Saturday, August 27, 2011

Krugman's reality problem

Paul writes that Rick Perry and inflation hawks on the FOMC are stopping Ben Bernanke from implementing a Fed policy that would be effective in increasing employment and growth.

He argues that for these reasons Bernanke is not acting on the advice he gave to Japan in 2000 about unorthodox policies to combat their situation which has parallels with ours.

Monetary economics superstar Michael Woodford makes a similar, though more nuanced, argument as well.

In both cases, the policy they want Bernanke to follow is to announce that the Fed will tolerate/encourage/create and sustain higher inflation than the Fed actually likes for some number of years in the future.

the only way for monetary policy to be effective in a liquidity trap was via expectations: the central bank had to convince the public that it would sustain monetary expansion even after the trap was over.

Yes, and if Grandma had wheels, she'd be a Harley.

People, the Fed has no commitment mechanism. For their policies to be credible, they must be time-consistent, meaning that they must be in the Fed's best interest AT THE TIME THEY HAPPEN (in each period).

The Fed simply cannot announce a time-inconsistent policy path and get the public to base their expectations on this non-credible announcement.

I am not a big Fed fan, but let's not excoriate them for failing to do the impossible.

Friday, August 26, 2011

No HCR, No Jobs

I win drinks in bars sometimes by betting on the answers to two questions. First, what nation in the world "lost" the most jobs between 1990 and 2005? Second, what nation in the world leads in the value of manufacturing products? (Yes, I have fussed about this before, it's true)

The answers are the U.S. and China, but not in that order. China lost by far the most manufacturing jobs between 1990 and 2005, and the U.S. still leads the next largest manufacturing economy by a full 25%.

Think about it: in 1990, a "factory" in China was a large shed with 1,200 workers with sewing macihines, sitting beside a pile of patterns, cloth, and scraps. Today that factory is 100 times as productive, but it only has 30 employees tending modern and lightning fast machines.

The same thing has happened in the U.S., in industry after industry. As we increased our output, we "lost" jobs to increased productivity. We didn't ship those jobs to China; China lost even more jobs than we did.

The difference is that China more than replaced its lost jobs with new jobs, in new industries. Until recently, the U.S. has always been able to do that, too. What has changed?

The problem is both obvious and hard to see: it's health care costs. The U.S. has produced quite a few new service sector jobs, jobs at the lower end of the pay scale, jobs that don't usually come with health benefits.

But those "good" jobs, the ones that President is looking for? Health care costs have driven a wedge between what employers pay and what they get in terms of productivity. Wages for workers in many industries has been flat, or nearly flat, in real terms since 1990. But total compensation, especially health care costs on the best jobs, has increased at a rate of more than 3% per year on average. (Census Report in 2008)

Employers paying more, workers seeing no increase in take-home pay: a constantly increasing wedge being driven into job growth. More than all of our productivity growth has been sucked into the voracious maw of health care costs. Until we break the connection between jobs and health care, there is no way for the U.S. to begin to recover job growth.

Unfortunately, the fiasco of HCR in 2009 made this problem worse, not better. Our HCR law created a complex, expensive system with no cost controls. And since insurance cannot cost less than the care it covers, this implicit but very real tax on job creation is hamstringing the recovery.

Thursday, August 25, 2011


If you paid a bribe.... did you pay too much?

I hate it when that happens.

Pretty interesting "corruption quotient" quiz. Fascinating, in fact. It turns out I am a...

Buffalo! Your corruption quotient is down in the dump. Corruption is such an important part of your daily life that you see no difference between corruption and honesty. In our opinion you need to take a step back and review your take on corruption. In a corrupt instance, your philosophy will definitely have you rolling in the muck. You are a BUFFALO

Thanks to Chateau, for the link.

Balancing Budget Should Be Progressive Priority

Not all progs are goofy.

My man Don Taylor makes considerable sense, in fact, in his new book.


