Den of Curiosity

If you're here, you're in the right place. This microblog aims to explore technical economic issues in a non-technical manner. I hope you find it both interesting and informative. Enjoy! - Tim M. "Good questions outrank easy answers." - economist Paul Samuelson "The first and simplest emotion which we discover in the human mind is curiosity” - philosopher Edmund Burke

[denofcuriosity]

Gimme More, Mankiw!

I am a longtime follower of economist Greg Mankiw's blog. His Principles of Micro textbook was my first exposure to college-level Econ, and it is in large part to the awesomeness of that book that I fell in love with Economics. With that out of the way, sometimes Prof. Mankiw's blog posts really annoy me! 

Here's a screenshot of the recent offending post:

That is the entire post! I realize Mankiw has a busy life, but you probably should not post a chart, give it your own provocative/biased title ("The Growth of the Welfare State"), and then provide no further analysis for your readers (many of whom are likely undergraduates!).

To be fair, the link goes to a Congressional Budget Office report entitled "Growth in Means-Tested Programs and Tax Credits for Low-Income Households", which provides its own solid commentary. But, how many of his readers are going to go read an entire report (or even the lengthy summary of the report) vs. how many of them will see "THE GROWTH OF THE WELFARE STATE" above a graph that appears to be showing THE GROWTH OF THE WELFARE STATE, conclude that America is suffering from THE GROWTH OF THE WELFARE STATE, and read no further.

If posts like these weren't such a common occurrence, then I would let it slide; however, this has increasingly become Mankiw's blogging style.

P.S. So as not to be hypocritical, here are just a few things Mankiw could have pointed out: 

The recession-induced growth of benefits spending in recent years

How the drop in GDP (denominator) will make the "Welfare State" seem larger, even if welfare spending does not grow in absolute terms, since the chart is in % of GDP

How the upward trend is caused almost entirely by Health Care spending

[denofcuriosity]

Our Economy is Not a Sports League: Implications for Immigration

Yesterday I was watching basketball and the announcers were discussing foreign players in the league. This led me to reflect upon how many people in the U.S. think of the economy, specifically in regards to immigration, as similar to a sports league in its functioning.

If we take the NBA, for example, there are a set number of players that can be on a team's active roster (12). There are also 30 total teams. This means that only 360 people in the entire world can be active in the NBA at any given time. Thus, if a player from Europe makes the cut for an NBA roster, this literally leaves one less NBA job opportunity for an American.

This is true of the NBA, but it is not true of the U.S. economy as a whole. If an engineer moves from India to the U.S., this sets off a chain of complex events. First, the new engineer obviously does increase the labor supply of engineers, causing the wages of engineers to fall. However, since the number of engineering jobs in the economy is not immutable, a lower wage for engineers will lead to more hiring of engineers. Thus, the foreign engineer does not necessarily "steal" a job, 1 for 1, from an American engineer.

However, you may wonder, the immigrant still lowered the wage of the native engineer, so it's not exactly no-harm, no-foul. But, the story does not end here! The presence of more engineers means companies will find it profitable to hire more bosses to manage the engineers. As well, with more engineers, this creates a demand for more workers to carry out the engineers plans. Further, the newly-arriving engineer creates other demand through purchasing of U.S. goods and services. When a person moves from India to the U.S., he now gets his taxes done by U.S. accountants, his hair cut by U.S. barbers, his groceries provided by U.S. supermarkets, etc. All of these effects will increase the wages for non-engineers (constant supply + increased demand).

But, you notice that the native engineers are still hurt by the arrival of the foreign engineer, via lower wages! First, this might not even be true if, for example, the interaction between engineers causes them to increase their productivity or if the skills of native and foreign engineers complement each other instead of compete with each other.

Leaving aside those possibilities for now, it would be a bizarre scenario in which all immigrants were engineers. Imagine a foreign doctor also moved to the U.S. to practice medicine. This would push down the wages of U.S. doctors, making a visit to the doctor cheaper. All of a sudden, the purchasing power of engineers has increased, because he can buy more doctors visits (and other goods/services) with the same salary. Multiply this effect based on an influx of foreign workers in agriculture, lawn service, accounting, child care, etc. and this can get to be quite large.

