Category Archives: PSST and Macro

House prices up

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The WSJ reports,

In nearly two-thirds of the metro areas tracked by NAR, prices posted double-digit gains. The biggest gainers were Bridgeport, Conn., where the median price rose 27.3%, and Crestview, Fla., up 27.1%.

My thoughts:

1. The NAR tracks the median price of homes sold, which depends on the mix of homes transacted. If the demand surge is for bigger homes, some of the rise in the NAR measure represents a mix shift.

2. I assume that not all of the real estate market is healthy. Apartment rents are probably down, at least in places like NY and SF. Commercial real estate is probably in bad shape.

3. The economic impact of the virus is probably very uneven. Affluent people who have kept working from home are spending less and banking their salaries, which can now go into housing. But job losers are not getting into the housing market.

4. Maybe we are starting to see some inflationary consequences of lockdown socialism.

Recoveries and unemployment

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Robert E. Hall and Maryanna Kudlyak write,

We have developed a parsimonious statistical model of the behavior of observed unemployment. It describes: (1) occasional sharp upward movements in unemployment in times of economic crisis, and (2) an inexorable downward glide at a low but reliable proportional rate at all other times. The glide continues until unemployment reaches approximately 3.5 percent or until another economic crisis interrupts the glide.

Pointer from Tyler Cowen.

They think that the main implication of this is that it causes problems for the theory of the natural rate of unemployment. I think it discredits much more in macro.

For example, the various recoveries that they analyze had different amounts of “stimulus.” If the pace of recovery is the same in all cases, then what good was the “stimulus”?

I think that their stylized fact fits a PSST story quite well. A crisis suddenly breaks up a lot of patterns of specialization and trade. There is no equivalent process for quickly creating new patterns of sustainable specialization and trade. Instead, the entrepreneurial trial and error that is needed to create new patterns of specialization and trade seems to take place at a persistent, steady rate.

Remote capital

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Paula Jacobs reports,

virtual Israeli folk dancing has proved a valuable solution during COVID-19, allowing a popular pastime to continue safely, while creating a global dance community. So even when in-person sessions resume, it’s likely that virtual dancing is also here to stay.

This is an example of what I call “remote capital.” That is, people have learned to do things remotely. Even if fears of the virus go away tomorrow what we would see is a blend of pre-virus in-person activities and remote activities. Live Israeli dance sessions likely will include a Zoom feed for dancers in other locations.

Corporations with offices in multiple locations will at the margin substitute remote conferences for some in-person get-togethers. Perhaps Boards of Directors will meet twice a year in person and twice a year virtually. Although much of education on Zoom is not satisfying, my guess is that students will vote with their feet against large in-person lectures.

Finance theory and the Fed

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Eugene Fama says,

Actually, the central banks don’t do anything real. They are issuing one form of debt to buy another form of debt. If you are an old Modigliani–Miller person the way I am, you think that’s a neutral activity: You’re issuing short-term debt to buy long-term debt or vice-versa. That’s not something that should have any real effects.

Pointer from Alex Tabarrok.

Two papers that influenced my view of banking in general and central banking in particular were Bank Funds Management in an Efficient Market, by Fischer Black, and Banking in the Theory of Finance, by Fama. Both take seriously the modern theory of financial markets that begins with Modigliani-Miller. One could see smoke coming out of Scott Sumner’s ears even before he responded.*

In a Modigliani-Miller world, the financial structure of one firm does not matter. Investors use the financial markets to adjust their portfolios to undo the effects of one firm’s changes to its financial structure. The public ultimately holds what it wants to hold. If it doesn’t like the mix of securities that one firm creates (by substituting bonds for equity, for example), it has ways of dealing with that. The metaphor that I would propose is that a single firm’s changes to its financial structure is like me sticking my hand in the ocean, scooping up water, and throwing it in the air: I don’t make a hole in the ocean.

Modigliani-Miller is not strictly true. But it is the best first approximation to use in looking at financial markets. That is, you should start with Modigliani-Miller and think carefully about what might cause deviations from it, rather than casually theorize under the implicit assumption that it has no validity whatsoever.

