 years ago and still does.

Update: It did post there, with some typos that I missed.

At my age, at this stage of my career, I get to teach a completely new course.

2011-01-23T16:13:00.002-06:00

Last year, my business school adopted a new course requirement, a course in American economic/business history. We had two reasons for this. First, in light of the recent business cycle events, we thought that our students could use some historical precedent on things. And second (here's where the inter-program politics comes in), my university now requires a course in "historical or cultural studies" as a part of its general education requirements. I would generally have been willing to leave that to the history department, but, at this point, we have essentially no one who can teach what would be for us a relevant American history course. (The full-time history faculty includes four faculty members, with the following areas of research and teaching interests: China/Japan; medeival Europe; 20th century Europe (especially France), and 20th century American political history. No one who even has any coursework, let alone interest in, economic history.)

So I wound up with it. I do, at least, have a graduate field in US economic history (but that was nearly 40 years ago), and I have always been (and remain) very interested in economic history. I've never taught a course in economic history, and my research interests (urban economic development/policy; labor markets; economics of professional sports) are elsewhere.

The course itself is an entry-level course, aimed at first-year students, and has no prerequisites (not even intro econ...not even having taken high school econ). (When we were talking about doing this, I had assumed that it was going to be a junior/senior level course, with the intro econ sequence as a prerequisite, and drawing mostly students who had completed a fair amount of the business core. Silly me. And I had to miss the faculty meeting at which the course was adopted.)

But I'm having a great deal of fun so far (two weeks worth of classes), and I'm trying to pull in enough economics so that some of the factual material in the text (History of the American Economy, by Gary Walton and Hugh Rockoff) has more theoretical context than the book gives it.

Given that I plan to retire in May 2012, however, my program will have to be very careful when it begins to look at replacing me. Neither of the other two economists we currently have would have a prayer in hell of teaching this course. They don't have the academic background, and neither of them grew up with US history, let alone US economic history, in the foreground of what they did. Fortunately, finding someone who can teach it shouldn't be all that hard. In the meantime, I get to have some late-career fun.

Productivity Quote of the Day

2011-01-20T12:08:00.003-06:00

From Karl Smith, in the Modelled Behavior blog:

"Countries aren’t poor because the people don’t have work, they are poor because the work they do is less “productive.”

"I put productive in quotes because I think even many readers of this blog instinctively equate productivity with the work ethic or can-do-it-ness of the worker. Productivity is mostly driven by machines and technology, however.

"Having a lot of can-do spirit and a shovel is no match for being ho-hum and having a bulldozer."

This is something worth remembering, I think, for all of us. Much of our "success" in life depends on where we are, and on where we were born.

The upcoming return of the prodigal

2011-01-17T11:55:00.004-06:00

I've been out of commission for a few weeks, having had not-exactly minor surgery and the attendant recovery period. I expect to be back and snarky within the next week or so. If you've missed me, don't give up quite yet.

What to do, what to do

2010-12-09T09:45:00.003-06:00

In common with many academic institutions, we've been going through the process of developing ways to assess student learning, both in their general education courses and in the major. In my program (business), we've been talking about using an outside test (the ETS Major Field Test in Business) as a high-stakes test, both in the undergraduate program and in the MBA.

The way this would work looks something like this: During a student's final semester/year, the student would take the ETS Major Field Exam in Business. (If anyone is curious, you can find a description of, and sample questions for the undergrad exam here, and for the MBA exam here.) In order to graduate, the student would have to achieve a minimum score (expressed as a percentile rank). (Our proposed minimum score is low, so I'm not really concerned very much about that.)

In short, the ETS MFT in Business would become a high-stakes exam for students.

Our current proposal allows students two attempts to achieve a "passing" score. (Another campus in the same system allows multiple attempts, with the university paying for the first attempt and the student responsible for paying the test fee for the second and subsequent tries.) The committee considering this is conflicted about the proposal (I'm not),

On the plus side. The test provides some external validation of what we are doing.

On the other side.

1) My reading of the sample questions on the ETS web site (here for the undergrad and here for the MBA) leaves me concerned about whether the tests correlate closely enough with what we do in our program.

2) That raises the possibility that a srudent who has done well in the coursework might not "pass" the ETS test.

3) Which means we would have to consider what the problem is. Does the ETS test fail to test what we emphasize? Does it in fact test what we emphasize, but our grading standards allow students to think they are succeeding when they are not?

A lot of schools use these tests, although I suspect most of them are not the sort of high stakes testing we're considering. But I'm not sold on the idea. And I'm trying to un-sell my colleagues.

Why I don't like having to do a forecast for my local economy

2010-11-06T21:24:00.003-06:00

I spent most of my day working on a presentation on the economic outlook for northwest Indiana, the 13th time I've done this. It seems like 13 versions of the same thing...northwest Indiana will grow more slowly over the next year than will the state of Indiana, which will grow more slowly than the nation. Sometimes I think I should just record my comments and play them next year.

But northwest Indiana has not done well since the steel industry collapsed in 1979. Oh, the steel industry has done well, but it has done well by shedding jobs, and the profits from that have gone elsewhere.

Population growth has all but ended. From 1900 to 1980, the population grew at an average annual rate of 2.2%; since 1980, it's grown at an average annual rate of 0.1%; since 1980, the region has added only 25,000 to its population, which, in 1980, was about 828,000.

Payroll employment has grown, since 1990, at an average annual rate of 0.14%. Now, I grant that we're still trying to climb out of a recession, but the average annual growth from 1990 to the December 2007 peak was a whopping 0.65%. Now, that's exciting. We added, from 1990 to the pre-recession peak, only 31,800 jobs (starting at 255,900).

And household employment is, if anything even less thrilling. Employment grew at an average annoual rate of 0.3% from 1990 to 2007, and has declined by 5.2% since the US economy hit bottom in June 2009. Using the household measure of employment, we have about 5,000 fewer jobs than we did in January 1990--and, because of seasonal factors, January is a bad month around here.

Growth in real per capita income hasn't been all that bad--average annual growth of 1.2%, compared with 1.5% for the nation since 1969 (through 2008). But growth since the beginning of the collapse of the steel industry has been only 0.8% per year, while the US PCI has grown at a 1.7%. Average annual compensation in non-farm employment has grown a total of 1.4% between 2001 and 2009--an average annual rate of 0.2% per year. Which is actually better than the US as a whole (average annnual compensation has declined by about 0.5% between 2001 and 2008).

So I'm trying to figure out what I'm going to say that won't be too depressing...

What managers do

2010-11-04T21:48:00.004-06:00

Tonight, I was looking for something to read, and I settled on a book by Bill James*, which I hadn't read since I bought it when it was published in 1997. Bill, as an undergraduate, double-majored in English and economics, and has spent his working life doing what he wanted to do (mostly), rather than working for someone else. And it's worked out pretty well for him.

The book is about managers of major league baseball teams, and it is in many ways quite fascinating.

Anyway, on p. 157, he writes:

"The most important question that a manager asks is "What needs to be changed around here?" Any manager, over time, loses the ability to see what needs to be changed..."

And

"If a manager is successful, he changes the needs of the organization. By so doing, he often makes himself obsolete."

(In the book, the second quote actually comes before the first.)

All of which makes a lot of sense in managerial contexts generally. Managers succeed when the make changes that redirect the organization as it needs to be redirected. Managers fail when they cannot identify what need to change. And, oddly, for reasons Bill writes about, it's almost always easier to implement changes early in a manager's tenure. Later on, managers have been captured by the culture they have created (or, at the very least, helped to create).

I'll let you all think about the applicability of this to your own work situations.

*The Bill James Guide to Baseball Managers From 1870 to Today, Scribner (New York: 1997).

How long will it take?

2010-11-01T21:36:00.002-06:00

This came up a few days ago over at Matt Yglesias' blog, and I made an off-the-cuff remark that it generally takes growth in real GDP in excess of 3% to bring the unemployment rate down. Well, I decided to be a bit more systematic, so (using quarterly unemploymenr rate and GDP data), I regressed the 4-quarter change in the unempoyment rate on the 4-quarter percentage change in real GDP. The resulting regression indicated that, if real GDP grows by 2.64% over a 4-quarter period, the unemployment rate will (generally) be stable. Faster growth than that, the unemployment rate falls; slower growth than that, it rises.

What does this mean for the economy? Suppose we want to get the unemployment rate down to 5.5% from its current 9.6%. Well, that'll take

1 year of 11.1% growth in real GDP or
2 years of 6.8% growth or
3 years of 5.5% growth

We just got a 2% (annualized) growth in real GDP estimate from the BEA...not good enough...at that rate, the unemployment rate would, on average, rise by o.3 percentage points per year. The San Francisco Fed is forecasting growth of 2.5% for 2010 (we ain't there yet) and 3.5% for 2011. If we got that, the unemployment rate would decline about 0.4 percentage points by the end of 2011; if the economy continued to grow by 3.5% for another five years, the economy would return to a roughly full employment state--in 2016. Also not good enough.

I have seen no forecasts of growth approaching 6.8% per year for any time in the near future.

Coming out of the recession of the mid-1970s, the economy achieved 4-quarter growth rates in excess of 6% for a four-quarter period from the first quarter of 1975 through the second quarter of 1976; we grew at an annualized rate greater than 5% from the 4th quarter of 1982 through the fourth quarter of 1984--two years. So rapid growth coming out of a recession is not impossible. But we've topped out around 4% in the last two (1991; 2001) recessions.

Unless something happens that leads to a much faster growth in real GDP than we seem likely to have, the unemployment rate will almost certainly remain high for many years. This is a scenario that should lead to more discussion of additional means of stimulating the economy.

What we seem to be getting instead is the return of what Paul Krugman has called the "austerians."

I have a bad feeling about this.

Bailing the NFL out?

2010-10-17T16:59:00.002-06:00

This week’s (cover date October 18, 2010) Sports Illustrated has three articles dealing directly with the economics of sports. I’m going to look at these three articles one at a time over the next few days.

In the first article (pp. 41-43), “Million-Dollar Maybes,” Jim Trotter takes on the issue of the high salaries/bonuses being paid by NFL teams to high draft choices. The essence of the argument advanced in the article is that teams that have high draft positions in the NFL draft have incurred large obligations under the league’s salary cap structure that have made it difficult for them to develop as teams. The three teams specifically mentioned are the Detroit Lions (drafting in the top 10 eight times since 2002; averaging under 4 wins per season, including an 0-16 year in 2008); the Oakland Raiders (in the top 8 six times in the past 7 years; no more than 5 wins in any season); and the St. Louis Rams, with 3 players potentially earnings $112 million if the final years of their contracts kick in—in addition to the early-career guarantees (3 wins in 2008-2009).

Trotter writes: “A hard rookie wage scale similar to the NBA’s slotting system would relieve some of the financial pressure on teams at the top of the draft.” What he does not address is why teams continue to offer such generous terms to high picks; my reading of the collective bargaining agreement is that teams choose to make these offers and that the players have little leverage, except to refuse to sign (and potentially, to play in Canada), which, given their options outside the NFL, doesn’t seem like a credible bargaining strategy to me.

Let me repeat that. The contracts signed by the players whose salaries are discussed in the article had little-to-no bargaining leverage and the teams voluntarily offered them extremely generous contracts, even knowing how well that was working out. Trotter does not discuss—he does not even mention—this disconnect. The tone of the article is that teams cannot avoid these contracts, somehow, and that only by bargaining explicit limits on salaries and bonuses for first-year players can teams avoid making extremely expensive (and, apparently, bad) decisions.

I may be missing something, but this does not make a lot of sense to me. Obviously, the NFL would like limits on compensation of first-year players; in the absence of higher salaries for players with more experience, such a limit would flow directly to the bottom line of the teams (and the league). Why the Players’ Association would bargain away the possibility of first-year players earning (what amounts to) windfalls, unless they know that they can make up those earnings for veterans has an obvious answer—they are extremely unlikely to, and (as Trotter notes) have made that clear.

There is only one reference to the real failure—that teams have perhaps incorrectly evaluated the potential of new draftees (p. 43)—and again, no mention of the fact that teams are voluntarily paying these salaries and bonuses.

Writing a “hard” rookie salary system in to the collective bargaining agreement is simply an attempt to win back, through bargaining, money that teams have lost through bad decision-making.

The Mortgage Crisis for Dummies

2010-10-12T13:33:00.002-06:00

This entire series is more than worth reading.

What Mike Konzcal is doing in covering the mortgage crisis is exceptional and deserves both wider coverage and HUGE public approval.

The unemployment problem

2010-10-11T18:49:00.003-06:00

Brad DeLong notes that the unemployment rate has now been at or above 9% for 17 months, from May 2009 through (so far) September 2010. And he's not alone in being concerned about the persistence of extremely high unemployment (Ezra Klein; Paul Krugman; Adam Posner (no link); and many others).

Looking back at the monthly data, we see that only in the twin recessions of 1979 to 1983 and the current recession did the unemployment rate rise above 9% for any significant period, 19 months in the earlier case (March 1982 to September 1983) and 17 (so far) in this one. Even more disturbing, the unemployment rate has been above its post-World-War-II average (of 5.7%) now for 27 months.*

Why do we think this is a problem? As DeLong and Krugman, again among many others, have pointed out, what starts out as cyclical unemployment resulting from a recession can become structural. The longer unemployment (or intermittent employment punctuated by additional spells of unemployment) persists, the more likely people are to see their skills decay and the harder it becomes for them to become re-employed.

While we don't know the precise dimensions of this, or how long it takes, it is something to be concerned about.

But (to be optimistic), we also know that a sufficient increase in aggregate demand leading to a sufficient increase in the demand for labor can drive unemployment down quickly and a lot. Our experience from the Great Depression at least indicates that this is true. The overall unemployment rate** was above 15% in every year but 2 from 1931 to 1940 (except for 1937 and 1940; in both those years, the unemployment rate was about 14%), falling to 1.9% by 1943.

So, given sufficient resolve, it seems to me, and a sufficiently large set of programs designed to produce employment opportunities, it seems to me that we still have the ability (and the opportunity) to reduce unemployment significantly and to dodge the quicksand of structural unemployment. The question is whether we have the will.

*The economic malaise of the late 1970s and early 1980s will not soon be approached, though. Back then, the unemployment rate remained above 5.7% from September 1974 through March 1988--163 consecutive months!

