The Construction-worker Bottleneck

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Conor Sen writes,

From a labor slack standpoint, the pool of potential construction workers is probably well-represented by unemployed men under the age of 55. To get back to late ‘90s levels of male unemployment (from a level standpoint, not an unemployment % standpoint), we would need essentially every single male unemployed worker who finds a job in the coming years to go into construction.

Generic pointer from Tyler Cowen. Like Kevin Erdmann, Sen sees us having to build a lot of housing to make up for under-production from 2008-present.

I am not sure there is a housing shortage. A lot of people my age have too much house. That is why they do not mind having their kids move back in with them. It could be that what we need is not so much a surge in construction as a redistribution of housing.

Indeed, Mark J. Perry writes,

In 2015, the average size of new houses built in the US increased to an all-time high of 2,687 square feet (see dark blue line in top chart above), and the median size new house set a new record of 2,467 square feet (see light blue line in top chart). Over the last 42 years, the average new US house has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from the Census Bureau) to 2,687 square feet last year. Likewise, the median-size house has increased in size by almost 1,000 square feet, from 1,525 square feet in 1973 to 2,467 last year. In percentage terms, both the average and median size of new US houses have increased by 62% since 1973.

Combined with a decline in household size, this means according to Perry that living space per person has nearly doubled.

Because we need more space to store our cookbooks, vinyl records, maps, encylopedias, radios, and photo albums.

Back to the 1960s

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Olivier Blanchard writes,

The IS relation remains the key to understanding short-run movements in output. In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation.

Pointer from Scott Sumner, who disagrees for different reasons than mine.

In the 1960s, macro was distinct from micro, and few people worried about that. If “spending creates jobs and jobs create spending” was contrary to Walrasian general equilibrium, then so be it. By 1985, the situation (at the graduate level) was totally reversed. Every macro model had to nod in the direction of general equilibrium. It stayed that way until 2008.

Now, the best that MIT economists can do is revert back to 1960s thinking. In my forthcoming book, I offer the alternative of PSST.

Double Standards on Presidential Power

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Michael Beschloss writes,

[Sean] Wilentz argues that, after achieving “historic health care reform” and an economic stimulus, it was only in 2015, after withstanding four years of an opposition Congress and failing to make a “grand bargain” with the other side, that Obama shed his “postpartisan illusion” to circumvent the House and Senate by vigorous use of executive orders.

In the same issue of the WaPo, there are many opinion pieces fretting over Donald Trump’s potential abuse of power. Although I disagree with Trump on many substantive issues, I am not going to get on the bandwagon of attacking his authoritarian personality.

I do not doubt that Trump has authoritarian tendencies. Or that he is a narcissist. Or that he is overconfident in his own views. But all of those qualities are present in Barack Obama. And yet when he acts on these authoritarian tendencies, the narrative becomes “vigorous use of executive orders.”

I have not changed my views from a few weeks ago. I will vote for Gary Johnson. But if the media continue to ignore the most respectable ticket on the ballot, then I hope Trump wins. Again, this is not because I agree with him on substance. It is because I believe that as long as we are going to have an arrogant, over-confident, self-centered President, I would rather have the institutional forces of the left arrayed against executive power than in support of it.

Tyler Cowen on Labor-Leisure Trends

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In his column he writes,

Yet it is a strange society that disproportionately bunches much work and stress for so many women in the middle of their lives, and rewards them only much later with leisure. It is a kind of feast or famine for work, leisure and earnings.

In terms of the four forces, I would say that as the size of the New Commanding Heights sectors (education and health care) increases relative to manufacturing, the proportion of women doing market work has gone up. With bifurcated family patterns, we see higher-status families where parents work until their children have completed their education. Then they retire.

Note that the cost of goods and services other than education and health care has tended to fall. Thus, the way to get the most leisure is to resist the cultural pressure to live in a high-status city, have your children attend a high-status college, and buy “good” health insurance (meaning a pre-paid health plan as opposed to real insurance). If you can do that while earning a decent wage when you work, you can afford a lot of leisure.

Indulging in Confirmation Bias

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For my view of the housing bubble. John Geanokoplos and others wrote,

Notice that if we freeze leverage (LTV) at constant levels, the boom gets dramatically attenuated, and the bust disappears.

This statement is based on a simulation of an “agent-based” model for house prices. Pointer from Eric Beinhocker from Mark Thoma.

