Category Archives: Mark Thoma is Indispensable

PSST: the idea is spreading

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Mark Muro writes,

Adjustment happens, but it’s a far more painful process than the models and textbooks have imagined. Policy, and the economists, should take it seriously.

Pointer from Mark Thoma.

Difficulty with adjustment is the essence of the PSST story for recessions. If the economy were a GDP factory, then the factory foreman would be temporarily confused about which job to give to which person. Of course, for the factory foreman, substitute the set of entrepreneurs and potential entrepreneurs.

Muro cites three recent papers, two of which I have covered. The new one is by Danny Yagan, who writes,

living in 2007 in a below-median 2007-2009-fluctuation area caused those workers to have a 1.3%-lower 2014 employment rate. Hence, U.S. local labor markets are limitedly integrated: location has caused long-term joblessness and exacerbated within-skill income inequality. The enduring impact is not explained by more layoffs, more disability insurance enrollment, or reduced migration. Instead, the employment outcomes of cross-area movers are consistent with severe-fluctuation areas continuing to depress their residents’ employment. Impacts are correlated with housing busts but not manufacturing busts, possibly reconciling current experience with history. If recent trends continue, employment rates are estimated to remain diverged into the 2020s—adding up to a relative lost decade for half the country. Employment models should allow market-wide shocks to cause persistent labor force exit, leaving employment depressed even after unemployment returns to normal.

The standard remedies for adjustment, including trade adjustment assistance, and worker re-training, are among the least effective programs government has ever tried. Not surprisingly if decentralized entrepreneurs are having calculation problems, the socialist calculation problem proves worse.

Jason Furman on Tax Reform

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He says,

The awkward fact, however, is that more than half of the value of these tax expenditures reflects exclusions from income that actually make it easier for individuals to file taxes. Many tax expenditures allow taxpayers to exclude or deduct income that is not received in cash and would be much harder to measure precisely than wages on a W-2. Taxing home production, imputed rent on owner-occupied housing, pension earnings, inside buildup on life insurance policies, and all government benefits would move the tax system closer to many economists’ ideal “Haig-Simons” concept of taxable income, but would in fact make filing taxes much more complex.

Pointer from Mark Thoma. Keep in mind that Furman is still part of the Obama Administration and so is not completely free to speak his mind. Still, I would bet he believes at least 90 percent of what he says here. I think that the one thing he leaves out is the payroll tax. I would place a high priority on reducing the payroll tax, which I think can be counted as progressive tax reform.

Economic Experts vs. the Public

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Noah Smith writes,

the economists were more likely than the public to support the U.S. auto bailouts, by 58.6 percent to 52 percent. They were also more likely to support President Barack Obama’s economic stimulus bill, by 52.8 percent to 43.4 percent. More economists — over 97 percent — were in favor of tax hikes, and fewer supported school-voucher programs.

Pointer from Mark Thoma.

The paper to which Smith refers, by Sapienza and Zingales, is complex, so do not take either Smith’s or my word for what it says. From their conclusion:

This difference does not seem to be justified by a superior knowledge of economists, but by a different way average Americans interpret the questions. Economists answer them literally and take for granted that all the embedded assumptions are true, average Americans do not.

…Hopefully, the same economists, when they do policy advice, would answer the same questions very differently. Otherwise, we would have to conclude with William F. Buckley, Jr. that “I’d rather entrust the government of the United States to the first 400 people listed in the Boston telephone directory than to the faculty of Harvard University.”

As to Smith’s larger point, that economists are becoming more interventionist, I would be curious as to how much more interventionist. As long as I can remember, many economists and nearly all economic textbooks have been interventionist. Going back to 1971, whose idea was it to try to control inflation with wage-price controls?

Given the general drift to the left in academia, it would not surprise me if economists are more interventionist today than they were 30 years ago. But I would like to see some careful study to show that, not just casual empiricism.

Economists Discuss the Movie “The Big Short”

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Jason Bram and Andreas Fuster write.

many people who were pessimistic about the housing market simply stayed on the sidelines—which in turn meant that for a while, valuations in the market primarily reflected the beliefs of optimists.

Pointer from Mark Thoma. I found myself agreeing with most of what they wrote.

I think that the same thing happened with the Internet bubble. Some of us thought that the prices were ridiculous, but we just stood aside and watched. You have to be really greedy and risk-tolerant to try to go short during that kind of frenzy, and you have to be lucky in terms of timing.

Why Have a Dynamic Economy?

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David Glasner writes,

I find it hard to believe that what makes people happy or unhappy with their lives depends in a really significant way on how much they consume. It seems to me that what matters to most people is the nature of their relationships with their family and friends and the people they work with, and whether they get satisfaction from their jobs or from a sense that they are accomplishing or are on their way to accomplish some important life goals. Compared to the satisfaction derived from their close personal relationships and from a sense of personal accomplishment, levels of consumption don’t seem to matter all that much.