**I'm not going to get into the controversey here about how to count people working under such programs as the WPA, PWA, CCC, and other New Deal temporary employment programs. (But, to the extent that one wishes to argue that the unemployment rates shown in the Statistical Abstract, for example overstate the extent of unemployment, one would have to acknowledge that the employment programs of the federal government were responsible.)

And so the recession ended 15 months ago...

2010-09-21T18:35:00.002-06:00

The Business Cycle Dating Committee of the National Bureau of Economic Research announced yesterday that the recession officially ended in June 2009. Can we say anything interesting or useful about that? Not much.

First, what does the announcement mean? Just the the economy bottomed out in June 2009, not that we have had a strong recovery or are even close to where we were before the recession began (December 2007). Total output (Gross Domestic Product) and employment both remain well below the levels they had reache dby the end of 2007. And the unemployment rate remains stubbonrly high.

Second, was this a surprise? Not really. Almost everyone I know, or whose work I know and read, had concluded some time ago that June 2009 was the likely date of the trough of the recession. So in a real sense, this isn't really "news."

Third, what does it tell us about the next 6 to 12 months? Next to nothing. The NBER gave us a little history yesterday, not a forecast.

So everyone should calm down, and take a deep breath. The NBER's announcement is something we could have expected, it does not tell us all is well, and it makes no statement about what to expect.

The economics major where I currently teach

2010-09-15T12:23:00.004-06:00

Truthfully, it's moribund.

Truthfully, we do not have enough faculty to staff a minimally acceptable economics major.

Here's the situation. We have three full-time economics faculty, teaching 6 courses per year (I ignore summer sessions for the moment); hiring part-time faculty in economics has proved difficult-to-impossible in the recent past. Here are the demands on us:

10 sections of intro econ per year (required for business majors).
4 sections of a freshman-level econ history class (newly required for business majors).
4 sections of statistics per year (required for business majors).
3 courses in the MBA program per year.

That adds up to 21 of the 18 sections that the three of us teach. Clearly, unless something gives, our ability to offer an appropriate slate of upper-level economics courses [1 section each of intermediate micro and intermediate macro per year; 1 section of money and banking per year (which we generally already do, as business students concentrating in finance tend to take it in fairly large numbers); selections from labor, environmental economics, international/trade/international finance] is, essentially, non-existent. (What usually gives is that some of the stat classes are taught by non-economists right now, but that's still not enough to allow us to teach anything like a reasonable selection of courses--take all the stat classes away, including the MBA stat class, and we still have 16 other courses we're responsible for.)

Or we could hire a fourth economist. Anyone want to guess how likely that is?

So we should probably put the econ major on hiatus. Or find some way to get the courses taught that need to be taught using non-local resources (e.g., on-line offerings from other institutions?). I certainly cannot, with a straight face, encourage anyone to major in economics here.

Sigh.

The present is not like my past

2010-09-13T22:53:00.004-06:00

I read today two rants about the state of the university (specifically, but not exclusively, in the US).

One ("In Defence of the Ancien Regime"), at the blog Organizations and Markets, argues that declining standards in universities and a move away from "total...dedicat[ion]...to basic research" has "...very likely led to a dumbing down of the curriculum in many disciplines and a fall in the requirements for entry."

The other ("Declining By Degree: Will America's universities go the way of its car companies?"), in Schumpeter's blog in The Economist, argues that the problem is, rather, a consequence of spiraling costs (occasioned in part by the construction of luxury dorms and other non-academic facilities), professors who do not teach (spending their time in research), and exploding administrative costs.

Hard to believe that both these crtiques could be true simultaneously. But there they are.

As I've thought about it, I've sort of come to the conclusion that both of these critiques are manifestations of what I think of as "the present is not like my past" syndrome.

Take the O&M blog post. It makes reference to comments by two academics, one written by an emeritus professor of economics at UCLA, the other written by a professor of mathematics at Humboldt University (Germany). Both are probably in their 70s.

Their world has changed dramatically. When they began teaching, universities in the US, and this would have been even more characteristic of German universities, were populated largely by middle-class and upper-middle class, white students. The dominant culture on the campuses reflected the culture of the faculty quite accurately. That is no longer true.

I've also lived through much of that transition, but, for me, it occurred much earlier in my career, and it was a transition that I supported and welcomed. I'm not sure that the generation of the faculty before me was as supportive or as welcoming.

So what I wonder is how much of the discontent one sees in these writings comes from being now in an environment that seems alien, in which the motivations (and often the behavior) of students is strange. In which their values are no longer (necessarily) assumed to be correct by their students, by their colleagues, or by the communities in which they live.

In economics, one of the consequence of the much larger enrollments, especially in introductory courses, means that your students are less likely to be economics majors, less likely to be considering going to grad school in economics. They are there to learn economics instrumentally, for some purpose other than entering the guild of the economists. I suspect that more and more of the students in introductory calculus classes are also there for reasons that are not the same as they were 40 years ago. What may look to these two men like a collapse in standards may simply be an adaptation to the goals of a new set of students, with different interests and concerns.

Is this hard to adapt to? Absolutely. Does it mean the world have been taken over by barbarians, or even that the barbarians are now at the gates and must be opposed with all our strength? I think not.

My interest in the history of higher education actually gives me some perspective here. Many orpfessors opposed the Land Grant Colleges Act (the Morrill Act), passed in 1862. They saw it as debasing the function and purposes of the university. A considerable group of faculty also opposed the GI Bill (and perhaps even more strongly that the Morrill Act was opposed--it established new universities, the gates of existing institutions were not opened to the hordes of the under-prepared).

I may be too little disturbed by the future of US higher education (and I gripe frequently about my own students), but I see no apocalypse around me. I see a world of greater opportunity and potentially greater achievements, open now to many people we would have excluded 20, 40, 60, or 100 years ago. And I think it's wonderful.

Housing

2010-09-08T15:03:00.003-06:00

David Leonhardt's column in today's New York Times is extremely important reading. In essence, he argues that, if the demand for housing is income inelastic, the average price of housing has a fairly long way to fall. Housing expenditures will, in this case, tend to rise more slowly than income; with reasonably price-elastic housing supply, then, the relative price of housing will fall.

On the other hand, if the demand for housing is income-elastic, housing expenditures will tend to rise as a percentage of income. Almost any plausible model of housing supply will likely generate rising relative prices for housing.

As is so often the case, then, we come down to empirics--what are our estimates of the income elasticity of demand for housing? What I found in a quick search of the research literature (here, here, and here) suggests that most of the estimated elasticities are less than 1...suggesting that housing prices are likely to drop further.

Matt Yglesias raises an additional issue, which is that regulatory constraints matter. Regardless of the income elasticity of demand, if housing construction is constrained (minimum lot sizes, maximum density regulations) in some places, then housing prices in those places will tend to rise in relative terms.

So it might depend on where you are, as well.

The Jedi Principle

2010-08-19T18:57:00.002-06:00

This will only make sense if you've seen the Star Wars movies, but it is so true.

The Jedi Principle, as proposed by Robert Farley:

The Jedi Principle runs so:

If you need the Jedi in order to make your project work,
don’t start.

2010-08-09T09:25:00.006-06:00

Paul Krugman recently commented that the extent of the stimulus provided by increases in government purchases has been significantly over-estimated:

"That is, for all the talk of a failed stimulus, if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we’re going into reverse."

Just how accurate is this? In the 4th quarter of 2007 (that is, at the peak of the business cycle as defined by the NBER Business Cycle Dating Committee), combined Federal, state, and local government purchases of goods and services totaled 18.4% of GDP. In the second quarter of 2010, that total was 19.4%--of a smaller GDP...In fact, government pruchases as a percent of GDP peaked in the second quarter of 2009, at 19.9%, and have declined since then.

In fact, government purchases grew at about a 2.1% annual rate between 1960 and 2007. At that rate, government purchases in the second quarter of 2010 would have been about $2,602 billion (annual rate). Actually, government purchases were less than that--$2,567 billion (annual rate). [One can argue whether having government purchases grow at that rate is appropriate or not--government pruchases grew more slowly than did GDP (which grew at a 3.1% annual rate), but that's a different question.]

So Krugman is unquestionably correct. Counting state and local government purchases (which have actually declined by 2.1% since the beginning of the recesion) as well as Federal government purchases (which have grown significantly, but the increase only slightly offsets the S&L decline--combined, state and local governments purchase considerably more than does the Federal government), the amount of fiscal stimulus was quite small.

Another ugly labor market report

2010-08-06T13:50:00.002-06:00

Let’s start with the establishment employment data…total nonfarm employment declined by 131,000 in July (compared with June). Where were the losses?

Total government employment declined by 202,000; 154,000 of that was a loss of Federal government jobs; 38,000 jobs were lost in local government, and 10,000 lost in state government. So the largest issue is a loss of Federal government employment. The BLS press release attributed the loss of Federal government jobs primarily to 143,000 temporary Census-related jobs coming to an end.

Still, leaving that aside, total employment by governments fell by 59,000. At the local government level, 27,000 of the jobs lost were in local public education. This incorporates a seasonal adjustment, reflecting the fact that there are fewer people employed in elementary and secondary education in the summer. The raw loss (not-seasonally-adjusted data) was over 1 million jobs in local public education; that’s about 15% of the level of employment in local public education, and that June-to-July loss has been roughly the same since the mid-1960s, so this is not something unusual. However, a June-to-July decline in the seasonally-adjusted data is unusual; until the last two years, the usual June-to-July change in the seasonally-adjusted employment number was about +2%. In 2009 and 2010, it has been about -0.8%--not a big deal, but something very different from prior years.

But without the losses in government employment, overall employment grew—by only 71,000, an increase of 0.07% (or, frankly, probably statistically insignificant). Over the past 70 years, the June-to-July change in total private employment has averaged only about 0.1%, so there has historically been very little change in private employment in the summer. (Incidentally, this seems to be true whether the economy is in a recession, just recovering from a recession, or near full employment.) So the overall change in the private sector is generally consistent with our experience. However, the change in private employment from July 2009 to July 2010 is actually negative (-0.04%, or 41,000 lost jobs). This is not only rare for a year-over-year change in general, but is almost unheard of in what purports to be a recovery, especially from a serious recession. For example, the annual change from July 1983 to July 1984 in private jobs was +5.6%; from July 1975 to July 1976, +4.3%. Recently, however, this is not so strange. In the “jobless recovery” from the 2001 recession, the annual growth in employment from July 2001 to July 2002 was -1.8%, followed by an additional decline to July 2003 (-0.4%).

So not only is the decline in government employment signaling a weak recovery, the tepid growth in private employment is almost equally discouraging.

The dismal nature of this month’s report also shows up in the household data. Overall, the household survey reports a loss of 159,000 jobs from June and 950,000 from July 2009. So in a year of “recovery,” employment has not only not stabilized, it has declined by about 0.6%. The unemployment rate did not rise (still 9.5%), but only because the labor force also fell, even more that employment did, by 181,000. Over the past year, the labor force has declined by 790,000, with the result that the labor force participation rate is now at 64.6% (back to the December 1984 level), and the employment-population ratio is 58.4% (November 1977!—essentially the same as 33 years ago).

Of the 15 million unemployed, 60% are job-losers; typically, this is around 40% in good times. So job loss continues to dominate the unemployment data. The average duration of unemployment is essentially unchanged from June 2010, at about 34 weeks, but is 10 weeks longer than it was in July 2009—long-term unemployment is still increasingly the rule, and the failure of the duration of unemployment to fall is extremely troubling. It suggests that we’re seeing something that has not been a prominent feature of our economy since the Great Depression, and it increases the likelihood that some of the currently unemployed will find regaining jobs more and more difficult, unless things change quickly.

I am depressed.

You're right; it IS hot out there

2010-07-21T14:16:00.002-06:00

From David Leonhardt, in the New York Times:

According to NASA, 2010 is on course to be the planet’s hottest year since records started in 1880. The current top 10, in descending order, are: 2005, 2007, 2009, 1998, 2002, 2003, 2006, 2004, 2001 and 2008.

Read the whole thing.

Another bad employment situation report

2010-07-05T20:33:00.004-06:00

The BLS released the employment situation report for June last Friday (July 2), and I haven't been able to get around to saying anything about it until today. I'd rather have something good to say, but I have no idea what I can say that would be good.

Let's start with the establishment employment report.

Overall, employment fell by 125,000; temporary employment of Census workers fell by 225,000, so non-Census employment actually rose. But not by much--only 100,000. At that rate, we would reach the pre-recession peak employment level in 84 months after we hit the employment trough in December 2009...of, we'd be back to 2007 employment levels in 2016...And private sector employment, which also peaked in December 2007, rose by 83,000. At that rate it will take 100 months--until early 2017--for private sector employment to recover to its pre-recession level.

The private-sector employment gains were concentrated in Professional Business Services (+46,000, about 40% of that in temporary help services); Education and Health Services (+22.000, mostly in health services); and Leisure and Hospitality (+37,000). Outside of those three sectors, private employment fell--down in Construction (-22,000) and Financial Services (-15,000) more than anywhere else.

In the Government sector, State and Local government employment continued to fall (down a total of 10,000 from May), while the Federal government added 27,000 (outside of the temporary Census jobs that vanished). The continued weakness of State and Local government budgets is likely to be a drag on the recovery in the months ahead--between them, employment is down by 193,000 since June 2009 (which is when the recovery is likely to have begun).

And the household survey does not look much better. While the unemployment rate fell from 9.7% to 9.5%, that occured entirely because thelabor force fell (-652,000) more than twice as much as did employment (-301,000). As a result, the Labor Force Participation rate is down to 64.7%, its lowest level since early 1985, and the Employment-Population ratio is now at 58.5%, a level last reached in September 1983. That's pretty depressing. Household employment is now 7 million below its pre-recession peak (also in December 2007). 46% of the unemployed have been out of work for 27 or more weeks, and the average (mean) duration of unemployment is now 32.8 weeks--both higher than they have been since the BLS began measuring duration of unemployment in 1948. In both cases, the previous peak came in May 1983, when 27.6% of the unemployed had been out of work for more than 26 weeks and the mean duration of unemployment was 21.8 weeks.

This is getting old. A very severe recession, a weak-to-moderate policy response, and a very un-recovery-looking recovery.