Beinhocker writes,

rather than predict we should experiment. Policymaking often starts with an engineering perspective – there is a problem and government should fix it. For example, we need to get student mathematics test scores up, we need to reduce traffic congestion, or we need to prevent financial fraud. Policy wonks design some rational solution, it goes through the political meat grinder, whatever emerges is implemented (often poorly), unintended consequences occur, and then – whether it works or not – it gets locked in for a long time. An alternative approach is to create a portfolio of small-scale experiments trying a variety of solutions, see which ones work, scale-up the ones that are working, and eliminate the ones that are not.

American pragmatist John Dewey also thought that technocrats should take an experimental approach. That is not a new idea. (I learned this from Jeffrey Friedman, who sent me a draft from his forthcoming book.) Of course, my view is that I would rather see experiments come from the market than from technocrats.

Later, Beinhocker writes,

A major challenge for these more adaptive approaches to policy is the political difficulty of failure. Learning from a portfolio of experiments necessitates that some experiments will fail. Evolution is a highly innovative, but inherently wasteful process – many options are often tried before the right one is discovered. Yet politicians are held to an impossibly high standard, where any failure, large or small, can be used to call into question their entire record.

I would argue that avoidance of failure is natural in any large organization, not just government. That is why I think that markets are better able to conduct experiments to solve problems.

I found Beinhocker’s essay interesting. However, if we are going to try to improve economics, it is important to include behavioral policy-making and politics into the analysis. Do not simply assume a benevolent, rational technocrat as decision-maker.

Speaking of confirmation bias, a recent Instapundit post linked to an old essay of mine, one which speaks to this comparison between expertise mediated by markets and expertise mediated by government.

Epistemology and Economics

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I am starting to read up on the topic. I see epistemology as the attempt to articulate what criteria we are using to evaluate the usefulness of economic analysis. Various initial thoughts:

1. I emailed Pete Boettke for advice on what to read to get me started on the topic, and not surprisingly he had useful suggestions. I told him that I of course know about Milton Friedman’s classic position.

2. One can argue that there is no need for epistemology. You could just assume that good economics is what leading economists do. Without having to articulate what they do, just try to do things similarly. However, for someone like myself, who is inclined toward heterodoxy and to doubt that leading economists are doing useful economic analysis, that is not the right answer.

3. One of the articles that Boettke suggested was by Dan Hausman, who wrote

Instead of attempting to discover what methodology neoclassical economists actually practice and to think seriously about how that methodology might be justified, … critics … have usually relied on indefensible philosophical theories of science to support broad condemnations. … Philosophers have, however, little to offer by way of informative well-supported systematic theories of the scientific enterprise and that little does not lend itself to mechanical application.

In other words, if you have a problem with how economists are doing things, that is your problem, not the economists’. Those who can, do, and those who can’t, do epistemology.

To put it another way, I read Hausman as saying that the task of the epistemologist is to figure out what economists do and then justify it. Again, from where I sit as a heterodox economist, this is hardly satisfactory.

What I contend in my forthcoming book is that economic theories are interpretive frameworks. These cannot be tested decisively. They are not falsifiable in the Popperian sense. Think of AS-AD. There is no combination of output and price movements that can falsify it. If they move together, you call it a demand shock. If they move in opposite directions, you call it a supply shock.

What I do not address in the book is the question of how best to evaluate competing interpretive frameworks. I believe that it is an important question. I am not convinced that the best way to answer to the question is to study how frameworks become popular in the profession. I think that factors such as path dependence (model X got published in a good journal, so something that pertains to model X can also get published in a good journal) and ideological preference play outsized roles in such evaluations in practice.

Somewhat related: Noah Smith on objectivity and economics. Pointer from Mark Thoma.

Housing Finance Policy to Maximize Harm

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A reader pointed me to this Urban Institute forum on housing finance policy. It is a topic that leads me to be bitter and uncharitable. I take the view that America’s housing policy in practice is to subsidize demand and restrict supply. There is no economic model that would argue for this, but it makes perfect sense from the standpoint of public choice theory (i.e., policy driven by interest groups)

Since, as usual, nobody asked me for my opinion, I will give it on this blog. My contribution will be to list what I think are the most harmful ideas and hope that they are not implemented. These are:

1. Restrict supply as much as possible by encouraging rent controls, the strongest tenant rights possible, Nimbyism, making environmental regulations difficult to comply with, encouraging additional environmental challenges by private groups, loading builders with expensive requirements (such as setting aside a percentage of their developments for “affordable” housing), etc.

