Financial Report of the U.S. Government

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The report is here. It looks interesting, but I find it difficult to parse. Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving parse it this way:

The liabilities reported in the FRUSG at this time last year included $12 trillion in debt held by the public, $6.5 trillion in federal civilian and military employees’ accrued pension benefits and other retirement and disability benefits, and $1.3 trillion in other liabilities, producing total liabilities of $19.9 trillion.

They point out that the liabilities for Social Security and Medicare seem suspiciously small, because the report acts as if these could be erased quickly with the stroke of a (legislative) pen. Technically, that is true, but realistically it is not. Instead, Liu, et al, propose to include benefits payable to current retirees.

Adding the $16 trillion in accrued Social Security and Medicare benefits payable to current retirees produces a total of $35.8 trillion in federal liabilities. These accrued Social Security and Medicare benefits are larger than the debt held by the public and are 45 percent of the total.

Pointer from James Pethokoukis.

This is still not very satisfying.

1. The liabilities to pay benefits to those of us not yet eligible ought to be included.

2. If we are going to include future government expenditures as liabilities, then we ought to include future tax revenues as assets.

3. We ought to use a discounted present value concept, rather than treat dollars that will be spent or received 10 years from now as equal to dollars that will be spent or received today.

Conceptually, I believe that what we want is a present discounted value of assets (including future tax revenues) and liabilities under current law (or what CBO projects law to be under its more-plausible “alternative scenario”). You can then look at the change in these values from year to year as an accrual-accounting measure.

Isabel Sawhill’s New Book

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Generation Unbound. I am reading it–may have finished by the time this is posted. In short, her thesis is that many twenty-somethings are having unplanned children out of wedlock, with detrimental consequences, particularly for the children.

Possibly related: This chart from Frances Woolley, showing Canadians’ intentions to have children, sorted by gender and age. What stands out is that among 15-24 year-olds, females are much keener on children than males.

Certainly related: Ben Casselman on a recent Pew survey of marriage patterns. Pointer from Jason Collins.

Robert Litan’s New Book

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It is called Trillion Dollar Economists. The concept is to show how useful the ideas of economists have been in business, finance, and public policy. For example, auctions have been used in business (Google’s ad words, e-Bay’s classified ads), price discrimination is very important in the real world (I like to tell students that “price discrimination explains everything”), option pricing is important, etc.

I like the concept, and I like much of the material. Litan’s taste in economics–what he considers to be valid and useful–is much closer to mine than that of just about anyone else who might attempt a similar project. However, this is one of those books that I wish had been structured differently. I will put my extended remarks below the fold. Continue reading →

Creative Class or Creative License?

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I started with Peter Lawler’s post.

Are we dividing, maybe more than ever, into a “creative class” and a “service class?”

I followed the link to Emily Badger’s piece.

Their analysis separates workers into three classes, derived from Florida’s research: the “creative class” of knowledge workers who make up about a third of the U.S. workforce (people in advertising, business, education, the arts, etc.); the “service class,” which makes up the largest and fastest growing sector of the economy (people in retail, food service, clerical jobs); and the “working class,” where blue-collar jobs in industries like manufacturing have been disappearing (this also includes construction and transportation).

I am inclined to accuse Florida and his colleagues of using creative license in defining the occupations that constitute the “creative class.” As I stated this summer, I view the process of urban gentrification as being driven by hospitals and universities. They have the money, they are expanding in cities (during my road trip this summer, I saw this in Pittsburgh, Cincinnati, and St. Louis), and they hire people with lots of education credentials, who then move into the city.

But these credentialed workers are not necessarily creative. They are not opening new vistas or making new discoveries or overthrowing social conventions. Many of them are administrators who, if anything, get in the way of the creative individuals in their institutions.

Look, I think that Florida and his colleagues are spot-on in their observation of the changing geography of social class. But the term “creative class” grates on me, because I think it is misleading.

QE and Fiscal Offset

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Tony Yates writes,

As Summers reportedly put it, while the Fed was engaged in quantitative easing, the Treasury was doing ‘quantitative contraction’. And surely the two arms of government should be better coordinated than that.

Pointer from Mark Thoma. My remarks.

