Category Archives: Scott Sumner is Coherent

General update, April 28

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1. Peter Zeihan writes,

Despite its smaller population, Iowa has half-again more COVID-19 cases than Minnesota. I’ve little doubt that this is due to Iowa still having no stay-at-home orders from the governor as well as the fact that Iowa hosts the country’s densest cluster of meatpacking facilities.

But despite Iowa’s much larger overall caseload, the state has also suffered fewer than half the deaths from COVID as Minnesota. Over ¾ of Iowa’s positive cases are in people aged 65 and younger, an age group that is highly likely to survive the virus. Minnesota’s cases are skewed into older age groups, making death more likely.

2. Tyler Cowen notes that people are turning toward comfort music and comfort food. I would add “comfort news” to the list. For the right, it’s news that supports the view that the virus is no worse than the flu. Right-wing sites are still all over the Santa Clara study as proof of that. For the left, comfort news includes analysis that blames the virus crisis on President Trump. The left also seems to want stories that show that remote learning and/or charter schools are really awful. There is a recent NYT story filled with such anecdotes. Meanwhile, I know a private school teacher who says that she is trying to make the best of it, noting that in this environment she has the ability to mute a student at the touch of a button.

3. WBUR reports,

After Brigham and Women’s Hospital in Boston began requiring that nearly everyone in the hospital wear masks, new coronavirus infections diagnosed in its staffers dropped by half — or more.

Brigham and Women’s epidemiologist Dr. Michael Klompas said the hospital mandated masks for all health care staffers on March 25, and extended the requirement to patients as well on April 6.

Pointer from Scott Sumner, who has other interesting items in his post.

4. Scott also points to a Vox story pooh-poohing the notion that the virus came from a Chinese lab. The story does not address the argument made by Weinstein/Heying that bats and pangolins do not ordinarily hang out together (I cannot explain why this makes the virus unnatural, but that is what they say).

5. Michael T. Olsterholm and Mark Olshaker write,

The F.D.A. must bring order to this chaos and determine which tests work well. It should stick to its normal review process but expedite it by giving it top priority with its clinical reviewers and bringing in more reviewers as necessary.

But they also write,

as long as testing for SARS-CoV-2 is too limited or unreliable, the United States must ramp up what public health professionals call “syndromic surveillance”: the practice by medical personnel of observing, recording and reporting telltale patterns of symptoms in patients

I also feel better about low-tech methods than I do about the technocrats’ favorites of models and tests.

6. Casey B. Mulligan, Kevin M. Murphy, and Robert H. Topel write,

If an extensive shutdown of economic activity costs $7 trillion, largely in terms of economic hardship, and a limited response would lead to a $6 trillion loss of life, then an intermediate solution could, in principle, achieve a great deal.

If you are salivating for a cost-benefit analysis, these may be your guys. I just skimmed it, then I did a search for the word “mask” which came up empty, and decided to dismiss it. Tyler Cowen says “They think like economists,” which would only be praise if we didn’t know that they are economists.

7. Derek Thompson writes,

In the early innings of this crisis, the most resilient companies include blue-chip retailers like Amazon, Walmart, Dollar General, Costco, and Home Depot, all of whose stock prices are at or near record highs. Meanwhile, most small retailers—like hair salons, cafés, flower shops, and gyms—have less than one month’s cash on hand. One survey of several thousand small businesses, including hotels, theaters, and bars, found that just 30 percent of them expect to survive a lockdown that lasts four months.

Big companies have several advantages over smaller independents in a crisis. They have more cash reserves, better access to capital, and a general counsel’s office to furlough employees in an orderly fashion. Most important, their relationships with government and banks put them at the front of the line for bailouts.

Pointer from Tyler. That last sentence is the important one. The politicians talk about helping small business, but it’s the banks and the big companies that will wind up getting most of the newly-printed money.

Ironically, I think that ordinary people, as opposed to government officials, want to do the opposite. They want to support small businesses, and they don’t worry about the banks much. The contrast between the preferences of the people that earn money and the looting class that prints money could create some social tension in the months and years ahead.

Behavioral meta-economics

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From my essay on Pascal Boyer’s Minds Make Societies.