Today's US Demography factoid

2010-06-22T12:24:00.004-06:00

From Richard Greene:

Detroit has not had the largest peak-to-trough decline in percentage terms among large American cities
Although it is getting close. Detroit has lost about 58% of its 1950 population; St. Louis has lost about 59%. And Detroit's population is much larger than it was in 1900; St. Louis has lost about 30% of its population since 1900 (just prior to the 1904 World's Fair, when 20 million people visited St. Louis.
Awesome. (Worth noting, though, that St. Louis has been surrounded by suburban communities, and Missouri's law (apparently) makes annexation very difficult, so the city limits of St. Louis have been essentially unchanged. I suspect Detroit has expanded grographically.)

Today's economic history quote

2010-06-22T11:58:00.005-06:00

From Brad deLong, in material he deleted from the ms. of Slouching Toward Utopia: An Economic History of the Twentieth Century, because it doesn't "...fit the book as a whole...":

A parasitic caste or class existing by virtue of their organized ability to take a substantial share of the agricultural (or craftwork) producers' crops became the rule soon after the coming of agriculture. Such classes and castes live better albeir more dangerously than the peasants. (If they didn't live better, after all, why accept the added danger?)

Sounds almost like an anarchist's take on government to me...

Good news on the employment front--or not?

2010-06-04T09:34:00.004-06:00

According to the BLS Employment Situation report for May, the economy added 431,000 jobs, compared with April. That's the good news.

390,000 of those were new government jobs.

So the first part of the not-so-good news is that we got only 41,000 new private sector jobs.

412,000 of the new government jobs were temporary jobs associated with the 2010 Census.

So the second part of the not-so-good news is that, absent hiring for the Census, there were 22,000 fewer government jobs. And all of that was at the state and local level. State government employment fell by 15,000 and local government employment fell by 7,000. Over the past year, state government employment fell by 32,000, while local government employment is down by 158,000. Ignoring the temporary Census jobs, federal government employment over the last year is up by only 120,000. Net, government employment is down by 70,000.

What about the 41,000 new private-sector jobs? To begin with, that's not very many new jobs, so that's not very good news.

Second--31,000 of those new jobs are in "temporary help services." That shouldn't make us too excited.

Third, construction employment fell by 35,000 jobs and is now at its lowest level since August 1996. Since peaking at 7.7 million jobs in January 2007, construction employment has declined by about 2.2 million.

In the household report, we observe, again, some good news--the unemployment rate fell modestly, to 9.7--and some not-so-good-news. The labor force fell by 322,000...giving up nearly half of the 800,000 gain in labor force articipation registered in April. Employment, measured in the household survey, fell by 35,000. So the entire reduction un unemployment came from a shrinking labor force.

And, perhaps most distressing, 45% of the unemployed have now been out of work for 27 or more weeks--by far the largest concentration of unemployment among the long-term unemployed since the beginning of the Current Population Survey in 1948.

Damn, I was hoping for another really good employment report.

Long-term unemployment and older workers

2010-05-13T18:49:00.002-06:00

Catherine Rampell, in the New York Times (May 12), presents an argument that the rise in long-term unemployment is a consequence of the destruction of many jobs, in manufacturing, but also in administrative support, office, clerical, and similar fields, have been destroyed by technical change and will not come back. She also argues that those jobs that have been destroyed had been held disproportionately by older workers, with the consequence that long-term unemployment--which has skyrocketed--has been concentrated on older workers.

The first part of that argument seems to me to be sound. But for the second--the concentration of long-term unemployment among older-workers--I can find no evidence. There would be, I think, two consequences of concentration of long-term unemployment among older workers. First, unemployment rates of older workers would have risen relative ot the overall unemployment rate. Second, labor force participation rates of older workers would have declined relative to the overall labor force participation rate. Neither of these have happened.

Let's look at look at the unemployment rates for (a) the overall population, (b) workers age 55-59, and (c) workers age 60-64. I can't seem to be able to paste the resulting chart here, but it shows, so far as I can tell, no difference in the patterns of change in the unemployment rate for these three groups. For older workers, the unemployment rate bottomed out at about 2% in 2006, rose to about 8% early this year, and has since fallen to a little less than 7%. The overall unemployment rate bottomed out at around 4% in the spring of 2006, rose to a litle over 10% early this year, and has since fallen to a little less than 10%. (I'm using not-seasonally-adjusted reates, which is all that's available for older workers.)

So let's look at labor force participation. While the overall labor force participation rate has been declining (from about 67% in 2000 to about 65% now), labor force participation has been increasing among older workers. For 55-59-year-olds, it's up from about 69% in 2000 to about 74% now. For 60-64-year-olds, up from about 47% in 2000 to about 64% now.

I see literally nothing to suggest that long-term unemployment is, in fact, concentrated among older workers.

(All data from the BLS.)

Rational expectations

2010-05-07T21:21:00.002-06:00

I recently, in another venue, had this exchange with a younger economist:
**********************************
Other economist (OE): The idea that tenure confers lifetime employment has turned out false across many departments and programs across the country. This story about potential program cuts at UNLV has a choice quote:

Me: I've said for years that tenure makes you slightly harder to fire...but harder to fire than if you don't have tenure. So it has some value. Which is why a lot of studies suggest that tenured faculty members actually work at a discount.

OE: Absolutely. Yet this is the first widespread fiscal crisis for my generation of economists. I think for many if my generation of academics, tenure was perceived as essentially job-for-life type of security where you could only get fired for cause or, theoretically for failing post-tenure review. The past two years have been an eye-opener to the fragility of that thinking.

Me: Financial exigency was always there in the provisions, even if people ignored it. And now, given the condition of many state government budgets (Illinois is about as bad as any, which makes me glad I don't work in a state-supported institution there; Indiana, where I am, is not so bad), financial exigency is alive and kicking.

OE: Of course, but my generation of academics probably dismissed that possibility. Now, not so much.

Me: Ah, irrational expectations...

OE: Well, it is might be irrational but then personal experience means a lot in these things. My grandparents used to sing the praises of annuities and downplayed equity. During my early career, I scoffed at this advice. Now, through our recent experience, I am a bit more sympathetic to that view. Similarly, the idea that financial exigency would be invoked is not something that any of my mentors ever mentioned - is it because it hadn't been invoked even during their careers? Clearly the language is in every faculty handbook for a reason, but I am not sure if I call it irrational if we have never seen a situation in which FE would be invoked on such a wide-spread basis.
*************************************
I cite this exchange for a reason. Rational expectations theory argues that people form their expectations about the future using all available information. And I have known the other economist, when dealing with macro theoretical issues, to invoke the rational expectations hypothesis. But note that, in this case, we clearly see expectations being formed without taking into account all the available information. (There's literally no way that anyone mentoring graduate students over the past 25 years would not have known about the actual use of financial exigency to revoke tenure. It was not simply a contractual possibility that was never invoked.) And these are expectations, not consistent with rational expectations theory, of someone trained in and conversant with rational expectations theory.

So why sould we think that rational expectations theory provides us with a coherent explanation for decision-making when we know that even those who profess it don't use it? (And, yes, I know that anecdote is not evidence, but sometimes the opportunity is just too good to pass up.)

It's time for some GOOD NEWS!!!

2010-05-07T10:45:00.003-06:00

A really good employment report today. The BLS reports that payroll employment rose by a whopping 290,000 in April. Employment gains were evident acros the economy:

Total Increase in Employment:.......290,000
Private Sector:................................231,000
Manufacturing:.................................44,000
Business, professional services:......80,000
Education and health services:........35,000

Of the major industry categories, only transportation and warehousing showed an employment decline (down 19,500).

Average weekly hours and weekely earnings were essentially flat, but that's good news, really. The added employment was not caused by spreading hours across more workers, or by workers being willing to accept lower wages.

In the household survey, employment growth was also strong--170,000 more people reported being employed. And, the labor force grew by 805,000, and is now essentially back to its April 2009 level. The growth in the labor force is good news--it suggests that people are becoming more optimistic about their ability to find work, are more willing to look for work. Because of the growth in the labor force, the unemployment rate did edge up (to 9.9%), but, in the context of strong employment and labor force growth, that's not too troublesome. Teenage unemployment rates actually fell.

If there's a fly in this ointment, it's that the number of people unemployed for 27 or more weeks continues to rise, as does the number of people reporting that they are working part-time but want full-time work.

If we get several months in a row of this sort of employment increase, though, that'll change. Cross your fingers.

Time for a baseball post: Robin Roberts and his dopplegangers

2010-05-06T19:45:00.006-06:00

Robin Roberts, the great Phillies pitcher of the 1950s, died today at age 83, Joe Posnanski has written a moving portrait of him, which is well worth your time. What I'm here to tell you about is Robin Roberts and his dopplegangers--two pitchers, one from (mostly) the 1960s/70s and one from (mostly) the 1970s/80s. These three pitchers have stunningly similar career statistics, so similar that they are almost impossible to tell apart. One was born in Zeeland, Michigan, the other in Zeist, The Netherlands. (Roberts, more prosaically, came from Springfield, Illinois.)
Robin Roberts, Jim Kaat, and Bert Blyleven.

Here's the data:

....................Roberts..........Kaat.............Blyleven
W...................286...............283.................287
L....................245...............237..................250
W-L%.........0.539.............0.544..............0.534
ERA..............3.41...............3.45................3.31
G....................676...............898.................692
GS..................609..............625.................685
GF...................49...............102.....................3
CG.................305...............180.................242
SHO.................45.................31..................60
SV....................25.................18.....................0
IP.................4688.2..........4530.1.............4970
H..................4582.............4620................4632
R..................1962.............2038................2029
ER................1774.............1738................1830
HR................*505*..............395..................430
BB..................902.............1083................1322
IBB...................69...............116....................71
SO................2357.............2461................3701
HBP..................54...............122..................155
BK......................3....................6...................19
WP...................33................128.................114
BF..............19,174...........19,023............20,491
ERA+..............113................108.................118
WHIP.............1.17...............1.26................1.20
H/9..................8.8.................9.2...................8.4
HR/9...............1.0.................0.8....................0.8
BB/9................1.7.................2.2....................2.4
SO/9................4.5................4.9....................6.7
SO/BB.............2.6.................2.3...................2.8

I am, perhaps, most amazed by Roberts' being charged with only 33 wild pitches in his career (although there's a lot of scorer discretion there; it'd be interesting to check their catchers' passed balls). Roberts also, and rather famously, gave up a lot of homers--but so did Kaat and Blyleven. Bert, obviously, was more of a strike-out pitcher.

For all the similarity in their statistics, they really weren't all that similar as pitchers. Roberts was almost entirely a fastball pitcher; Kaat came up as a power pitcher, but for most of his career changed speeds and moved the ball around (and, late in his career, developed a knuckler); Blyleven, or course, was famed for his curve. Roberts was 6'0", 190; Kaat, 6'4", 205; Blyleven, 6'3", 200. Roberts attended Michigan State; Kaat, Hope College (in Michigan); Blyleven signed out of high school, from California.

Roberts, of course, is in baseball's Hall of Fame. Kaat and Blyleven are not.

Lessons from the Great Depression

2010-05-05T20:26:00.002-06:00

I re-read this week Peter Temin's book Lessons from the Great Depression (MIT Press: 1989), which is of extraordinary relevance to our current situation. The book is a set of lectures (the Lionel Robbins Lectures) that Temin delievered in the UK in 1989, in which he lays out his views about the causes of the worldwide economic collapse of the 1930s and about the sources of the eventual recovery.

He sees the collapse stemming from continued adherence to a theory of the way in which national economies interact with each other, with an initial deflationary impulse then transmitted both internationally and amplified domestically. He argues that tentative policy steps to arrest the decline, or to spur recovery, were ineffective because these steps were seen as a part of a policy regime that was inadequate to the real conditions of the global economy. Ultimately, he argues, the recovery could not occur until, in two countries (the US and Germany, in both cases following the coming to power of "outsider" governments), the old orthodoxy was decisively replaced by what was immediately seen as a new policy regime aimed at reversing the deflationay impulses of the late 1920s and early 1930s and focused on a return to full employment.

While the particular policy regime that led, according to Temin, to the Great Depression is no longer much with us (he blames adherence to, and an attempt to restore behavior consistent with, the gold standard), this general story seems extremely plausible in our current situation. We developed, through the 1980s and 1990s (but beginning earlier) a policy regime based on a theory of financial markets emplasizing (a) rational expectations and (b) a fairly strong form of the efficient markets hypothesis. In this world, deregulation of financial markets, according to the theory, would generate increased efficiency in financial activity and would thus support expanded real economic activity. The policy regime was thus one that stressed deregulation, financial innovation without much restriction, reduced concern for lending and underwriting standards, increased financial leverage, and the use of new (and fairly opaque) instruments to manage risk.

The results have not been pretty. Taking Temin's analysis as a template, one would suggest that we need a new policy regime, one that constitutes as much of a break from the recent orthodoxy as breaking with the gold standard did in the 1930s. Temin's story [and Barry Eichengreen's exhaustive analysis of the gold standard (Golden Fetters: The Gold Standard and the Great Depression 1919 - 1939 (Oxford University Press: 1992)] makes it clear that such a break is difficult even to think of, much less to act upon.

I think we need to take the necessity of developing a new policy regime seriously. And, while there are financial regulation proposals in Congress, it may be that none of them actually constitutes a clear enough break with the "old" regime as we need. Times like this, I could wish I'd decided to specialize in financial economics all those years ago...

And just how is the recovery going?

2010-04-30T10:23:00.004-06:00

Data for the first quarter of 2010 was released today (and will be revised as new data comes in, so let's not get too excited one way or the other). It shows 3.2% growth, at an annual rate, in real GDP. This works out to about 0.8% growth from the fourth quarter of 2009 to the first quarter of 2010. Based on our experience with recoveries from recessions, are we recovering rapidly or slowly from this one? I've put together a table showing the quarter-over-quarter growth for the first three quarters following the troughs of recessions, beginning with the 1960/61 recession (trough in February 1961, or the first quarter of 1961 for GDP purposes). For the purposes of this table, I'm assuming that we'll eventually conclude that the trough of the 2007/09 recession occurred in June 2009 (or the second quarter of 2009).