Oh noes, I'm obsolete!

Apparently Peter Theil & Moore's law are going to kill the species professorus tenuris!

At least according to James Miller of Smith.

Theil famously paid 20 kids $100,000 to not go to college. Not sure how big of a dent that will put in demand, even if he spend $100,000,000 every year to keep 1,000 kids out of our clutches, but Miller is worried.

On the supply side, Moore's law means that "20 years from now computers will likely be around a million times more powerful than they are today".

Apparently online education is "Halo" and I am "Pong".

Interestingly, Miller's article doesn't even mention what I think are the biggest real threats to my species; the proliferation of adjunt/non-tenure track/low paying positions and the explosion of high paying administrative positions.

KPC pal and uber-blogger Mark Perry is excellent on these points.

Wednesday, August 24, 2011

Headline of the day

"Greek police smash violent doughnut ring"

Well done, lads, I'm pretty sure that in Britain the doughnuts would have smashed the police.

Corporate [ TAXES ] are [ PAID BY ] People

Not sure why the goofy lefties are so gleeful about Romney's "corporations are people" statement (gaffe, they would say).

Here is a NOT goofy lefty, my PhD student Tom Schaller, going ballistic, even planetary orbital, over Romney. Tom is a smart guy. But like most people on the left, almost entirely innocent of economic knowledge. I submit that is the only reason they COULD be on the left, since an understanding of basic economics moves one over to the center right position, almost by definition.

Good lord. Let's do this. Corporations are owned by stockholders. Corporations don't pay taxes, stockholders pay taxes. They pay taxes on income, and they also pay an implicit tax in the form of reduced stock prices when gov't taxes corporate income separately. (Consumers may also pay corporate taxes, if the taxes are on inputs, raise prices of production, etc. I submit, without further discussion, that consumers are people).

Every intro econ book, even Samuelson, noted that the corporate income tax is "double taxation," and therefore inefficient. It restricts investment and reduces employment. Better to have a lower corporate income tax, and much more progressive income tax system.

The US has corporate income tax rates that are 5-10% higher than almost any other country we compete with. If you add fed and state CIT, our rates are 50% or higher; Germany is 30%; France is 33%.

Corporations can move around; stockholders won't move around, at least not as much.

So, Romney meant, "Corporate taxes are paid by people, my friend." And it was absolutely clear that that is what he meant. People misspeak in the heat of the moment. IT. WAS. CLEAR.

Look, I am not a Romney fan. He's an unprincipled gas bag. But this whole "corporations are people" kerfuffle really shows why our center left folks cannot understand even basic economics. The Obama admin, and as far as I can tell the entire Washington press, thinks corporations are just cows to be milked. Instead, they are geese, laying golden eggs. BUT GEESE CAN FLY. Why are "jobs" leaving the U.S.? Because our corporate tax rates are too high, and our regulatory policies too stupid.

And, in any case, corporate taxes are paid by people.

Stupid Economist tricks

Was reading the Economist, the Aug. 13-19 issue and found two very jarring and wrong statements.

On page 71 in the article "Poor dollar standard":

"The 66 members of the dollar block have a collective GDP of over 9 trillion...the list includes...rebels such as Venezuela, which expresses disdain for American imperialism even as it surrenders its monetary sovereignty to America's central bank".

Wow. That is amazingly incorrect.

According to page 89 of the same issue, Venezuela's inflation rate is around 27% while the America's is under 3%. It's pretty clear that Hugo, for all his faults, hasn't "surrendered" his inalienable right to have an irresponsible national monetary policy.

On page 70 in the "Buttonwood" column:

"The Bretton Woods system had strict capital controls, designed to protect the exchange-rate peg. But these became unnecessary in an era of floating rates."