Concerning economic inequality, Boyer writes,

… the economy or society as a whole is construed as a gigantic collective action, to which everyone contributes in one way or other, and from which they may receive rewards.
… humans do not generally believe that any individual’s contribution could possibly be hundreds or thousands of times greater than anyone else’s.

This reinforces the instinct that economic inequality must be derived from power rather than from merit.

You might call this behavioral meta-economics. Like behavioral economics, it looks at human inclinations to commit errors. But what I mean by behavioral meta-economics examines human inclinations to commit errors in assessing markets and large-scale society.

The challenge that economics teachers face is helping their students to understand and overcome behavioral meta-economics. Although he did not use that term, I think Scott Sumner’s post expressing doubts about the value of teaching behavioral economics is derived from a view that teaching behavioral economics might be counterproductive in getting students to overcome their behavioral meta-economics.

Would forecasting tournaments reduce polarization?

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Barbara Mellers, PhilipTetlock, and Hal R.Arkes claim that they would.

We explore the power of an emerging methodology, forecasting tournaments, to encourage clashing factions to do something odd: to translate their beliefs into nuanced probability judgments and track accuracy over time and questions. In theory, tournaments advance the goals of “deliberative democracy” by incentivizing people to be flexible belief updaters whose views converge in response to facts, thus depolarizing unnecessarily polarized debates. We examine the hypothesis that, in the process of thinking critically about their beliefs, tournament participants become more moderate in their own political attitudes and those they attribute to the other side.

Pointer from Tyler Cowen.

I have my doubts.

1. People who hold polarized beliefs are not interested in making probability statements. It’s like asking a religious fanatic to give the probability that he is mistaken. It probably would be easy to steer people to rational thinking about politics if politics were about policy. But it’s not.

2. The interesting forecasts are conditional forecasts. As Scott Sumner put it, “(Unconditional) prediction is overrated.”
If there is strict gun control, will that reduce gun violence? We can argue about that, and we can even make empirical arguments, but we cannot run the controlled experiment that allows forecasts to be tested.

Does W = MP?

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Scott Sumner writes,

merely by changing the laws on intellectual property rights you will impact the distribution of wage income. But the appropriate IP laws are a complex issue, about which even free market economists do not agree. There is no obvious straightforward way to think about the marginal product of labor; it depends on many institutional factors.

This is somewhat beside his main point, but it pertains to the central point that I will make in an essay that I am working on. My point is going to be that the whole neoclassical apparatus of marginal product is not valid in the real world. We have no precise idea what the marginal value of a worker is to an enterprise. Can you calculate the bushels-of-wheat equivalent of what you accomplish with an hour of your labor? I bet not. We are mostly Garett Jones workers, meaning that we are overhead labor. And firms’ cost is mostly overhead (recall the discussion on this blog of hospital costs). And if the people inside the market cannot measure accurately the quantities that economists think matter, what does this mean when economists try to use market measures as a basis for intervention?

What I see as Sumner’s main point is probably this, concerning the perception of fairness among non-economists vs. economists:

people probably visualize something like the following thought experiment. In 1820, a hardy pioneer and his family move out to a remote valley in Montana, where they build a cabin, plant crops and hunt for animals. There are no other families nearby. Doesn’t that family earn their marginal product? Yes, but that’s not why our intuition tells us that their compensation seems fair. Rather the perceived fairness comes from the fact that they also earn their total product.

Thoughts on a wage subsidy

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Scott Sumner writes,

let’s suppose that in my town, eliminating the minimum wage laws would cause the equilibrium wage for entry level jobs to fall to $9/hour. (I think it would he higher, but I’ll use this example.) The government could then chip in enough wage subsidy to boost the equilibrium wage to say $14/hour, which is about $28,000/year for a full time worker.

1. Note that the wage subsidy has to go to more than just minimum-wage workers. Otherwise, the marginal tax rate on workers earning just above the minimum is too high. You can only phase out the subsidy slowly, or not at all. I am sure Scott was thinking that, but he didn’t say it.

2. But why go to the trouble of implementing a wage subsidy? We already have a wage penalty, namely the payroll tax. Just cut the darn thing. You only need to implement a subsidy if cutting the payroll tax to zero still doesn’t get the equilibrium wage up to your desired minimum.