Trough.............Q1.............Q2.............Q3.............3 Quarter Growth
Feb 61..........+1.82%.....+1.62%......+2.04%...............+5.57%
Nov 70.........+0.87%.....-1.11%.......+2.85%................+5.57%
Feb 75..........+0.77%.....+1.73%......+1.46%................+4.00%
Jul 80...........-0.26%.....+1.59%... ...+2.12%.................+2.87%
Nov 82.........+1.22%......+2.29%... ..+1.97%................+5.58%
Mar 91.........+0.48%......+0.36%.....+0.52%........... .....+1.37%
Nov 01.........+0.48%......+0.36%..... +0.63%............. ....+1.48%
Jun 09..........+0.75%.....+1.24%.... .+0.80%.................+2.81%

Well, we have 8 recessions here. Three of them (troughs in 2/61, 11/70, and 11/82) had fairly robust growth over the first three quarters of recovery, around 5.5% to 5.6% over those 3 quarters, a little more than a 7% annual rate of growth. In another (2/75 trough), the recovery's first three querters saw 4.0% growth, a little more than 5% on an annual basis. This recovery has been fairly similar (albeit with a very different quarterly growth pattern) to the recovery beginning in 7/80--about 2.8% over the three quarters (or about 3.7% or so on an annual basis).

The current recovery is about twice as robust as the recoveries from the two immediately preceeding recessions (ending in 3/91 and 11/01), but those recoveries were barely worthy of the term.

Overall, this has not been, so far, a robust recovery (5.5% or so growth over the first three quarters of recovery). It has not been even an "average" recovery, which would require three quarters of growth totalling about 4%. But things could be, I suppose, worse....

The detailed BEA news release is here.

A simple financial reform

2010-04-23T13:40:00.000-06:00

Proposed by Richard Green; I like this a lot.

Athletic department salaries

2010-04-22T09:59:00.004-06:00

I probably shouldn't make too much of this, but in 2008, Purdue University paid salaries of $100,000 or more (the maximum was $322,600) to 22 people working in "Intercollegiate Athletics Administration." (The database apparently does not include Indiana University.)

Addendum (3 hours later): Having found the data elsewhere, I can now tell you that Indiana University has 29 athletic department staffers making more than $100K in the 2009-10 academic year.

Hat tip to Phil Miller at The Sports Economist.

Casinos and Crime Rates

2010-04-20T17:20:00.002-06:00

William Reece has published* an extraordinarily detailed analysis of the relationship between the opening of casinos and crime rates, using a unique data set for Indiana, much of which (especially the data on hotel rooms by county) he constructed. As he notes, determining what we would expect the relationship between casinos and crime rates is difficult to determine:

"Following the economis model of crime, new casinos could either increase or decrease local crime rates. If introducing new casinos creates job opportunities in the area, new casinos could, by increasing the opportunity cost of crime, reduce crime rates. Also, increasing activity within existing casinos could have the same effect...The economic model of crime [also] suggests that colser proximity of potential criminals and potential victims would increase local crime rates...lowering transportation costs between potential criminals and victims...increases crime rates..." (p. 146)

What he finds may be disconcerting for advocates of casinos as a tool for economic development. For several classes of property crimes (larceny, burglary, and robbery), crime rates rise significantly over the five years following the opening of a casino. Thefts of motor vehicles apparently rise in the first year, but then experience no significant change in the following years. So it appears that casinos do, on balance, lead to increaed rates of property crimes.

On a more hopeful note, assault rates apparently fall in the five years following the opening of casinos, and the incidence of rape is apparently unchanged. (These results are derived from his Table 2, on p. 153, and Table 3, on p. 155.)

But--and, casino supporters, take note--he also finds that greater casino activity (not openings), as measured by the number of casino patrons (using turnstile counts) is associated with lower crime rates. This suggests that, as the economic activity associated with casinos increases, crime falls.

There are many ways to view this, including the classic economist's call for additional research. My own take is that, at present, it's hard to conclude that casinos have a significant effect, either as factors leading to increases in crime rates, or as opportunities leading to reduced incentives for crime.

*William S. Reece, "Casinos, Hotels, and Crimes," Contemporary Economic Policy, V. 28, N. 2, April 2010, pp. 145-161.

Disaster and death

2010-04-06T12:05:00.002-06:00

Another disaster in another coal mine, and it is again the miners and their families who bear the immediate price.

I spent five years in West Virginia, in graduate school, from 1970 to 1975. Each year, there were coal mine disasters, deaths, communities shattered. Each year, in one way or another, someone in the coal mining industry reminded us that mining is dangerous. It is, but it does not have to be.

In 2008, 40,500 workers were employed in underground and surface mining in the US. There were over 2,600 reported cases of injury (including death); 26 of those injuries were fatal (apparently, according to the NY Times, 35 died in 2009). 2010 will almost certainly be worse. But in Germany, where, in 2009, over 30,000 workers were employed in mining coal, only about 1,200 workers were injured and only 4 fatalities occurred.* High injury and fatality rates are not a necessary consequence of coal mining in an advanced, industrial country.

And it's happening again. At least 25 miners are dead and at least four are missing and presumed dead in an explosion in a coal mine near Montcoal, West Virginia (about 40 mines south of Charleston).

This makes two things clear. First, that safety regulation in coal mining is not optional. It is essential if we want to regard ourselves as a civilized country. Second, that the system is broken. The New York Times, reporting the current disaster, tells us:

"For at least six of the last 10 years, Federal records indicate, the Upper Big Branch mine has recorded an injury rate worse than the national average for similar operations. The records also show the mine had 458 violations in 2009, with $897,325 in safety penalties assessed against it, of which it has paid $168,393."

This is, according to the Times, a company that took safety, if not casually, then not as a priority. 458 safety violations discovered in a single year--and inspections are not a daily event. Fines of less than $2,000 per violation, of which only 18% were even paid? Human life? Less important than coal. Unless we, as citizens and voters, decide we care more about the lives of coal miners than we do about cheap energy, unless we press our Representatives and Senators to enact more stringent regulations, and unless the US Mine Safety and Health Administration has the power and the will to enforce those regulations, then, in another two years or less, another mining disaster will occur. More people will die, needlessly. Another community will be shattered.

*To be fair, things are worse--a lot worse--in China.

As the Baseball Season Begins

2010-04-05T12:40:00.006-06:00

It's time to take a brief look at the payroll numbers, as reported by USA Today.

Not surprisingly, the Yankees had the highest team payroll, both in 2010 ($206.3 million) and in 2009 ($201.4 million). In 2010, the Pittsburgh Pirates seem poised to begin the season with the lowest team payroll ($34.9 million, down 28% from 2009). The Pirates' payroll decline is MLB's largest (14 teams enter this season with lower payrolls than last, and 11 of these teams have cut their payrolls by 10% or more; Toronto, at -23%, and Cleveland,at -25%, were fairly close to the Pirates; the largest dollar reduction: Cleveland, -$20 million; Toronto, -$18 million, and the Mets, -$15 million).

If 14 teams cut their payrolls, then 16 teams increased them. Boston (+$40 million), Minnesota (+$32 million, partly on the basis of Joe Mauer's large salary increase), and Philadelphia (+$28 million; winning two consecutive pennants will do that to you) led the way in dollar terms, with Florida (+55%), Minnesota (+49%), and Boston (+33%) having the largest percentage increases. And Boston managed the third largest payroll increase from the third largest base ($121 million, behind only the Yankees and the Mets--$149 million--in 2008).

Overall, the average team payroll is up 2%, from about $88.9 million to about $90.6 million. In 2008, the largest team payroll was 5.47 times as large as the smallest (again, that's the Yankees and the Marlins); this year, it's 5.9 times as large (Yankees and Pirates).

There's a fair amount of stability at least in the rank order of team payrolls; the correlation between 2010 payrolls and 2009 payrolls is 0.91 (1.0 is the maximum correlation).

How well does payroll correlate with winning? Here, the answer may depend on what your expectations are. Payroll clearly does not determine team wins, although it is fairly strongly related. The correlation between team's payrolls in 2009 and their wins was 0.48. Perhaps not surprisingly, the correlation between 2010 payroll and 2009 wins is stronger, and significantly stronger, than that: 0.59. Clearly, teams pay a price for winning. The correlation between 2010 payroll and a team's change in wins from 2008 to 2009 was also 0.59--so getting better also has a (future) cost. And the correlation between a team's change in payroll from 2009 to 2010 with its change in wins from 2008 to 2009 is also relatively robust, 0.42. (the correlation between the percentage change in a team's payroll and its change in wins is somewhat smaller, only 0.38).

Oh. And were the best teams in 2008 and in 2009 the same? Well, yes and no. The Phillies and the Dodgers both repeated as division champs, and the Phillies made the World Series in both years. Only the Angels repeated as division champs in the AL, and the Yankees, who won the Series in 2009, were not in the playoffs at all in 2008. More concretely, the correlation between wins in 2008 and wins in 2009 was a significant, but not huge, 0.48.

Let the games--and the arguments about whether you can buy a pennant/World Series--begin!

Wishing for a better press corps

2010-03-29T19:17:00.002-06:00

In today's Chicago Tribune, we read:

"Manufacturing's share of the economy has dropped to 11.5 percent in 2008 from 21 percent in 1979...as manufacturing declined, so have supply chains, support firms, capital investment, and, perhaps most important, research and development. "

Here's a quick quiz: By how much has manufacturing output changed in the past 30 years?
a. It's down by nearly 50%.
b. It's remained about stable, but the overall economy has grown.
c. It's increased, but only by about 10%.
d. It's increased by a little over 20%.

And the correct answer is (drum roll): D.

Manufacturing output--defined not as gross manufacturing output, but as value added in manufacturing--in the US has increased by 21% over the past 30 years. But you would never know that from the story in the Chicago Tribune. It is true that manufacturing's share of total US output (Gross Domestic Product) has declined, but (a) why is the period since 1979 such a big deal and (b) why is manufacturing output share of total output somehow special? After all, the share of finance in the economy has increased from 15% to 20% over the same time period.

And what about "supply chains"? I'm not sure what the author meant by that, but the share of the economy devoted to transportation and warehousing has declined from 3.7% in 1977 to 2.9% in 2008. Capital investment? Real capital spending has only increased by 146% since 1979 (to be sure, much of that is not in manufacturing, but, still...).

R&D? According to the OECD, R&D spending in the US rose from 2.34% of GDP in 1981 to 2.62% in 2006...in real dollar terms, that's an increase of 144%. Yep, R&D spending in the US has fallen off a cliff, all right...

So an article that is essentially gloom-and-doom about manufacturing in the US economy manages to get, so far as I can tell, one fact right, the share of manufacturing in GDP, but uses that in a way designed to confuse almost all of its readers.

Sigh.

The Bureaucratic Pen At Work

2010-03-23T14:39:00.003-06:00

From The New York Review of Books:

"A typical planning document from King's College London, explains that the institution 'must create financially viable academic activity by disinvesting from areas that are at sub-critical level with no realistic prospect of extra investment.' "
(Anthony T. Grafton, "Britain, the Disgrace of the Universities," The New York Review of Books, April 8, 2010, p. 32.)

I know that, in my days as a bureaucrat, I never wrote anything quite that bad.

Ten books

2010-03-19T06:35:00.011-06:00

Blame this on Tyler Cowen, who started the whole thing over at Marginal Revolution. (Others have responded by posting their own lists.)

Ten books that changed my life, not necessarily in order of importance:

1) J. R. R. Tolkien, The Lord of the Rings. The ultimate book about life, the universe and everything. Good, evil, hope, struggle, redemption, and loss. What else is there to say? But no sex.

2) Michael Harrington, The Other America. I grew up in a very conservative, very conventional household. Everything was for the best in this best of all possible worlds, or so we were encouraged to believe, and damn the reality in which we lived (genteel poverty in Indianapolis). Then my second cousin pressed me to read Harrington’s analysis of contemporary American society, and things were no longer so comfortable. The book that led me to study economics—why poverty in the richest country in the world?

3) Kurt Vonnegut, Mother Night. Yes, even more than Slaughterhouse-Five (but it is on the list). A man betrays his country, escapes immediate punishment, but is brought to trial, a couple of decades later. But he didn’t. He was working for his country, and the one man who knows has sought him out, in prison as he awaits trial, to offer to testify for him. What is truth? What is loyalty? What is the worth of having suffered, having lived one’s life to hide a life people will call wicked, for the purpose of hiding one’s real life? To my mind, Vonnegut’s greatest work.

4) Raymond Chandler, The Big Sleep. Step by step into the fog and into the muck. America as an amoral wasteland long before Mario Puzo even dreamed of Don Corleone. And the importance of keeping your moral compass, however shaky the hand that holds it.

5) Dashiell Hammett, The Maltese Falcon. All of which could also be said about Hammett’s masterpiece. Together, these two books deconstruct the American Dream.

6) J. M. Keynes, The General Theory of Employment, Interest, and Money. I read this in 1972 when I should have been preparing to take my prelims in my Ph. D. program. Oh, sure, we’d been taught “Keynesian” macroeconomic theory, largely starting with John Hicks, “Mr. Keynes and the Classics.” But the depth and subtlety of The General Theory astounded me…of course, I read it just as the profession was turning away from Keynes (and toward such things as rational expectations theory). It led me to A Treatise on Money, which is also astounding. And Axel Leijonhufvud’s On Keynesian Economics and the Economics of Keynes, which led me to...

7) Thomas Kuhn, The Structure of Scientific Revolutions. Which led me to Paul Feyerabend’s Against Method (which I concluded was a detour, but no matter. What Kuhn had to say about the way scientists actually work turns out not necessarily to have been accurate, but the general point—that even scientific knowledge is socially constructed, even when it is objectively true—remains a focal point of my approach to what I do.

8) Kurt Vonnegut, Slaughterhouse-Five. “I’m a fat old fart who smokes too much…” The author’s description of himself. A searing, troubling look at America at war, something my high school (and college) history courses hadn’t bothered to tell us about (and in my recent American history course in college we spent two weeks on dropping the bombs on Japan). And the fantasies one told one’s self to avoid crumbling under the strain of feeling responsible for what had been done on our behalf.

9. Alexander Solzhenitsyn, One Day in the Life of Ivan Denisovich. And the movie was also amazing. A vivid, visceral presentation of the impact of totalitarianism and its essentially random impact on people. Even more of an impact than The Trial or Darkness at Noon.

10. J. D. Salinger, Raise High the Roof Beam, Carpenters; and Seymour: An Introduction. If I had made this list at age 18, I would almost certainly have included Catcher in the Rye. These two extended stories, however, are things I keep returning to. “Roof Beam…” takes place largely in the narrator’s apartment, with three other people, following a wedding that didn’t happen—the groom (who is narrator Buddy Glass’s brother Seymour) didn’t show up, because he was too happy to get married. I don’t know how to describe the story, though. “Seymour” pretends to be about Seymour and his importance in Buddy’s life. What it actually is, is Buddy’s going through something of a nervous breakdown (finally) as a result of Seymour’s suicide years before. (It took me a while to figure that out.) The conclusion is almost exhilarating.