Taking this approach, I view the Fed as just another bank. Its portfolio decisions do not make a hole in the ocean. That heretical view is the basis for the analysis of inflation in my book Specialization and Trade.

*Sumner’s response is actually beside the point, in my view. The Modigliani-Miller theorem does not in any way rely on different asset classes being close substitutes. It relies on financial markets offering opportunities for people to align their portfolios to meet their needs in response to a corporate restructuring.

Virus update

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1. Timothy Taylor has a useful discussion and links regarding the issue of whether lockdowns have a large effect over and above voluntary changes in behavior.

2. The president told me [Marc Siegel] in a late July interview that he was more excited about therapeutics in the short term even than vaccines. Does that mean he reads my blog?

3. The average daily death rate has trended up recently.

4. Robin Hanson writes,

those virus harm estimates come from assuming a $7M value for each of these lives lost, and that I say does seem crazy.

He refers to estimates by David Cutler and Larry Summers of the direct harm caused by the virus vs. the indirect cost of prevention measures. The thrust of Robin’s post is that the cost of the prevention measures was probably higher than the cost of the virus, and that we are “over-preventing” COVID. I want to question that conclusion.

We should be cautious about employing the notion of “lost GDP.” There are two states of the world, one in which some activities have little or no perceived risk and the other in which those activities have a significant perceived risk. The value of “output” for those activities differs under those two states of the world.

Note that most of the prevention measures were voluntary. Many of us are making decisions to restrict travel, social activities, and in-person shopping. Our revealed preferences indicate that the GDP that we are thus giving up is worth less to us than the value of risk prevention.

Think of it as a relative price shift. Valuing today’s output at yesterday’s relative prices can be misleading.

Resilience and efficiency

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Lorenzon M. Warby writes,

Efficiency tends to encourage specialisation. Stable environments tend to select for efficiency.
Resilience is about being able to continue to operate in changing circumstances.

Resilience tends to encourage generalised adaptability. Unstable environments tend to select for resilience.

It is a long essay, and I have not necessarily picked out the main point. But in terms of this scheme, I think that complex supply chains and high debt are suited to efficiency but not to resiliency. The result is that the housing bust of 2006-2007 and the current pandemic imposed much higher economic costs than might have been the case otherwise.

Virus update

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1. Kling was wrong. Regarding the drop in” deaths from the virus relative to cases, Tom Chivers writes,

it’s almost certainly not because the virus has mutated or anything. “There are some things we know are definitely not true,” says Beale. “We’re convinced that the virus itself isn’t substantially different, that there’s no ‘milder form’ of the virus.” The little package of RNA in its protein-and-lipid wrapper is essentially the same now as it was at the beginning of the outbreak.

Pointer from Tyler Cowen.

2. Maybe the high death rate in the U.S. is not something that would have been prevented by a different President (on this issue, my view is being reinforced). Andrew Biggs writes,

U.S. policymakers also suffered under the handicap that Americans entered the Covid pandemic in much poorer health than citizens of other developed countries. For instance, over 27,000 U.S Covid deaths list diabetes as a comorbidity, accounting for 16% of total Covid-related fatalities. But what if instead of having the highest diabetes rate among rich countries the U.S. had the same rate as Australia, with less than half the U.S. level? The same holds for obesity, listed as a comorbidity in 4% of Covid cases. Forty percent of Americans are obese, the highest in the developed world and over twice the OECD average. U.S. death rates from heart disease are also higher than most European and Asian countries. Hypertension is listed as a comorbidity in 22% of Covid deaths. If Americans simply had the same health status as other high-income countries, it is likely that tens of thousands of lives could have been saved.

Pointer from Bryan Caplan.

3. Timothy Taylor has links to more economics papers on the virus than anyone has time to read.

4. What if the virus had made its appearance in 1990?

–I don’t think people would have self-quarantined. We didn’t have the infrastructure for low-cost direct-to-home delivery. We didn’t have the technology to allow people to work from home.