The Bretton Woods Consensual Hallucination

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Scott Sumner writes,

You might think it’s no big deal that exchange rates becomes more volatile after the end of Bretton Woods—after all, Bretton Woods was a fixed exchange rate regime. Actually, it’s a huge deal, as you’d expect the real exchange rate to be unaffected by a purely monetary change, like switching from a fixed to a floating exchange rate regime.

Read the whole post. Sumner makes his points powerfully. I am not sure that anyone has an easy explanation for this volatility change.

1. An old-fashioned pure monetarist view of the Mark/Dollar exchange rate is that its movements are inversely related to movements of the relative money supplies. Hold the supply of dollars constant and print 10 percent more marks, and the mark should depreciate by 10 percent. In that case, you in order to arrive at the volatility depicted in the chart in Sumner’s post you have to imagine the two central banks at their respective printing presses randomly alternating between flooring the accelerator and slamming on the brake.

2. A modern monetarist (Sumner?) might not focus on relative money supplies, but the inclination would still be to attribute the variation in exchange rates to the actions of central banks. But it is difficult to imagine a central bank policy reaction function that would generate the swings observable in the chart.

3. The Dornbusch overshooting model would tell you to keep your eye on relative interest rates. If the American interest rate in dollars is higher than the German interest rate in marks, then the dollar has to become overvalued relative to its long-term equilibrium rate, so that the expected depreciation of the dollar equates the expected return on German bonds and American bonds. My problem with that model is: what is this “long-term equilibrium rate” of which you speak? The model treats this as if it were some widely known and agreed-upon benchmark. In my view, there was no such thing, especially after Bretton Woods broke down.

4. My view of money and inflation is that they are consensual hallucinations. If that term bothers you, think of them as conventions. We explicitly agree to accept currency as payment, and then we tacitly agree on what other forms of payment are acceptable. We tacitly agree on how we expect prices to behave as measured in terms of currency.

The Bretton Woods agreement fostered the consensual hallucination that inflation would be gradual and that exchange rates would be stable. These beliefs were self-reinforcing up until the late 1960s. When the U.S. started losing too much of its gold reserve trying to maintain the Bretton Woods exchange rate, something had to give. In August of 1971, President Nixon took us off Bretton Woods and left the dollar unpegged. My interpretation of the chart is that for the next dozen years or so people did not have any consensus on where values belonged. Inflation rates started to vary widely across countries and over time. Exchange rates fluctuated wildly. People’s expectations had no anchor.

As Sumner points out, the end of that episode makes a great case for monetarists. Fed Chairman Paul Volcker said he was going to do something to restore sanity, and sure enough, sanity was eventually restored. I am left waving my hands and saying that somehow sanity was restored, and it was coincidental that it happened while Volcker was Fed Chairman.

Remember: I think that the Fed is just a bank. Yes, I know that the liabilities on its balance sheet are an accepted form of payment. But there are a lot of accepted forms of payment.

Sales of homes to foreign buyers

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CNN Money reports,

The National Association of Realtors released a report Tuesday that said foreign buyers and recent immigrants spent an estimated $153 billion on American properties in the year ending March 2017. That was a 49% increase over the previous year and the highest level since record-keeping began in 2009.

The purchases accounted for 10% of the total value of existing home sales in the U.S. The report did not include new homes.

Pointer from Scott Sumner, who writes,

the sale of homes to foreigners does represent a US export, and creates lots of goods jobs for American blue collar workers. (Note that it doesn’t really matter whether they buy new or existing homes; the net effect on the housing market is the same.)

When a house is built, that counts as GDP. But when an existing house is sold, that is not new production, so it does not count as GDP.

Suppose an existing house gets sold by an American family to a someone in China or Canada, who leaves it vacant. Next, a new house gets built to house the American family that still needs to live somewhere. The new house gets counted as GDP. It seems to me that if you counted the sale of the existing house as an export, then that would be double-counting. So I am not with Sumner here.

I am more interested in the statistics in the article. Let us suppose that these foreign owners are not choosing between renting and buying in the U.S. They are buyers only, with no thought of renting. Let me guess that these Chinese and Canadians are just a bit more likely to be buying houses in San Francisco or Manhattan than in rural Ohio. Then this might help to explain why price/rent ratios are so divergent within the U.S.