Close, but no cigar:
Albert Camus, The Plague
Martin Buber, I and Thou
Soren Kierkegaard, Fear and Trembling
Franz Kafka, The Trial
Arthur Koestler, Darkness at Noon
Jane Jacobs, The Death and Life of Great American Cities
Joseph Conrad, The Heart of Darkness
John Stuart Mill, On Liberty
James Baldwin, Notes of a Native Son
John Balaban, Locusts at the Edge of Summer
Bernard Fall, Hell in a Very Small Place
Michael Casey, Obscenities (o.p., but available)
T. S. Eliot, The Wasteland and Other Poems
Langston Hughes, Montage of a Dream Deferred (available in The Collected Poems of Langston Hughes, not readily available separately)

I suppose I shouldn't be too surprised that these are almost all still in print.

The oldest automobile dealership in the US

2010-03-17T06:59:00.002-06:00

A while back, it occurred to me that the oldest continuously operating automobile dealership in the US should have reached 100 years in business. But I did nothing about trying to identify what or where that dealership might be. Now I know.

According to Terry Horvath, the oldest dealership in the US is in Noblesville, Indiana, Hare Chevrolet. According to Horvath, the company got its start in 1847 building wagons, carriages, and buggies, and has been selling cars since shortly before the turn of the 20th century (its initial offerings included Hupmobiles, Studebakers, and Cadillacs). Here's the list of the ten oldest dealerships, dated by their date of original operation, which in most cases was probably not as a car dealership:

1847, W. Hare & Son, Inc., Noblesville, Indiana
1852, Schaefer & Bierlein, Inc., Frankenmuth, Michigan
1859, Reynolds' Garage & Marine, Inc., Lyme, Connecticut
1875, Kemmann Chevrolet, Inc., Lowden, Iowa (no website that I could find)
1875, Normandin Chrysler/Jeep, San Jose, California
1885, Moser Motor Sales, Inc., Berne, Indiana
1895, Ferman Motor Car Co., Inc., Tampa, Florida
1897, Hill International Trucks, LLC, East Liverpool, Ohio
1898, Eich Motor Co., St. Cloud, Minnesota
1900, Diehl Ford, Inc., Bellingham, Washington

This confirms something I have long believed--that Indiana was car-crazy from the beginning: Two of the 10 oldest are in Indiana. And a location in Noblesville makes some sense; it's essentially a suburb of Indianapolis (and has been for a long time). But Berne? It's about half-way between Muncie and Ft. Wayne, in the northeastern part of the state. on U.S. 27. About 4,400 population, income below the Indiana state average (which is itself below the US average). I am somewhat surprised by a car dealership surviving in Berne for more than 100 years.

The economics of NASCAR

2010-02-28T14:22:00.002-06:00

I've started working on a project that looks at changes over time in competitive balance and earnings differentials in NASCAR, and, so far, the single most interesting piece of data I've dug up is this:

Between 1975 (the earliest year for which data are readily available) and 2009, the number of drivers who appeared in at least on NASCAR race in a year fell from 133 in 1975 to 67 in 2009.

This is, it seems to me, extraordinary.

While I still have to look into this, I think there are two primary potential explanations.

First, NASCAR may have changed the rules governing car design and operations in ways that have significantly increased the costs of owning and maintaining a racing operation. (Safety provisions leap to mind.) This will have the effect of pushing out those car owners and drivers who only occasionally saw a reason to enter a race (e.g., the race was close to home.) Why might NASCAR have wanted to do this? I suspect two reasons.

A. Having a large number of very part-time drivers diluted the quality of the field, even when they managed to qualify. Because these owners/drivers did not compete regularly, they had less competitive cars and less well-honed driving skills. This reduced the quality of the experience for everyone involved. Pushed to choose between an open racing format and higher-quality events, NASCAR (rationally) chose quality.

B. Having less-skilled drivers may have had a secondary effect as well. Car racing is dangerous, and that danger is a part of the spectator appeal. But with inexperienced and less-skilled divers, the risks may be more random, and may be more likely to lead to crashes involving the drivers people do want to see. This could reduce, rather than increase, fan interest.

Second, it could be that many of the part-time participants were older and that the reduction in their numbers was a part of natural attrition. Over time, the drivers and owners attracted to NASCAR may have come to see it as more of a full-time commitment, independent of NASCAR's rules.

I suspect both were involved. But I also suspect my first explanation will prove to be the stronger one.

Two emails

2010-02-26T13:27:00.001-06:00

I recently received two emails, back-to-back, with the following subject lines:

First:
Nutrition Action Healthletter to be distributed to each department

Then:
Biology Club Krispy Kreme Sale

The jokes write themselves.

Casinos

2010-02-06T18:29:00.008-06:00

"Speculators may do no harm as bubbles on a steady stream of enterprise.But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

J. M. Keynes, in The General Theory of
Employment, Interest, and Money

"It's like on Wall Street, when your heart is in your throat. You make the wrong move and you could lose your clients' money...Wall Street is just a form of legalized

gambling."

Dave "Spider" Perry, a 41-year-old f

ormer bond trader, living in Las Vegas,
in The Wall Street Journal,
February 6, 2010, p. A-10

Headline in The Wall Street Journal, February 6, 2010, p. A-1:

"Firm Engineers Vegas Wedding Between Wall Street and Sports Betting"

The lede:

"LAS VEGAS---Investors are sometimes accused of treating the stock market like a casino. Now, one Wall Street firm wants to treat casinos like the stock market.

"Bond-trading specialist Cantor Fitzgerals in March took over the management of sports betting at the M Resort..."

Their approach includes in-game betting (e.g., on such things as whether a pass will be completed or a field goal made), in addition to the formerly standard win/lose, with-the-spread/against-the-spread betting.

Be afraid. Be very afraid.

There's some good news

2010-02-05T12:42:00.002-06:00

The good news: The national unemployment rate fell to 9.7% in January 2010 (from 10% in December 2009.

Even better news: The decline in the unemployment rate did not occur because of a shrinking labor force--the labor force grew (slightly) between December and January.

Which (still better) means that employment as measured in the household survey rose--as did the the employment-population ratio.

Somewhat good news: Establishment employment was essentially unchanged (down 20,000, out of about 130 million). Construction employment was down 75,000, more than accounting for the decline.

And some really good news: Manufacturing employment actually rose (not enough to cheer about, but, hey, up, in this case, is better than down).

So maybe, just maybe, the corner really has been turned. More details than you could possible want are here.

Is having a pro football franchise related to higher metropolitan area incomes?

2010-02-03T13:13:00.003-06:00

The conventional answer to this question is probably "No." But in a paper appearing Economic Inquiry (V. 48, N. 1, January 2010, pp. 39-50), Davis and End ("A Winning Proposition: The Economic Impact of a Succesful National Football League Franchise") find that "the winning percentage of the local professional football team had a significant positive effect on real per capita income." If this holds up, this is a truly significant result in the analysis of the impact of sports on local economies.

But even based on their results, I have my doubts. First, the coefficient of having a team at all is negative and large. Just having a team is associated with a real per capita income that is about $150 lower than in comparable cities without teams. Second, before the net effect is positive, a team has to win at least 8 games. Third, the marginal effect turns negative at 11 wins, and by 14 wins the net effect is again negative. So having a team is bad. Having a medicore-to-good team is good. But having a great team is bad. I think the negative marginal effect of going from a 10-6 record to a 11-5 record is really an important result of their model, but it goes undiscussed.

Beyond that we have to deal with the causation issue. A plausible case can be made that teams in more prosperous cities have more resources available (e.g., through larger local revenue streams that are exempt from revenue sharing) and are thus able to acquire more talent.

So color me skepitcal for now.

Twenty years of schooling...

2010-02-02T18:15:00.003-06:00

I've been teaching full-time since 1973, and I do have the requisite 20 years of schooling. And, after all, Bob Dylan wrote (in Subterranean Homesick Blues)

"Twenty years of schoolin'
And they put you on the day shift..."

Well, this semester, I teach until 7 PM two nights a week and until 10 PM one.

I'm still waiting for the day shift.

(This is a whine. You may return to your regularly scheduled activities now.)

Trends in Establishment Employment

2010-01-08T20:42:00.005-06:00

Just for information, here's actual establishment employment (the black line) and two trends. The first (the blue trend line) is based on the 1950 - 2001 period; the second (red) trend line is based on the 1950 - 2007 period. My own sense is that the trend for the 1950 - 2001 period fits the earlier part of establishment employment better, and is more consistent with the observation that establishment employment grew quite slowly in the first decade of the 21st century, even if we use only the period up to 2007 to establish our trend. Click on the chart to enlarge it.

Infrastructure

2010-01-08T14:26:00.002-06:00

James Fallows has a very good post (based on an article in The Atlantic) on the decline in the quality, and even operability, of public infrastructure in the US (with an embedded video of a frightening water main break in Baltimore). A key quote:

"Stephen Flynn points out that the physical infrastructure of big East Coast cities was mainly built by the 1880s; of the industrial Midwest by World War I; and of the West Coast by 1960. "It was advertised to last 50 years, and overengineered so it might last 100," he said. "Now it's running down. When a pothole swallows an SUV, it's treated as freak news, but it shows a water system that's literally collapsing beneath us." (Surface cave-ins often reflect a sewer or water line that has leaked or collapsed below.)"

Given the general scholarly consensus that returns to infrastructure investment are quite large, there are significant opportunities here both to improve the quality of life in the US (and particularly in our larger cities) and also to undertake projects with significant job-creation potential.

It's worth pointing out, though, just how much more difficult it is to replace sewers and water and gas lines and buried telecommunications lines than it is to put them in place to begin with. Even modest sewer replacement projects create horrendous traffic problems, and even modest road reconstruction projects can be ruinous for local businesses, which often see 50% or larger declines in sales.

In addition, any coordinated effort at doing infrastructure replacement will almost certainly have to be developed and funded by the federal government. Too many cities--Gary, for example, where I work, or Detroit, or Camden*--cannot do this themselves. Even reasonably prosperous cities (Chicago, Miami, Atlanta) would find the burden very difficult to bear.

But if we don't make the effort, then the ability of our economy to continue to grow and to provide adequate opportunities is likely to be severely undermined.

*If you want to be really depressed, take a look at this book.

Why I continue to worry about the recovery.

2010-01-08T11:44:00.007-06:00

The employment-population ratio peaked in March 2007 at 63.4%.

It has declined consistently since and is now (December 2009) at 58.2%.

That's 33 months of decline so far.

That's a decline of 5.2 percentage points, which is 8.2%.

The previous largest post-World-War II decline occurred in the twin recessions of the early 1980s.

Then, the employment-population ratio peaked in December 1979 at 60.1%.

Then, it bottomed out in February/March 1983 at 57.1%.

That was 39 months of decline.

But the decline was only three percentage points, or 5%.

As our population continues to grow, and employment continues to fall, it will become harder, and take longer, to return to our long-term trend.

Based on the long-term employment trend from January 1950 through December 2007 (before the recession began, but after seven years of sub-standard employment growth), we would expect to have had something around 150 million payroll jobs by the end of 2009. We actually had about 131 million.

If employment grows at 50% above its 1950 - 2007 trend (2.65% per year instead of 1.75% per year), it will take until November 2011 until our economy returns to the pre-recession level of employment. And, to date, employment is still falling.

If employment grows at 50% above its 1950 - 2007 trend, it will take until March 2032 until our economy returns to its long-term trend level of employment.

I am not happy about any of this.

I am especially not happy when UPS lays off 1800 workers and its stock price rises.

(Click on the chart to enlarge it.)

"...working as adjuncts at less than the minimum wage..."

2010-01-07T17:45:00.004-06:00

A recent article in the Chronicle of Higher Education presents some cogent arguments against encouraging one's students to attend grad school, especially in the humanities. But then, the author says this: "...working as adjuncts at less than the minimum wage..." You see comments like this a lot when people write about how badly adjuncts are paid. But, of course, it's nonsense.

In 2010, the federal minimum wage is $7.25 per hour. Suppose you're teaching one course for a stipend of $2500 (which sounds pretty typical to me). That's 344 hours at the minimum wage, or, over a 16-week (countng finals) semester, 21.5 hours per week. Ri-i-i-i--i-i-ght. Anyone spending that much time on a single course is acting foolishly, and I seriously doubt that there is anyone working in higher ed who is that foolish. I was an adjunct (at IUPUI back in the 1970s), and I know how much time I spent per course...about 10 hours a week, or 160 hours for a course. At my assumed stipend and semester length, that's $15.625 per hour, or slightly more than twice the minimum wage.

That's not to say that adjuncts are well paid. At $2500 per course, one would have to teach 8 courses per semester (presumably at four different institutions, given the typical constraints on adjunct faculty teaching loads) to make $40,000 during the academic year. With, typically, no benefits. (Remember--that's 32 weeks worth of work, not 50.) Adjuncts are severely underpaid and given much less respect by their institutions and by full-time (and particularly tenured) faculty than they deserve.

But they don't make less than the minimum wage.

The Persistence of Hope Over Experience

2009-12-31T13:11:00.002-06:00

One of the things that fascinates me is the persistence of effort people show in the face of extreme disappointment. This was brought home to me while I was preparing some data sets for my course in sports economics for the spring semester.

Over the past three decades, a number of professional golfers have entered 15 or more tournaments in a year, with little to show for it in the way of results. I'm omitting player names, because that's not the point, but here are the results--year, number of tournaments, and winnings. Some of these, in context, are semi-understandable--players trying to come back from injuries, very good players who just lost it. But consider the guy in 1980, who entered 17 tournaments and won $138, total. An average of $9.50 per tournament. Or the 20-and-over tournaments champ, in 1988--21 tournaments, $661 in earnings. $31.50 per tournament.

The desire these men had, and probably still have, to play tournament golf, to compete at the highest level, must be, and have been, amazing. And far beyond anything I would willingly suffer.