2. Encourage as much housing speculation as possible by subsidizing mortgages with low down payments and by giving the same subsidies to investors as to owner-occupants.

3. Instead of going back to the “originate to hold” model or the Freddie-Fannie model, invent a whole new complicated approach to mortgage finance that mixes government support and private sector activity. This will ensure privatized profits and socialized risks. Above all, creating a new system will ensure that no one has enough experience to be able to manage risk or even to observe where it is being concentrated.

The Post-Modernist Swindle

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I get the impression that post-modernists make two moves with regard to what I call frameworks of interpretation.

1. Let us agree that no framework of interpretation can be demonstrated conclusively to be correct.

2. Let us proceed to rely on a framework of interpretation that explains all social phenomena in terms of the concepts of race, gender, privilege, and power.

The first proposition denies that there can be such a thing as science. I disagree when it comes to the natural sciences. As I see it, using the atomic theory to interpret chemical reactions, using Newton’s laws to interpret the behavior of large bodies, and using evolution to interpret the characteristics of plants and animals is valuable enough that we can treat those frameworks as truth.

However, I agree when it comes to social phenomena. I would say that economics, sociology, social psychology, and the study of politics are disciplines, but not sciences. They are disciplines in that it is better to be informed about the literature than to be uninformed about it, but they are not sciences, because there are relatively few propositions that can be tested conclusively.

But proceeding to (2) is a brave swindle. With (1), you have said that you believe in disarmament. With (2), you have brandished your favorite pistol.

If students were alert to the swindle, they would demand that the post-modernists recognize that the race-gender-privilege-power framework is just one imperfect framework among many that might be used. It should have to contend on a level playing field with other frameworks.

In my new book, I elaborate on the concept of frameworks of interpretation.

A Taxonomy of Policy Ideology

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This post is adapted from something I wrote in an email exchange with Jeffrey Friedman.

Consider two questions we can ask someone about policy knowledge.

1. Does an ordinary citizen know enough about policy area X so that you can say that things would be much better if an ordinary citizen were in charge of X?

2. Do experts know enough about policy area X so that you can say that things would be much better if they were in charge of X?

There are four possible answers: yes to both; no to both; yes to 1 but no to 2; no to 1 but yes to 2.

Yes to both is the progressive reformer quadrant. The claim is that we all know how to fix policy, but we have to overcome evil people by reforming the system.

Yes to 1 and no to 2 is the populist quadrant. Think of Trump supporters and policy area X is immigration. Or Bernie Sanders supporters who don’t believe the technocrats who say that we can’t afford free health care and free college for all.

Yes to 2 and no to 1 is the technocracy quadrant. You will find most mainstream economists here.

No to both is the skeptical quadrant. One example of a policy area in which many people can at least relate to the skeptical quadrant is “bringing peace between Israelis and Arabs.”

One thing to note is that you do not have to be in the same quadrant on every policy area. I am in the skeptical quadrant when it comes to most areas of economic policy, particularly macroeconomic management. Jeffrey and I are in the same quadrant, and perhaps not surprisingly we both champion exit over voice.

However, for me there are some exceptions. For example, I am relatively populist when it comes to breaking up the largest banks. I am in the technocracy quadrant when it comes to military operations or urban sanitation. I am not much in the progressive reformer quadrant. Perhaps the area where I come closest is housing finance policy. I see American housing finance policy as dominated by a conspiracy of interest groups, and I could see us being better off if policy were controlled by politically independent technocrats or even by ordinary citizens.

Did You Visit the Same Country?

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Atif Mian and Amir Sufi write,

we highlight the increasing body of macroeconomic evidence on the link between household debt and business cycles.

Dean Baker writes,

while it has become fashionable to cite the importance of debt in explaining the severity of the downturn following the collapse of the housing bubble, it really doesn’t fit. The severity of the downturn can easily be explained by the loss of wealth and the end of the construction boom, debt is at most a secondary consideration.

Pointer from Mark Thoma.

One point that Baker makes is that, in terms of employment, the recovery from the recession that coincided with the dotcom crash was very weak. What I would say, from a PSST perspective, is that we have had a lot of structural change over the past 20 years, and the process of creating new patterns of sustainable specialization and trade has generally operated more slowly than the process of making some old patterns unsustainable.