Note, however, that the foreign owners might still be interested in renting out the properties they buy. In that case, the ratio of price to rent should still matter to them.

Scott Sumner’s macroeconomics: my thoughts

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He writes,

I’ll use “(e)” to denote a (market) expected value.

NGDP(e) is the single most important variable in macro; it should be the centerpiece of modern macro.

How can we work with a central concept that is purely mental? Nominal GDP, or NGDP without the (e), is a measure derived from the market exchange of goods and services. Most concepts in macroeconomics, such as interest rates, or prices, are observable when goods or securities change hands.

NGDP(e) is not an observable result of goods or securities changing hands. It is something in people’s heads.

But it’s even more problematic than that. At least 99.9 percent of all people do not even have an NGDP(e) in their heads. Even most economists do not have one.

Even if you had a futures market in NGDP, NGDP(e) would still be a purely mental concept. In the wheat market, if you sell 1000 bushels of wheat forward, on the day that the contract expires you could deliver 1000 bushels of wheat to fulfill the contract. (Actual delivery does not take place in such markets, because buyers and sellers unwind their positions at expiration.) But nobody can deliver NGDP against an NGDP futures contract. It is a pure bet.

In any event, an NGDP futures market currently does not exist. So the most important variable in macroeconomics is something that exists in people’s minds, and yet in truth it exists in almost no one’s mind. I worry that this is like saying that in physics the most important variable is the ether, even though no one can observe it.

Sumner writes,

Low and stable NGDP growth minimizes the welfare costs of “inflation”, and also leads to approximately optimal hours worked.

NGDP is an observable variable, and Sumner argues that low and stable NGDP growth is associated with good performance of inflation and employment. So why bother with NGDP(e) at all?

At the risk of putting words in Sumner’s mouth, I think he would say that NGDP(e) is important because the Fed affects NGDP by manipulating NGDP(e). How did he get there?

Monetary theorists used to say that the Fed manipulates NGDP by manipulating the quantity of money. The problem with this is that it is impossible to find a definition of money that can satisfy two conditions at the same time: (1) that the Fed can control it; and (2) it closely correlates with NGDP. The former requires a narrow definition of money, and the latter requires a broad definition.

Old Keynesians said that the Fed manipulates NGDP by manipulating the short-term interest rate. When the short-term rate gets stuck at zero, it has to manipulate the long-term rate. Or it becomes impotent. But even when it is not stuck at zero, the Fed’s manipulations often seem ineffective. For one thing, long-term interest rates sometime do not respond, or they respond perversely.

Then there are the New Keynesian types who say that the Fed manipulates NGDP by manipulating expected inflation. But to me that is another ethereal concept. At the risk of putting words in their mouths, the New Keynesians are saying that the Fed can mysteriously change expected inflation through “quantitative easing” even if short-term interest rates and long-term interest rates are both impervious to Fed actions, or even if long-term rates react perversely.

From the New Keynesian view, it is a relatively small step to Sumner’s view. Just swap out the ethereal expected inflation for the ethereal NGDP(e).

Got it? In modern macro, we have everybody working in the GDP factory. And we have everybody forming expectations about the price of the output from this GDP factory, or about the total nominal value of that output. And booms and recessions are caused by changes in these expectations. And the Fed can manipulate these expectations through an immaculate process that cannot be measured using interest rates or the money supply.

Oy.

I know that almost nobody who reads Specialization and Trade buys into my view that movements in aggregate price indices mostly reflect habits and inertia, rather than central bank operations. But when you see the contortions that monetary theorists have gone through over the years, I think I have a fair case.

The State of the Housing Market

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Scott Sumner writes,

It looks like the supply side is being hit by a triple whammy of adverse supply shocks

These are problems with funding, land and labor supply.

I think that the problem boils down to land in a few cities, like San Francisco, Los Angeles, New York, and Boston. And we know that the land scarcity is artificial, due to regulation. Public policy is to subsidize demand and restrict supply. My guess is that as the problem of housing scarcity becomes more apparent (there was a rather uninformative article about it in the WaPo last week), the politicians will work on subsidizing demand.