Pointer from Mark Thoma.

If this were true, then the ideal economic arrangement would be the caste system. There would be no economic progress, but everyone would have their place and be secure about that.

I think that it is fair to say that on the margin more consumption would have little effect on our lives. But the cumulative effects of a better consumption opportunities are quite large. The thing is, in order to get those opportunities, you need a dynamic economy. And in a dynamic economy, business models become obsolete and the corresponding jobs go away.

Glasner brings up this issue in the context of the argument about protectionism (he is not protectionist–read the whole thing). But I think that trade with people from other countries is just one aspect of a dynamic economy.

Also, read Scott Sumner’s comments.

Instead of Deposit Insurance?

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Clive Crook writes,

banks should be made to pledge assets as collateral, in sufficient quantity to cover their deposits and other short-term liabilities. A rule to this effect could replace conventional deposit insurance (with premiums in effect collected upfront in the form of haircuts on the collateral).

Read the whole thing. Pointer from Mark Thoma. Crook is reviewing a book by Mervyn King. I will have to read the book, because I do not understand the concept.

I think of an ordinary bank as having loans as assets. Its liabilities consist of deposits and equity. You can think of the assets as already “pledged” to the depositors, and if the depositors can be paid off, then the shares in the bank have positive value. It sounds like what King is talking about is an intermediary (a government agency?) that manages the way that these assets are pledge in a way that better protects depositors. Again, I will have to read the book.

Genghis Khan on Macro

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Stanley Fischer said,

one of the major benefits that were expected from the introduction of inflation-indexed bonds (Treasury Inflation-Protected Securities, generally called TIPS), namely that they would provide a quick and reliable measure of inflation expectations, has not been borne out, and that we still have to struggle to get reasonable estimates of expected inflation.

He cites a paper by D’Amico, Kim, and Wei arguing that a large liquidity premium can suddenly appear in the TIPS market.

Pointer from Mark Thoma.

There is much of interest in Fischer’s speech, but I was particularly struck by the remark on TIPS.

One more excerpt:

it remains a pity that the fiscal lever seems to have been disabled.

I have some objections to that statement.

1. The “automatic stabilizer” components of fiscal policy are significant and certainly have not been disabled.

2. The stimulus package enacted in 2009 was quite large.

3. To the extent that the fiscal lever has been used less than some Keynesians might want, this could perhaps be blamed on the high levels of debt that governments accumulated, even when times were good. If anything has been disabled, it has been the “off switch” for fiscal stimulus. When you run deficits at full employment, this is going to limit your flexibility to increase deficits during a recession.

Guess the Axis

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David French writes,

I grew up in Kentucky, live in a rural county in Tennessee, and have seen the challenges of the white working-class first-hand. Simply put, Americans are killing themselves and destroying their families at an alarming rate. No one is making them do it. The economy isn’t putting a bottle in their hand. Immigrants aren’t making them cheat on their wives or snort OxyContin. Obama isn’t walking them into the lawyer’s office to force them to file a bogus disability claim.

Call it the civilization-vs.-barbarism hypothesis to explain the increase in labor immobility. Pointer from Mark Thoma, who I am sure looks at this from the standpoint of a different axis.

French is commenting on a piece by Kevin Williamson. More coverage here.

“It is immoral because it perpetuates a lie: that the white working class that finds itself attracted to Trump has been victimized by outside forces,” the NR roving correspondent writes. “[N]obody did this to them. They failed themselves.”

American Workers and Substitution

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Raven Molloy and others, in a paper for a Brookings conference, show that there has been a largely unexplained decline in the rate of job switching and other measures of what they call labor market fluidity over the past three decades. Pointer from Nick Bunker via Mark Thoma.

My thoughts turn to the four forces, and in particular to globalization and the rise of the Internet. Think of three margins of substitution:

1. Substitute American workers for other American workers.

2. Substitute foreign workers for American workers.

3. Substitute capital equipment (including computers) for American workers.

If the elasticity of substitution has gone up for (2) and (3), might it not follow that we would see less of (1)? In more concrete terms, if a firm wishes to expand, nowadays it can increase production overseas or use more capital equipment, rather than hire more American workers. That would reduce (domestic) labor fluidity.

Dueling Inflation Stories

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Justin Fox writes,

Since 1995, durable goods (cars, televisions, computers and the like) have been getting cheaper in the U.S. That’s even as the prices of services and nondurables have mostly kept rising.

Read the whole post. Pointer from Mark Thoma.

At one point, Fox recycles the often-told tale of Fed Chairman Paul Volcker vanquishing inflation. My alternative view is that bond market vigilantes took over. That is, lenders got tired of generously offering borrowers negative real interest rates.