Year......Tournaments.......Winnings
2009...............17..................$13,671
2008...............16..................$34,303
2007...............21..................$53,673
2006...............22..................$11,160
2005...............20..................$7,630
2004...............25..................$21,250
2003...............15..................$10,091
2002...............18..................$16,854
2001...............16..................$21,904
2000...............15..................$16,925
1999...............22..................$9,550
1998...............26..................$3,173
1998...............25..................$2,850
1996...............23..................$2,544
1995...............22..................$2,748
1994...............21..................$4,250
1993...............19..................$2,343
1992...............17..................$6,075
1991...............16..................$3,195
1990...............17..................$2,367
1989...............19..................$3,052
1988...............21..................$661
1987...............16..................$680
1986...............20.................$4,399
1985...............17..................$1,463
1984...............16..................$400
1983...............16..................$402
1982...............15..................$1,161
1981...............16..................$320
1980...............17..................$138

And the current Treasury auction of 28-day notes...

2009-12-15T13:28:00.002-06:00

...goes for a yield of 0.0%. That's right, the US Treasury has just borrowed $27.7 BILLION dollars for 28 days at a ZERO rate of interest. (Issue date, 12/17, due 1/14.) More. They received bids totalling $121 Billion at a zero interest rate. More. Last week, the Treasury borrowed $28..7 Billion, with $154 Billion bid, at a zero interest rate.

And there are both transactions costs and foregone interest involved here. (Not much foregone interest; my credit union is paying 0.3% per year, so, on the most recent $27 Billion, the 28-day interest payable at 0.3% per year would be a little over $6 million over the 28 days of the term of the T-notes.) So the real return on these is negative.

Now, I don't do finance (I am thankful about that), but this could stand some explaining. One of my colleagues--who does do finance--suggests the purchases are being made by governments. So they must view the next-best-alternative (holding the $27 Billion in non-interest-bearing bank deposits?) as carrying enough risk to offset something around $10 million of opportunity costs.

What's scary, I think, is the excess demand for these notes even at a zero rate of interest. If the "flight to safety" of US Treasury notes is still proceeding at that rate, then maybe we should be a little more concerned than we are about the fragility of the world financial system...

A Samuelson Bibliography

2009-12-14T10:38:00.006-06:00

"Some Aspects of the Pure Theory of Capital", 1937, Quarterly Journal of Economics.

"A Note on Measurement of Utility", 1937, Review of Economics and Statistics.

"A Note on the Pure Theory of Consumer's Behaviour", 1938, Economica.

"Numerical Representation of Ordered Classifications and the Concept of Utility", 1938, Review of Economics and Statistics.

"Interaction Between the Multiplier Analysis and the Principle of Acceleration", 1939, Review of Economics and Statistics.

"The Stability of Equilibrium: Comparative statics and dynamics", 1941, Econometrica.

"Constancy of the Marginal Utility of Income", 1942, in Lange et al, editors, Studies in Mathematical Economics.

"The Relation Between Hicksian Stability and True Dynamic Stability", 1944, Econometrica.

Foundations of Economic Analysis, 1947.

"Some Implications of Linearity", 1947, Econometrica

"Consumption Theory in Terms of Revealed Preference", 1948, Economica

Economics: An introductory analysis, 1948.

"International Trade and the Equalisation of Factor Prices", 1948, Economic Journal.

"International Factor-Price Equalisation Once Again", 1949, Economic Journal.

"The Problem of Integrability in Utility Theory", 1950, Economica.

"Probability and the Attempts to Measure Utility", 1950, Economic Review.

"Evaluation of Real National Income", 1950, Oxford Eeonomic Papers.

"Abstract of a Theorem Concerning Substitutability in Open Leontief Models", 1951, in Koopmans, editor, Activity Analysis of Production and Allocation.

"Economic Theory and Mathematics: An appraisal", 1952, American Economic Review.

"Spatial Price Equilibrium and Linear Programming", 1952, American Economic Review.

"Prices of Factors and Goods in General Equilibrium", 1953, Review of Economics and Statistics.

"Consumption Theorems in Terms of Overcompensation Rather than Indifference Comparisons", 1953, Economica.

"Balanced Growth under Constant Returns to Scale", with R.M. Solow, 1953, Econometrica.

"Utility, Preference and Probability", 1953, Econometrie.

"The Pure Theory of Public Expenditure", 1954, Review of Economics and Statistics.

"Diagrammatic Exposition of a Theory of Public Expenditure", 1954, Review of Economics and Statistics.

"Social Indifference Curves", 1956, Quarterly Journal of Economics.

"A Complete Capital Model Involving Heterogeneous Capital Goods", with R.M. Solow, 1956, Quarterly Journal of Economics.

"Wages and Interest: A modern dissection of Marxian economic models", 1957, American Economic Review.

"An Exact Consumption-Loan Model of Interest with or without the Contrivance of Money", 1958, Journal of Political Economy.

Linear Programming and Economic Analysis with R.Dorfman and R.M. Solow, 1958.

"Aspects of Public Expenditure Theory", 1958, Review of Economics and Statistics.

"Reply to Lerner", 1959, Journal of Political Economy.

"Analytical Aspects of Anti-Inflation Policy", with R.M. Solow, 1960.

"Efficient Programs of Capital Accumulation in Terms of the Calculus of Variations", 1960, in Arrow, Karlin and Suppes, editors, Mathematical Models in Social Science.

"Parable and Realism in Capital Theory: The surrogate production function", 1962, Review of Economics and Statistics
.
"Proof that Properly Anticipated Prices Fluctuate Randomly", 1965, Industrial Management Review.

"Rational Theory of Warrant Pricing", 1965, Industrial Management Review.

"A Theory of Induced Innovation along Kennedy-Weizsacker Lines", 1965, Review of Economics and Statistics.

"Using Full Duality to Show that Simultaneously Additive Direct and Indirect Utilities Implies Unitary Price Elasticity of Demand", 1965, Econometrica.

"A Catenary Turnpike Theorem Involving Consumption and the Golden Rule", 1965, American Economic Review.

"Economic Forecasting and Science", 1965, Michigan Quarterly Rev.

"The Non-Switching Theorem is False, with D.Levhari, 1966, Quarterly Journal of Economics.

"A Summing Up", 1966, QJE.

"The Pasinetti Paradox in Neoclassical and More General Models", with F. Modigliani, 1966, Review of Economics and Statistics.

"General Proof that Diversification Pays", 1967, J of Finance and Quantitative Analysis.

"What Classical and Neoclassical Monetary Theory Really Was", 1968, Canadian Journal of Economics.

"Lifetime Portfolio Selection by Dynamic Stochastic Programming", 1969, Review of Economics and Statistics.

"The Fundamental Approximation Theorem of Portfolio Analysis in Terms of Means, Variances and Higher Moments", 1970, Review of Economics and Statistics.

"Understanding the Marxian Notion of Exploitation: A summary of the so-called transformation problem between Marxian values and competitive prices", 1971, Journal of Economic Literature.

"Unification Theorem for the Two Basic Dualities of Homothetic Demand Theory", 1972, Proceedings of the National Academy of Sciences.

"Maximum Principles in Analytical Economics", 1972, American Economic Review.

"Marx as a Mathematical economist", 1974, in Horwich and Samuelson, editors, Trade, Stability and Macroeconomics.

"Complementarity: An essay on the 40th Anniversary of the Hicks-Allen Revolution in Demand Theory", 1974, Journal of Economic Literature.

"The Canonical Classical Model of Political Economy", 1978, Journal of Economic Literature.

Paul Samuelson, 1915 - 2009

2009-12-14T09:53:00.002-06:00

Paul Samuelson died over the weekend, at age 94. He was born in Gary, Indiana (one of two Noble prize winners in Economics born in Gary, a remarkable enough fact), and he changed the world, in a very real sense.

Samuelson transformed economics, both through his scholarship (starting with Foundations of Economic Analysis, and going on from there) and through his textbook, Economics (recently co-authored by William Nordhaus). Unlike a lot of economists, he did not write books (either scholarly or popular), but published extensively in a large number of fields. What do I mean by a large number of fields?

He developed the theory of revealed preference and used it to derive both product demand curves and consumer surplus.

His doctoral dissertation (Foundations of Economic Analysis) demonstrated how advanced mathematical tools could be applied to problems in economic theory.

He developed and formalized the accelerator principle in macro theory.

He did work in trade theory, notable drawing out implications of the Heckscher-Olin trade hypothesis and developing the Stolper-Samuelson theorem.

He formalized the theory of public goods (building on the work of Richard Musgrave).

He extended the overlapping generations model.

With Robert Solow and Robert Dorfman, he developed the application of linear programming analysis to economics.

He pioneered the analysis of stock market prices; his work laid the groundwork for the studies that led to an Economics Nobel for Robert Merton and for the development of the Black-Scholes formula for valuing complex financial instruments.

He was responsible for the neoclassical synthesis in macroeconomics.

And that's just a taste of what he accomplished.

His textbook, Economics, which first appeared in 1947 and is now in its 19th edition, transformed the teaching of economics. Virtually every economics textbook currently available has borrowed the structure of Samuelson's book--and much of its analytical content. Whether they have used his book or not, every economics instructor and every economics student has bee influenced by it.

Keynes once wrote: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil…"

Samuelson laid the basis for much that economists have created in the past 70 years. It has been mostly for good. His presence will be missed, but his example should continue to inspire and to stimulate economists well into the future.

One of the advantages of being curious is that you're always learning something new and interesting

2009-12-09T17:55:00.002-06:00

I just started reading Robert Allen's The British Industrial Revolution in Global Perspective (Cambridge University Press: 2009), and in Chapter 1, I ran across this:

"Northwestern Europe also developed a distinctive pattern of marriage that contributed to high living standards and a broader sphere of personal independence than prevailed in many societies....early-twentieth-century censuses showed two patterns of marriage in the world. East and south of a line from St. Petersburg, virtually all women married, and many of them married in their teens. West and north of that line, as many as one-fifth of women never married, and most who did marry waited until their twenties. These tendencies were most pronounced in northwestern Europe. The first marriage pattern led to high fertility and low living standards. The second...implies a lower level of fertility and one that responded to economic conditions through shifts in the proportion of women marrying and the average age of women at first marriage. [This second] pattern implied a persistently higher standard of living for the mass of the population, and that high standard facilitated savings and economic growth...DeMoor and van Zanden...have traced [this marriage pattern] back England and the Low Countries in the late middle ages. While developments in religious doctrine that emphasized the role of personal (rather than family) choice of marriage partner played a role, the decisive factor was the high wage economy following the Black Death. High wages and the strong demand for labor meant that young people--and young women in particular--could support themselves apart from their parents and control their lives and marriages. Women put off marriage until it suited then, and they found the right partner..."

This is fascinating (to me) and suggests a range of questions about subsequent developments in the economies of the Americas (north and south) and of western and eastern Europe.

A Pretty Good Employment Situation Report for November

2009-12-07T12:26:00.003-06:00

The Employment Situation report for November has a number of positive developments.

First, of course, the top-line number for most people--the unemployment rate--fell from 10.2% in October to 10.0% in November.

Second, two major sectors (Professional and Business Services; Education and Health Services) both added jobs--a total gain in these sectors of 126,000 jobs, only 0.3%, to be sure, but a gain.

Third, the overall employment loss was only 11,000 jobs in the establishment survey--and the household survey actually showed a gain of 227,000 jobs. (The employment loss in the establishment survey was the smallest in the past 22 months, by a lot.)

Fourth, the employment loss in the establishment survey has gotten smaller each month since June. The job losses look like this:

June 2009:................-463,000
July 2009:.................-304,000
August 2009:............-154,000
September 2009:.....-139,000
October 2009:..........-111,000
November 2009:........-11,000

Paul Krugman sees a potential downside in this better-than-the-recent-past news, writing:

Today’s unemployment report was good news. But in a real sense good news is bad news, because this month’s not-too-bad number deflates the sense of urgency....The fact remains that realistic projections show unemployment staying disastrously high for many years....[The Federal Reserve's forecast shows] [u]nemployment above 8 percent in the fourth quarter of 2011; above 7 percent in the fourth quarter of 2012....And what are we going to do about it? The de facto consensus is, not much — that we can’t and/or shouldn’t take any significant further action...It’s a tragedy, wrapped in a weird complacency.

I understand his concern, but I'm a lot happier with almost stable employment than with continued losses in six figures.

This week's sign that the United States is altogether too wealthy a nation

2009-12-03T10:21:00.003-06:00

"...a 42-disc set of Dr. Quinn, Medicine Woman..."

Read more here. And with gratitude to Felix Salmon for mentioning this.

China's Economic Stimulus Program

2009-11-24T13:20:00.000-06:00

A report, courtesy of Al Jazeera:

http://www.youtube.com/watch?v=0h7V3Twb-Qk&feature=player_embedded

The American Economic Association's "Economists Calendar" for 2010-2011

2009-11-23T11:19:00.003-06:00

I just received my copy of the AEA's "Economists Calendar," and am pleased to discover I share a birth date with David Card and Nicholas Georgescu-Rogen. Order yours today! (Sorry, apparently there is no online order facility; information here.)

Advertising claims that don't always mean what they seem to mean

2009-11-09T21:09:00.004-06:00

While watching (sporadically) Monday Night Football and reading John LeCarre's The Lookingglass War, I noticed a claim by Toyota: "80% of all Toyotas sold over the past 20 years are still on the road."

And just what do they want you to think? Well, one possibility is that they want you to think that 80% of the Toyotas sold in (not just since)1990 are still on the road.

Suppose that Toyota's sales have increased at a constant 5% per year over the part 20 years. Then, it's possible that the oldest Toyotas still on the road were sold 14 years ago.

(The faster the rate of growth in sales, the closer in the past 80% of the sales would be; at 7% per year sales growth, it'd take only the last 13 years.)

I guess the moral of this is to be wary of advertising claims. (Did anyone need to learn that? I hope not.)

Productivity and the Employment Situation

2009-11-09T15:24:00.002-06:00

When I read the productivity report for the third quarter (July through September) on Thursday, November 5, I knew we would see a disappointing employment report for October on Friday, November 6.

Productivity rose at an annual rate of 9.5% in the third quarter. And output did not rise nearly that fast. It's clear that when productivity rises more rapidly than output, employment will fall. And if output does not rise sufficiently faster than productivity growth, employment will rise very slowly.

Now, productivity growth can change a lot from one quarter to the next, and the correlation between this quarter's productivity growth and last quarter's productivity growth is what one might call modest (0.018, which is not significant at any conventional level of significance). Nonetheless it does suggest that a higher rate of productivity growth last quarter does not suggest a slower rate this quarter.

The productivity growth that occurred in the third quarter is hardly bad news. But, assuming productivity growth did not suddenly slow down in October, and that output growth did not suddenly accelerate, then, we were likely to be facing an employment decline. And decline employment did. If you want the gruesome details, they are here.