This is somewhere between naive and wrong. First, the written articles of the IMF from Bretton Woods, mandated full currency convertiblity for trade purposes (which wasn't actually achieved until the early 1960s), but allowed individual countries to decide whether or not to have capital controls. Controls were not part of the system requirements. Further, rather than the end of the Bretton Woods era causing the decline of capital controls, as the article claims, the decline of the effectiveness of controls DURING the Bretton Woods era helped to bring about the demise of the system.

Buttonwood should seriously consider reading Barry Eichengreen's classic "Globalizing Capital".

Economist FAIL.

Tuesday, August 23, 2011

Two Party System

The Daily Show Correspondents explain the two party system.

(Nod to Neanderbill)

My Dinner with Tyler

Sure, I'm riffing on the movie title.

But this was very, very interesting: dinner at Chutny, breaking the Ramadan fast, along with Chug R.

And, while I can't speak for Tyler formally, I can quote from MR: "There are plenty of good arguments that taxes have to go up." We agree on that, completely. At dinner, we came to the conclusion that the actual solutions we expect, which do NOT involve taxes going up in a sensible way, are probably worse than other solutions we can imagine.

If you are not going to cut spending, you have to raise taxes, because DAFT. And nobody wants to cut spending.

The point is this: the BEST case for something that is actually feasible looks like this:

1. Cut military spending
2. Solve Soc Sec with combination of means testing and delayed retirement age
3. Health care reform, with most preferable outcome being a Singapore-light system. Even a German style system, which preserves considerable competition, and controls cost.
4. Medicare reform. But #3 solves #4, automatically. We can't solve Medicare, we have to finesse it.
5. Mild inflation, 5%, for 5 years
6. Tax increases and cutting deductions

Do I favor the above policies? I do not, in an unconstrained world where I was dictator.* Do I think that the actual package of stupid s**t we are going to pick is substantially WORSE than the above package? I do.

*Non-doughy samosas for everyone!

Tuesday's Child is ALSO Full of Links

Back from DC. Some links, with no theme or coherent order.

1. Philosophy as psychotherapy

2. R. Branson running nekkid from Necker

3. Amusing earthquake tweets (the tweets are funny, not the earthquake). (I particularly like the premature looteration)

4. Explaining charter school effectiveness (Gated, but I have a PDF. Send me an email at munger at duke dot edu)

5. Pronouns: The secret code of power and weakness

6. Jeff Miron: Capitalism--It doesn't suck

(Nod to Chateau, the Blonde, and Kevin Lewis)

Monday, August 22, 2011

This video presented by Tucks Medicated Pads

People, Ken Tremendous directs a music video for a cool new song by Colin Meloy that is based on a section of "Infinite Jest".

Life is good.

Time to make the donuts


Another semester starts today.

Don't get me wrong, I probably have the best job in the world, but the sudden influx of 23,000+ students and the imposition of a fixed schedule always takes me by surprise somehow, even after 26 years of being a professor.

Last night I dreamed that Mr. 2T got lost on campus and I couldn't find him. I couldn't recognize buildings (the dream campus was a mix of OU, George Mason, Duke and my old K-12 building), and someone had put a snow capped mountain between the front and back halves of the campus.

Tomorrow, I'll be sweaty and nervous when my classes meet for the first time.
I know, there are tons of people in the world with actual, real problems.

Thanks for listening anyway.

Sunday, August 21, 2011

Twisted steel & Sachs appeal

In an otherwise well thought out and well written piece, Jeff Sachs joins the list of economists who throw unreasoned, knee-jerk, shout outs to "greenness" into their economic analysis.

Here's the quote:

The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy.

This sentence appears in the third graph. There are eight paragraphs afterward that flesh out what Sachs considers to be the path to recovery. Carbon, or green, or alternative energy is not ever mentioned in any of his analysis.

Is it some kind of secret lefty code way to say "hey, you can trust me and my views, I love windmills just like you"?

I really wish economists would either (A) cut it out, or (B) explain why public investment in greenness can help lead to recovery (in a way that would be better than a simple carbon tax).

But I'm not holding my breath.