–I don’t think we would have had lockdowns. We didn’t have a generation of people raised to believe that it was unsafe for children to play without adult supervision. Shelter-in-place orders from the government would have been too unpopular for elected leaders to contemplate.

–We would not have been promised a vaccine. No one could have announced “We already sequenced the virus genome!” as if that meant a vaccine was coming any day now.

–We would not have had all of the treatment options available today.

–Our population would have had a lower proportion of high-risk individuals–fewer elderly, obese, and diabetic individuals.

–We would not have had social media to fill our heads with statistics and model forecasts and expert pronouncements to keep the virus foremost in our minds.

In short, I suspect we would have come out about the same in terms of population death rate, maybe a little more or maybe a little less. The economic consequences would have been much less. And it would not have blown up into a national trauma. For the trauma, we can thank the fact that we now live in the Digital City.

UPDATE: after writing the foregoing, but before posting, I came across Vaclav Smil comparing the current pandemic to those in 1957 and 1968,

Why were things so different back then? Was it because we had no ­fear-reinforcing 24/7 cable news, no Twitter, and no incessant and instant case-and-death tickers on all our electronic screens? Or is it we ourselves who have changed, by valuing recurrent but infrequent risks differently?

Business closures

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CNBC reports,

According to Yelp data, permanent closures have reached 97,966, representing 60% of closed businesses that won’t be reopening.

This is what they attribute to the coronavirus. I wonder what the “excess deaths” measure would show. That is, even without the virus, some businesses would close.

My guess is that these are mostly excess deaths, and it will take quite a while for new entrepeneurial activity to employ the people whose jobs have been lost in the process.

The latest virus puzzle

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Tyler Cowen writes,

many of the herd immunity theorists strike back and ask “where are the deaths“? But that is not the right question for testing herd immunity claims. Those claims were about transmission slowing down, and those claims should be true about Covid-19 cases whether or not more people are surviving in the hospital.

Why are cases spiking but deaths not spiking? Here is a set of hypotheses, in my subjective order of likely importance.

1. The strains that are circulating are less deadly.

2. The people who are getting it are less frail. See the discussion of “dry tinder” in Daniel Klein’s essay. And also enough folks finally got the memo about protecting people in nursing homes.

3. The treatments people get now are helpful, whereas six months ago they were ineffective/harmful.

4. Testing protocols are finding more of the milder and asymptomatic cases that they were missing before.

5. The long and variable lag between cases and deaths has become longer and more variable.

And note that the average daily death rate still stands above 700, which is outside of the range for a normal flu, at least on an annual basis.

No follow-up

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1. Back in late June, I was surprised to receive an email from a White House staffer who was unknown to me asking if I would consider a job as a member of the President’s Council of Economic Adviser. I said yes, although I don’t think I sounded very enthusiastic.

My perception is that the CEA is not a significant body. At least since the Clinton Administration, it seems to me that whatever power over economic policy that is not wielded by the Fed or Treasury is wielded by an Economic Council under the President that is not the CEA.

Even though the CEA job might be meaningless from an influence perspective, it could be an opportunity to meet various people in government and to travel and speak to various groups. But in a COVID world, those benefits are reduced and/or offset by costs. That is what made it hard for me to sound enthusiastic.

Working for the Trump Administration would make me a pariah among some people. I see that as a mark against those people, not against me.

Anyway, I spoke with the staffer on the phone and he said I would be interviewed the following week. That was the last I heard of the matter–no interview ever took place.

Meanwhile, last month I accepted another position, in the child care sector. One of my daughters moved in with her husband and their new baby. They view us as the child care providers least likely to bring the virus into the family. I saw no reason to question their judgment. I really enjoy babies. These days when people ask how I am doing, I say that I am having a good pandemic.

2. Last month, I wrote an essay about economic policy in the current environment and sent it to a think tank. Never did hear back, so I will paste it in here. Continue reading →