Tuition and Enrollment at Elite Private Universities

2009-11-05T10:01:00.002-06:00

As I think about the article (“The $50K Club: 58 Private Colleges Pass a Pricing Milestone”) in the November 1 edition of the Chronicle of Higher Education on the breakthrough into $50,000+ annual college costs, I find myself puzzling over one issue. What has happened to undergraduate enrollment at these institutions?

Since I entered college (at a small, selective, private liberal arts college) in 1965, the population of the United States has increased by about 70%. Median family income has increased by about 50%. So the number of students with the academic qualifications to succeed, and the family income to support, enrollment at elite universities has probably close to doubled. In addition, rising populations, expanded access to education, and rising incomes in the rest of the world has expanded still further the pool of fully qualified students.

But what has happened to undergraduate enrollment at elite private universities?

If the experience of the school I attended (DePauw University) is any guide, the answer is—almost nothing. Undergraduate enrollment at DePauw in 1965 was about 2,400. It is now about 2,200 (and the decline was planned). If the experience of the other highly-regarded small, selective liberal arts schools that I know of personally is any guide, the answer is—almost nothing.

So in a market for enrollments at elite private universities in the U.S. that has at least doubled in size, and probably more like tripled or quadrupled in size, if I am right, undergraduate enrollment at these elite institutions has responded little, if at all.

Now I know that one response to this is that the educational experience would not be the same if the school doubled or tripled in size. And I think I agree with that (although undergraduate enrollment at DePauw did roughly double in the 20 years before I entered). But expanding enrollment on the current campus is not the only way for elite private universities to have responded.

The number of institutions that have referred to themselves (or have been referred to by others) as “the Harvard of the Midwest” is quite large. So why not the real Harvard of the Midwest? Why not Sarah Lawrence-Santa Fe? Or Middlebury-St. Petersburg?

Why hasn’t Harvard built a campus in Chicago? I don’t think it could be the cost of doing so; Harvard’s endowment would easily allow the school to have done so, if it chose. It has chosen not to.

A private, profit-motivated business, seeing an increase in demand that allows it to roughly triple its price (in inflation-adjusted terms), would almost certainly seek to expand. It would leverage its brand name to find new locations (at the very least) from which to offer its products.

Elite private universities have chosen, in large part, to leverage their brand names, not to provide increased access, not to expand, but to increase tuition. (And, yes, I know that technologies have changed, that costs have changed. But do we really think that accounts for the entire increase in tuition? I sure don’t.) Unless I’ve missed something. Unless I’m wrong about enrollments.

So let some enterprising reporter find out.

The issue is not just that tuition and other costs have soared; it’s also that elite institutions have responded by not expanding. Let’s ask about that, as well.

Tuition

2009-11-03T18:01:00.003-06:00

An article in this week's Chronicle of Higher Education (unfortunately paywalled here) notes that "...58 private colleges and universities published rates for tuition, fees, room, and board totaling $50,000 or more in 2009-10. Last year only five institutions did so." Recalling the tuition I paid when I entered college in 1965, at a selective private liberal arts school, I thought it would be interesting to bring that up-to-date in 2008 prices.

Entering tuition, 1965: $1,400 per year.
Adjusted to 2008 prices: $9,569.
Tuition at that institution in 2009/10: $32,800.

At least my school is not one of the $50K institutions. Makes it a bargain, right?

The leader nationally is Sarah Lawrence University, at $55,788. Northwestern leads the schools inthe midwest at $50,164. Harvard isn't on the list, somewhat to my surprise...

To be fair, the "list price" is not what many-to-most students pay, because of various forms of financial aid, whether need-based or merit-based. Nonetheless, tuition and other direct expenses private, non-profit, four year schools averaged nearly $36,000 this year, nearly 60% of median family income. My 1965 tuition was less than 25% of the median family income then.

Whatever one might say, this looks not like a sustainable trend to me. And, as Herb Stein once said, if a trend can't be sustained, it won't be.

Jack Gilbert

2009-11-03T00:29:00.003-06:00

Jack Gilbert has published a new collection of poems, his fifth over a span of 47 years. His first book (Views of Jeopardy) appeared in the Yale Series of Younger Poets. 20 years later, Monolithos appeared. In 1996, The Great Fires (a Pulitzer Prize finalist). Refusing Heaven came out in 2007. He's 84 now, and The Dance Most of All is brilliant. Here's one very short example:
------------------
WINTER IN THE NIGHT FIELDS

I was getting water tonight
off guard when I saw the moon
in my bucket and was tempted
by those Chinese poets
and their immaculate pain.
------------------
Not surprisingly, I suppose, death--or, at least, the end of life--is a frequent visitor.

If you have not made his acquaintance, and if you love poetry, I urge you to spend some time with his words.

FINALLY!! Some Good News

2009-10-29T10:06:00.002-06:00

The preliminary GDP numbers for the third quarter are now available, and they show that real GDP has increased at a 3.5% annual rate. Following as this does four quarters of decline, I think we should be in something of a celebratory mood.

The increases were pretty much across the board: "...positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment..." Nearly half of the growth in GDP comes from motor vehicles (1.66 percentage points of the 3.5). (This is a potential issue, given that much of this may be a consequence of the "Cash for Clunkers" program, and that program has ended.) Durable goods consumption (motor vehicles are part of that) rose at an annual rate of 22.3% in the third quarter, after falling at an annual rate of 5.6% in the second quarter--a huge turnaround.

A piece of data that suggests caution--nonresidential fixed investment fell at an annual rate of 2.5% in the third quarter, still better than the -9.6% rate of change in the second quarter.

But, overall, this report is really good news. Let's hope the revisions don't change our view, and that the next report continues to be strong.

On the basis for non-profit organizations

2009-10-20T21:43:00.007-06:00

Earlier today, Tyler Cowen (answering a reader request to comment on under- and over-researched topics in economics) suggested the economics of non-profit organizations as an under-researched topic. Matthew Yglesias did a little follow-up. One of Cowen's commenters made one of the less-well-informed comments I think I've ever seen: "The non-profit sector is an artifact (or maybe excrudesence) of the tax code. Get rid of that and it goes away."

This betrays an appalling lack of knowledge of the development of a large chunk of the US economy, a sector dating back well into the 18th century, if not further.

Hospitals (and this is true for Europe as well) in the US have been, from their beginning, largely off-shoots of charitable organizations, most often religious organizations. Catholic hospitals are, of course, well-known, but the Methodists, the Baptists, the Presbyterians, the Jews, the Lutherans, and clearly others as well, have long sponsored and supported hospitals. Local, and sometimes state, governments have also established and supported hospitals as well. Yes, for-profit hospitals have become a presence in the last quarter century, but they are still a fairly small minority of the total.

In general, non-penal institutionalized care facilities (nursing homes, orphanages, etc.) have been created and run by not-for-profit organizations.

Education at all levels has also been largely a not-for-profit (or local and state government) activity. Private, not-for-profit institutions dominated higher education, in particular, until the Homestead Act (1862) provided states with strong incentives to create the "land-grant" universities. Privately-run, profit-motivated institutions have largely focused on training--apprenticeship programs (run by individual firms, industrial organizations, and unions, often in cooperation with employers); narrowly skill-focused "schools (beauty colleges, truck-driver schools); technical institutes (DeVry Technical Institute, ITT Technical Institute, and, one from the city in which I grew up--Indianapolis, Mallory Technical Institute). All these profit-motivated places have one thing in common. They do not emphasize intellectual development, or scholarship; they all emphasize acquisition of narrowly-focused, immediately job- and employer-focused skills. (And, yes, states and local governments did get into this as well; in Indiana, the Indiana Vocational Technical College, before it morphed into a community college system, did this kind of training.)

Other private activities operated by not-for-profit entities include such things as the YMCA/YWCA/YMHA movement, providing places for young people to live and gather, with (subsidized) places to live and eat, and with organized activities, generally with some religious overtones. These could be national movements, or local. In Chicago, for example, the Parkway Eleanor Foundation (founded in 1898) provided housing, meals, and activities for young women on their own in Chicago.

The entire settlement movement of the late 19th century, perhaps epitomized by Hull House (also in Chicago) allowed immigrants, and other struggling people, access to various forms of education, culture, and social services.

With much of this, the emphasis was not just on the education, or the housing, or the social services, but on the provision of some moral or ethical guidance, more or less heavy-handed, depending on the inclinations of the organizations involved. So, yes, young people on their own could find housing (and most of them did), but the organizations like the Ys provided housing--and something else. Elementary and secondary schools, and colleges and universities, founded largely by various churches, provided education--and something else. Hospitals and other custodial institutions provided care--and something else. And that something else was not something that would have been provided by profit-motivated entities. (And I write this as someone who has as little contact with organized religion as I possible can.)

The current tax breaks were not the source of these developments, and removing the tax breaks won't (and shouldn't) put an end to them. They have fulfilled a role, and will continue to fulfill a role, that profit-motivated business firms cannot. To refer to them as an "excrudesence"* of the tax code is both wrong and ignorant.

*Clearly, the poster meant "excresence"--"an abnormal outgrowth, usually harmless, on an animal or vegetable body."

It's Ostrom and Williamson

2009-10-12T08:51:00.015-06:00

The Royal Bank of Sweden announced the winners of their Nobel Memorial Prize in Economics this morning, and they are Elinor Ostrom (Indiana University) and Oliver Williamson (University of California--Berkeley). Here's what the New York Times has to say:

In its announcement, the committee said Ms. Ostrom “has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories.”

Mr. Williamson’s research, the committee said, found that “when market competition is limited, firms are better suited for conflict resolution than markets.”

Addemdum 1:
This, from John Nye's comments on Ostrom (see the link below), is, I think, particularly important: "...creating and accessing markets is often quite costly and hence organization, hierarchy and collective agreement can, under the right conditions, serve as viable or even superior alternatives to market competition." One could say similar things about Williamson's work on corporate structure and governance.

This award probably surprises a lot of people, but it seems to me to be an interesting and deserved one,

Addendum 2:
Somewhere, I read a prediction that economists would be disturbed by Ostrom's share of the prize, because she is a political scientist. Yet that has clearly not been the case, largely, I think, because many economists know and use her work routinely (see some of the appreciations below).

Addendum 3:
Here's Alex Tabarrok's take on Williamson and on Ostrom at Marginal Revolution.
Paul Krugman at the New York Times on the prizes.
Peter Klein at Organizations and Markets promises more comment to come.
Steven Levitt (the Freakonomics guy) chimes in at the Times.
Henry Farrell, a political scientist, comments at Crooked Timber.
And another set from Marginal Revolution, Tyler Cowen on Ostrom and Williamson.
John Nye provides more insights.
Paul Romer (himself a possible winner, sometime), adds this.
Vernon Smith's views are here.
Add in David Henderson, writing in the Wall Street Journal.
Peter Klein gets around to it (at Organizations and Markets).
Nobelist Michael Spence parses the awards.

Addendum 4:
Justin Fox informs us that "...I can report that this means Williamson now gets the most coveted possession in Berkeley: his own free campus parking spot..."

The September Employment Situation

2009-10-05T10:52:00.003-06:00

Things are getting better, aren't they?

The (revised) second quarter GDP data show a decline (on an annual basis) of only 0.7% (compared with the preliminary estimate of 1%). And even the 1% decline is a lot less than the fourth quarter 2008 and first quarter 2009 nnumbers.

But, as we (sadly) have come to expect, the employment situation continues to show little or no strength.

*The unemployment rate (as usual, the headline number, but perhaps not the most important piece of information) rose slightly, from 9.7% to 9.8%. And it's up from 6.2% in September 2008, and from 4.6% at the peak of the business cycle in November 2007.

*The employment-population ratio (the percentage of the non-institutionalized population with jobs) continued its decline, to 58.8%, down from 59.2% in August, down from 61.9% a year ago, and down from 63% at the November 2007 business cycle peak.

*The labor force participation rate (the percentage of the non-institutionalized population that is actively participating in the labor force--either employed or actively seeking work) is down to 65.2%, from 65.5% in August, from 66% a year ago, and from 66.1% in November 2007. Furthermore, it has now declined from its all-time high of 67.3% (in January and February, 2000).

*Employment continues to decline. As measured by the household survey, employment fell by 0.56% between August and September, and has declined by 4.25% over the past year and b y 5.32% since November 2007. The other employment measure, based on a survey of businesses ("establishment" employment) fell by (slightly) less than did household employment; it's down by 0.2% compared to August. But the longer-term declines are similar--4.23% over the past year and 5.13% sice November 2007.

If we compare the current recession to the 1980-82 twin recessions, the employment-population ratio has declined by more (down 4.2 percentage points so far, compared with a decline of 2.8 percentage points from January 1980 to November 1982). The unemployment rate has risen more (up 5.1 percentage points, compared with an increase of 4.8 percentage points then). And the percentage declines in employment are larger as well (down more than 5% in this recession, down--depending on our measure--somewhere around 3% then).

This is increasingly feeling like it's going to replace the 1980-82 twin recessions as "The Worst Recession Since the Great Depression" (TM), which doesn't make me, or anyone I know, particularly ecstatic.

Jim Carroll died last Friday

2009-09-15T21:01:00.006-06:00

Jim Carroll, punk rocker and poet died last Friday. While the obits stress his authorship of The Basketball Diaries (the Chicago Tribune says of it: "But it was "The Basketball Diaries," his autobiographical tale of life as a sports star at Trinity, an elite private high school in Manhattan, that brought him his widest audience. The son of a bar owner, Carroll attended the school on a basketball scholarship"), I found his work through his poetry, especially Void of Course (which is a great title) and Fear of Dreaming (also a great title). Here's one poem, from Void of Course which moves me deeply each time I read it:

My Father's Last Words

On his death bed

He reached up and grabbed my wrist
Pulling me close so I could hear he said.

"Promise me that you'll never eat
Any of that Japanese food. Promise."

It may sound racist and perhaps it is
but keep in mind my father spent all
Of World War II fighting in the Pacific
Mainly the island of Saipan.

I myself admire the Japanese, but
As they themselves would well appreciate,
I must honor my father's last wishes.

The irony is I've never liked Japanese food.

The irony is that
At his funeral,
The Priest that said
Mass was Japanese.

And, from Fear of Dreaming,

Fear of Dreaming

Too many teeth
In this city
Are bared.

What I want is to sleep
inside a strange language.