1. Read the rest of his post.

2. Larry Summers is quite late to the party. Some of us have been talking about this issue for years. For example, almost four years ago, James Hamilton wrote,

since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it… What we find in the latest data is that this trend has continued over the last 3 months, even with QE2.

3. Wikipedia defines superstition as

the belief in supernatural causality—that one event causes another without any natural process linking the two events—such as astrology, religion, omens, witchcraft, prophecies, etc

I think that belief in the macroeconomic impact of the Fed can be properly regarded as a superstition. The Fed’s rules and regulations affect the allocation of credit, and it can aid particular banks when they get in trouble. However, its ability to control interest rates and nominal GDP is far less than most economists and investors believe.

Note that, as with the vast majority of my posts, this was written a few days ago and scheduled to be posted at this time. I find that staying away from immediate publication encourages me to evaluate the wisdom of a post using my “future self.”

Slowing Medical Innovation

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Scott W. Atlas has the bad news.

The CEO of one of the largest health-care companies in America recently told me that the device tax his company paid last year exceeded his company’s entire R&D budget. Already a long list of companies—including Boston Scientific , Stryker and Cook Medical—have announced job cuts and plans to open new centers for R&D, manufacturing and clinical trials overseas.

The bureaucrats at the Food and Drug Administration are also hindering medical-technology and drug development. According to a 2010 survey of more than 200 medical-device companies by medical professor and entrepreneur Josh Makower and his colleagues at Stanford University, delays of approvals for new medical devices are now far longer in the U.S. than in many other developed countries. In the European Union—not exactly known for cutting through red tape—it takes on average seven months to gain approval for low- to moderate-risk devices. In the U.S., FDA approval for similar devices takes on average 31 months.

The FDA is no longer safe and effective.

Economists Heart Uber

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The IGM forum asks its elite economists to react to the assertion that,

Letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare.

Of those who respond, 2/3 “strongly agree” and the remainder “agree.”

Let me suggest the next poll question: “Letting unlicensed medical providers compete with doctors and other licensed practitioners on equal footing regarding genuine safety requirements, but without restrictions on prices or services, raises consumer welfare.”

Or, more puckishly: “Letting unaccredited professors compete with Ph.D’s on equal footing using tests devised and graded by the same third party, but without restrictions on prices or services, raises consumer welfare.”

I wanted to title this post “economists heart markets,” but I fear that is not always true.

Again, I schedule posts in advance, so others have already mentioned this poll, but more favorably.

John Cochrane on Inequality

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He writes,

They believe that raising tax rates and a large increase in state direction of economic activity will reduce rent-seeking and cronyism. I assert the opposite, which is the rather traditional conclusion of the vast literature on public choice as well as obvious experience. If I were trying to be polite, I might say it’s an interesting new theory to be debated and investigated. But I’m not, and it isn’t. It is the cream on the cake of amateur ad-hoc assertions of cause-and-effect relationships in human affairs, changing the sign of everything we know.

There are some good thoughts in the piece, but there is too much ranting and too much asymmetric insight (believing that you know why your opponents hold their views better than they do themselves). When you engage in asymmetric insight, you are encroaching on Krugman’s turf. Best to stay out of there.

I think that the phenomenon of inequality is a poster child for what Jim Manzi calls “causal density.” Picture a causal relationship diagram with inequality in a circle in the center and arrows leading in and out from other circles.

There would be many arrows pointing to the inequality circle, representing possible causes. Some of them are bad things, like effective rent-seeking by wealthy people. Some of them are good things, like globalization, which reduces global inequality even as it increases inequality within counties.

There would be many arrows pointing out of the circle, representing possible effects. Some of them are bad things, like greater concentration of political power. Some of them are good things, like more saving. Note that I talk of these as possible effects, not necessarily actual effects.

Going directly at inequality by confiscatory taxation means you give up on trying to differentiate good from bad and just hope that you do more good than harm. In the context of causal density, this strikes me as a case of blind hope. For purposes of public policy, I think it is more likely better to focus on promoting the good things and thwarting the bad things. And if you say that you are not sure how to promote the good things and thwart the bad things, then I fail to see how you can be confident that confiscatory taxation will be beneficial.

Cochrane’s blog post is adapted from remarks he gave at a conference in honor of Gary Becker. John Taylor summarizes the conference.