The bonsai, under glass,
........................................its redolent needles

clipped precise as The Buddha's fingernails.

Yet, I'm nervous to sleep. Afraid to dream
And fearful as well of waking too late.

Wary at the end of this century,
Its bloodthirsty and dead weight.

The Census Bureau updates us on family income.

2009-09-10T12:24:00.007-06:00

According the the Census Bureau, the median income of households in the US fell by 3.6 between 2007 and 2008 (to $50,303 from $52,163). This need not be all that surprising during a recession; in earlier recessions, the peak-to-trough declines were about this large, or larger (down 3.5% in the 2001 recession, down 3.9% in the 1991 recession, down 6.0% in the early '80s recession, down 5.7% in the 1973-75 recession).

What's more noteworthy is that median household income is about 2% less in 2008 than it was in 1998, as David Leonhardt notes in his New York Times blog. He concludes that median family income has not declined over any 10-year period at least since the 1930s. What needs to be added to this is that average household income has continued to rise, almost entirely because of income increases among the top 1% of households. This is also apparently unprecedented.

There's an immense amount of information in the Census Bureau report, including this little gem: The median annual (labor) earnings of full-time, year-round, employed male workers is slightly lower now than it was in 1973...36 years of no growth in median earnings of men...Women's earnings have grown during this time period, by about 25%, so the ratio of female to male earings (for full-time, year-round, employed workers) is now at an historic high--women earn 77% as much as men. But even women's (median) earnings have grown at much less than 1% per year.

More. While 13.2% of the population is in a household in which the income falls below the provery threshhold, 19% of the children under the age of 18 live in such households; people over age 65 are less likely to experience poverty-level incomes than are people under age 65.

And we could go on...

Obvious teaser of the month

2009-08-21T10:20:00.001-06:00

On the NYT Business home page:

A-List Stars Flailing at the Box Office
By BROOKS BARNES

Studios aren’t giving up on stars but they are trying to pay them less or looking for cheaper alternatives.

Response to a critic of GDP

2009-08-10T10:11:00.007-06:00

Eric Zencey, in an op-ed in today’s (8/10) New York Times, makes (yet another) argument against using Gross Domestic Product as a key measure of how the economy is performing. Early on, he writes:

“G.D.P. is one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing…gross domestic product excludes a great deal of production that has economic value. Neither volunteer work nor unpaid domestic services (housework, child rearing, do-it-yourself home improvement) make it into the accounts, and our standard of living, our general level of economic well-being, benefits mightily from both.”

Well, yes and no. Let’s start with a standard definition of GDP. GDP is the market value of all goods and services produced for final use in an economy in a defined time period, usually a year. It explicitly does not include goods and services that are produced but not offered, or intended, for sale. It is related to our national income, but it is not a(complete) measure of economic well-being, nor was it ever intended to be. It was intended to be, and it is, a measure of how much we produce.

Economists recognize this as a shortcoming of GDP as a measure of economic well-being. Here’s Timothy Taylor, in his on-line macro text (pp. 399 ff.):

“However, “standard of living” is a broader term than GDP. GDP focuses on production that is bought and sold in markets. Standard of living includes all elements that affect people’s happiness, whether they are bought and sold or not…[Examples follow]…GDP includes spending on recreation and travel but does not include [the value of]leisure time..GDP includes what is spent on environmental protection, but it does not include actual levels of environmental health, cleanliness, or learning…GDP includes spending on medical care, but does not address whether life expectancy or infant mortality have risen of fallen…it counts spending on education, but does not address directly how much of the population can read, write, or do basic mathematics…GDP has nothing to say about the level of inequality…GDP has nothing to say about what technology of products are available…In certain cases it isn’t clear that a rise in GDP is even a good thing. If a city is wrecked by a hurricane and then experiences a surge of rebuilding construction activity, it would be peculiar to claim that the destruction [caused by]…the hurricane was therefore beneficial. If people are led by a rising fear of crime to pay for the installation of bars and burglar alarms on all their windows, it is hard to believe that this rise in GDP has made them better off…"

Taylor goes on to argue that we cannot necessarily conclude that an increase in GDP represents an increase in economic well-being.

I’m not sure that Zencey has anything really to add here to what Taylor says. And what Taylor says is typical of intro econ textbooks.

Zencey does make an additional, and somewhat interesting, argument:

"Nor does it [GDP] include the huge economic benefit that we get directly, outside of any market, from nature. A mundane example: If you let the sun dry your clothes, the service is free and doesn’t show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable — and give G.D.P. a bit of a bump...In general, the replacement of natural-capital services (like sun-drying clothes, or the propagation of fish, or flood control and water purification) with built-capital services (like those from a clothes dryer, or an industrial fish farm, or from levees, dams and treatment plants) is a bad trade — built capital is costly, doesn’t maintain itself, and in many cases provides an inferior, less-certain service. But in gross domestic product, every instance of replacement of a natural-capital service with a built-capital service shows up as a good thing, an increase in national economic activity."

I think there’s some value to this point. But consider. Natural fisheries can be—and are—over-fished, and thus are not necessarily sustainable. Sun-drying ones laundry works well in the spring and summer and on sunny days, but not so well in Chicago in January. “Natural” flood control, which usually (as Dan Drezner snarks) often means allowing floods to occur, and (my point) would make a lot of land that is currently used for agriculture or for urban uses unavailable. (One can argue about whether that would be good or bad, but it is a fact that flood plains would be less available for other uses.) "Natural" capital is neither necessarily as productive nor as universally available as "man-made" capital. And "natural" capital is also not necessarily any more sustainable.

Zencey then commits this fallacy:

"In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up."

So if your car is damaged in an accident, which makes you better off—getting it repaired or not getting it repaired?

We see Zencey’s argument made, as well, about prisons or about health care (indeed, he goes on to make it). If no one ever got in an automobile accident, we would not produce as many auto repair services. But—in a world in which auto accidents do occur, are we better off, or worse off, to produce those repair services? If no one ever committed a crime, we would have fewer prisons (and police officers and judges and courthouses…). But—in a world in which crime does occur, are we better off or worse off with police forces and judges and courtrooms and prisons? If no one ever got sick or injured, we’d have fewer doctors and nurses (and other health care professionals) and fewer hospitals and clinics. But—in a world in which people do get sick and injured, are we better off or worse off to have health care workers and facilities?

More broadly, suppose that we did not need to produce auto repair or health care or crime prevention/control. Would the resources we currently use to do that go unused? No, we’d use them to produce other things instead, and GDP would be, as measured, about the same. Zencey’s actual argument is that the things we are producing aren’t really “goods,” not that GDP is a bad measure.
Then, we get this:

“If we don’t count ecosystem services as a benefit in our basic measure of well-being, their loss can’t be counted as a cost.”

That’s just a non-sequitur. GDP measures production, not benefits and costs. We can certainly—and we do certainly—count the benefits of ecosystem services as benefits and the loss of them as costs in our environmental regulations.

And now, something just flat-out wrong:

“If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together.”

No. GDP measures the value of what we buy. We argue that the value of what we buy and the value of our incomes must be the same (there’s an accounting identity here, really, like the balance sheet identity that says that the value of Assets must be equal to the value of Liabilities plus the value of Net Worth.) Zencey appears to be saying that we compute GDP as Income plus Expenditures. Really, we argue that GDP equals Income equals Expenditures.

We begin to reach a conclusion:

“Because we use such a flawed measure of economic well-being, it’s foolish to pursue policies whose primary purpose is to raise it. Doing so is an instance of the fallacy of misplaced concreteness — mistaking the map for the terrain, or treating an instrument reading as though it were the reality rather than a representation.”

He concedes that such measures have been proposed; what he doesn’t point out is that one of the most prominent of these measures—Net Economic Welfare—was proposed by two prominent economists, William Nordhaus and James Tobin, in 1972. Measures like this have not been widely adopted for the very reason Zencey cites—that they can be highly "subjectiv[e] — for the expression of personal values, of ideology and political belief..." [Oddly, Zencey even wants to create such a measure (“Call it net economic welfare”), apparently not even realizing that it’s already been done.]

Continuing,

“Common sense tells us that if we want an accurate accounting of change in our level of economic well-being we need to subtract costs from benefits and count all costs…”

The problem is to decide what is a benefit, and what is a cost. For Zencey, if I get my car repaired after an auto accident, that’s a cost. As far as I’m concerned, that’s a benefit. Which of us is right? And, if we can’t agree about that, then how can we agree on his sort of measure? GDP doesn’t even try to argue about that, it says, “What’s the market value of what we produced?” Zencey wants a measure that does more than this, and criticizes GDP for not being something it has never been designed to be—a measure of economic well-being (and he even quotes Simon Kuznets, the founder of national income accounting, to this effect). But what he proposes is not really an improvement, if only because it allows (as he even concedes) for our measure of well-being to be determined by “subjectivity — for the expression of personal values, of ideology and political belief.”

I can agree with Zencey that using GDP as a measure of economic well-being is not something we want to do. I (and everyone I know who teaches intro economics) make this point in my classes. We can be sensitive to the shortcomings of GDP as a measure of economic well-being (and, for that matter, as a measure of production), while retaining it for the purposes for which it is well-suited. Zencey’s error is to mistake the measure for something it is not, and, in many ways, to miss what it can and does achieve. I’m not sure he points us to something that would be an improvement.

Hat tip to Dan Drezner for mentioning this op-ed.

The good news is that employment is falling more slowly

2009-08-07T07:42:00.006-06:00

The BLS released the employment situation report for July this morning, and it's full of half-good news.

*Employment declined by only 247,000 jobs--the smallest decline since last October. (July was, however, the 19th consecutive month of employment declines, and the total employment is now 6.6 million lower than in December 2007.)

*The unemployment rate fell (by a statistically insignificant 0.1 percentage point) from 9.5% to 9.4%. (This is the first decline in the unemployment rate since February 2008.)

*Average weekly hours (of production workers) rose to 33.1 hours from 33.0 hours. (This is also the first increase since February 2008. Longer-term, average weekly hours continues its secular decline; since the early 1960s, average weekly hours have dropped by about 1 hour per decade, as part-time work has become a more prominent feature of our economy.)

*However, employment losses were widespread across industeies (construction, manufacturing, financial services, retail trade, transportation, and professional and business services all lost jobs. Health care continues to be a bright spot, adding 22,000 jobs.

So a better report than the past six.

Let's hope the rate of improvement accelerates.

Our alcoholic past

2009-07-31T14:49:00.004-06:00

I’m reading John Nye’s War, Wine, and Taxes: The Political Economy of Anglo-French Trade, 1689 – 1900. So far, it’s an excellent analysis of the bilateral trade relations between France and England and a useful corrective to the widely-held belief that England (at least by 1820 or so) was committed to free trade, while France remained committed to one form or another of mercantilism.

But that’s not my point here. Nye points out that in 1742 “the consumption of spirits and strong drink [in England] reached a total of 20,000,000 gallons” (p. 64). He earlier (p. 61) noted that “…on average between one and two pints [of beer] a day were consumed by the late 1600s by each person in Britain, or approximately 4 to 8 gallons of beer per month per capita.” Let’s call that 6 gallons per month (or 72 gallons per year) and let’s assume that per capita consumption of been was the same in 1742 as it had been in the late 1600s. Oh, by the way, those are Imperial gallons (154 fluid ounces, rather than 128).

Then, given a population in the 1740s of about 6,500,000 (p. 66), the average person (not the average adult)) consumed about 1.3 fluid ounces of distilled alcoholic beverages and about 32 fluid ounces of beer a day. That’s per person again, including children, non-drinkers (of whom there were probably few), and so on. [And it excludes consumption of wine (which was, apparently about 1 gallon per month per capita in the mid-1600s).]

We would probably consider that consumption of alcoholic beverages to be excessive. So is there an explanation for it? Turns out there is, and it’s one we would, today, tend to overlook. Here’s Ney (p. 61):

It is well known that beer and wine were free of pathogens and were therefore superior sources of both liquid and [of] basic calorie intake, and, until the introduction of tea and coffee in the West, no widely available alternatives to alcoholic beverages were to be found…” because of “…evidence that water was often unfit for human consumption…”

Given the lack of refrigeration and pasteurization for milk, I suspect that milk was also often unfit for human consumption.

So we were a world of heavy drinkers because the alternative was thirst or illness. Interesting (or at least so it seems to me).

Star Trek

2009-07-24T07:34:00.002-06:00

I (rather belatedly) got around to seeing the new Star Trek movie. The movie sped by and reached its end in what seemed like much less than the 2:06 running time. But.

Then I had time to think about it, and the more I thought, the less satisfactory the movie seemed.

What struck me first was that several plot devices were pretty straightforwardly lifted from earlier Star Trek movies. The "revenge over the death of my wife" meme and the "inject him with a creature that controls his brain" meme both came from The Wrath of Khan. The "hiding the Enterprise behind a planet to escape detection" ploy was used in The Search for Spock. The "guy from the future provides a how-to to a guy in the past" gimmick was used in The Return Home (Scotty provides a 20th century engineer with the specs for transparent aluminum; Spock provides Scotty with the equations for trans-warp transportation).

So there was a significant lack of creativity.

And then there was the gaping plot stupidity. In order to set off the explosion that creates the black hole, the Romulan commander (Nero) drills into the planet's core. Um. Why not just set off the explosion on the planet's surface? That'd be a lot quicker, no? And, by the way, why was the response, both on Vulcan and on Earth, for people to run around in confusion? Neither planet's security forces had any weaponry that could have been used to disrupt the drill? Please.

And there was the "evil overlord" syndrome. Nero left the Spock-from-the-future alive so he could grieve over the destruction of Vulcan. Which, of course, left him around to help the Kirk-from-the-present. ("6. I will not gloat over my enemies' predicament before killing them. ") And, for that matter, Nero had the Kirk-from-the-present in his grasp...and didn't kill him. ("47. If I learn that a callow youth has begun a quest to destroy me, I will slay him while he is still a callow youth instead of waiting for him to mature.")

Finally, the thing that has made the movies mostly inferior to the TV series. The movie was essentially a one-note, the evil guys are trying to destroy the good buys story. Oddly, the TV series, the original one and more especially Deep Space Nine, dealt with deeper issues of morality. Right and wrong were not so clear. And so the TV series tended to make its viewers think about their world in a somewhat more subtle way. Not so much with the movies, and especially not so much for this one.

So the movie moved right along and I enjoyed it until it had been over for maybe 5 minutes. Then, I began to think about it...