Notes from a Hayek Tribute

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I refer to yesterday’s event, held at Mercatus.

1. Google has made me stupid. I know where Mercatus is, but the address on the invitation was different, and I went with the address, and with Google Maps, and got off at the wrong subway stop (along with at least two other would-be attendees).

2. Everyone who was everyone was there.

3. The main speaker was Israel Kirzner. He spoke really well. I took his main point to be that the causality ran fromm Hayek’s 1974 Nobel Prize to the interest in his insights rather than the other way around. Those insights include the knowledge problem, the implications of subjectivism, and the importance of the open-ended world in which we live, as opposed to the closed world of general equilibrium theory. Instead, the Nobel folks focused on Hayek’s macro work. Hayek’s speech at the Nobel might be considered an attempt to shift the focus to his other insights. Whether it was that speech (which Pete Boettke later pointed out was not accepted for publication by Economica and thus was not published until almost two decades later) or something else, a rebirth of interest in Austrian economics can be traced to that period.

4. Among the all-stars in the audience asking questions was Russ Roberts, who admitted that although he had moved far in the Austrian direction he still liked old-fashioned supply-and-demand. Kirzner was sympathetic, saying that it is much easier to teach new students supply-and-demand than to teach the insights of Hayek. (Note that Russ has made a remarkably good attempt to teach Hayek in his didactic novel, The Price of Everything.)

5. The afternoon was to feature three Nobel Laureates, but one of them, Edmund Phelps, was sick, and so Boettke read Phelps’ remarks. The other Nobelists were Vernon Smith and Eric Maskin, and I disagreed with both of them.

6. Smith said that the financial crisis was caused by principal-agent problems in mortgage securitization. He suggested that loan originators should not be paid up front, but they should instead be paid over time, as the mortgage is paid off. That is an approach for reducing principal-agent problems, but in my view there are better approaches–the stream of payments over time is a complex financial asset that few originators would be equipped to manage.

One alternative, of course, is to go back to the old originate-to-hold model, in which the loan originator is an employee of the bank, and the bank is in a position to reward or punish originators based on how well they adhere to standards. But more important, I do not believe that principal-agent problems were at the heart of the crisis. Originators were contractually obligated to deliver loans that met the guidelines of investors. Loans that did not meet those guidelines can be considered fraud, and there was plenty of that going on. But the real problem is that investors were, for the most part, getting the loans that they were asking for. The geniuses on Wall Street, and at Freddie and Fannie, believed that they could make money on loans with no down payment, shaky credit history, and so on, because–so the thinking went–if they bought enough of them, the risk would be diversified, particularly since everyone knew that house prices only go down in some places, never in lots of places at once.

Anyway, I’ve made the point about cognitive failure, as opposed to moral failure, at length.

7. Maskin said that mathematical proofs in mechanism design demonstrated formally Hayek’s point that markets make efficient use of information. During the Q&A, I asked if it was possible to reconcile the methodology of those proofs, which involve closed-end models, with the larger point stressed by Kirzner that the world is open-ended, including new technology that has not yet been discovered. Maskin answered, in effect, that all you have to do is extend the Arrow-Debreu state-space to include all possible technological discoveries, and the proofs carry over. I was not satisfied with that answer. Some possibilities:

a) He is correct, and I am too prejudiced against formal modeling.

b) I asked the question poorly, and had I been more articulate he would have given a different answer.

c) He just does not “get” the point about open-ended economics and that it eludes formal treatment.

Among those I spoke with afterward–and obviously there would be selection bias at work–the unanimous opinion was (c). This raises the intriguing possibility that mainstream economics and Austrian thinking are still a long way from reconciliation. In effect, Maskin is no further along the road to understanding Hayek than is a freshman to whom Kirzner would only teach supply-and-demand.

Perhaps Hayekian economics is a bundle of insights that are deceptively simple. Some people think that they get them, but, like Maskin, they are still stuck in the mainstream paradigm.

Russ and I are examples of mainstream economists who drifted toward a Hayekian view. I cannot think of economists who have drifted in the other direction. To me, this suggests that there is something difficult to grasp about Hayekian economics, or the Austrian viewpoint more generally, and that training in mainstream economics does not necessarily ease that difficulty.

That is my main take-away from the event.