Ultimately, the issue comes down to whether the potential negative effects of competition from foreigners for your job outweighs the potential positive effects of increased demand for the goods/services you produce and the lower costs of the goods/services you buy due to immigration lowering labor costs. The U.S. does not have completely open borders, so we can only guess at which effect would outweigh the other; however, what we do know is that the impact of immigration on U.S. labor deserves a far more complex treatment than the "immigrants steal our jobs!" rhetoric that derives from simple-minded thinking of the U.S. labor market as a fixed entity, a la a sports league.

P.S. Below are the results from two of the more well-known attempts at estimating the wage impacts of immigration. The Borjas estimates are the most negative you are likely to find in the economic literature, and even those estimate a (small) positive wage effect on the average U.S.-born worker. Personally, I find the Ottaviano-Peri methodology more convincing than the Borjas one, but that's open for debate.

[denofcuriosity]

Unemployment's Far-Reaching Consequences

The abstract from "New measures of the costs of unemployment: Evidence from the subjective well-being of 2.3 million Americans" by John Helliwell and Haifang Huang (highlighting is mine):

By exploiting two very large samples of US subjective well-being data we are able to obtain comparable estimates of the monetary and other costs of unemployment on the unemployed themselves, while simultaneously estimating the effects of local employment on the subjective well-being of the rest of the population. For those who are unemployed, the subjective well-being consequences can be divided into income and non-income effects, with the latter being five times larger than the former. This is similar to what has been found in many countries, as is our finding that the non-income effects are lower for individuals living in areas of high unemployment. Most importantly, we are able to use the large sample size and variety of questions in the BRFSS and Gallup daily polls to reconcile, and extend to the United States, what had previously seemed to be contradictory results on the size and nature of the spillover effects of unemployment on subjective well-being. At the population level the spillover effects are twice as large as the direct effects, making the total well-being costs of unemployment fifteen times larger than those directly due to the lower incomes of the unemployed.

[denofcuriosity]

Today's Poverty Rate Is Not Your Grandparent's Poverty Rate

If one wants to reach accurate conclusions, it is best not to start with inaccurate "facts". Those who ponder why the poverty rate has not fallen since 1960 are ignoring what the official poverty rate actually measures and how the social safety net has changed over the past half century.

In the 1960s, the vast majority of people covered by the safety net received cash assistance. This form of assistance was factored into the poverty rate. Over time, those receiving cash assistance have become the minority, as cash benefits were replaced with tax credits, food stamps, and other in-kind benefits. This type of welfare does not count toward lowering the poverty rate.

Here is how the poverty rate would look if we factor in the changing safety net:

If the government were to completely eliminate the safety net tomorrow, the poverty rate would jump from 15.5% to 28.6%. Now, the actual jump would likely be less, since there are some disincentives to work in anti-poverty programs; however, research suggests that, since the safety net is geared toward helping disabled and elderly people, the jump in the poverty rate would be nearly the entire way to 28.6%.

In fact, if you are working-age, healthy, unemployed, and do not qualify for unemployment insurance, then the safety net has very little to offer you. Thus, the work disincentives from the U.S. safety net are likely insignificant.

[denofcuriosity]

Over the following century, economists like John Stuart Mill, Walter Bagehot, Irving Fisher, Knut Wicksell, and John Maynard Keynes devised a list of steps to take in order to avoid or cure a depression. 1. Don’t go there in the first place: avoid whatever it is – whether external pressure under the gold standard, asset-price bubbles, or leverage-and-panic cycles such as that of 2003-2009 – that creates the desire to deleverage. 2. If you do find yourself there, stop the desire to deleverage by having the central bank buy bonds for cash, thereby pushing down interest rates, so that holding debt becomes more attractive than holding cash. 3. If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market; this, too, will make holding debt more attractive. 4. If that fails, stop the desire to deleverage by promising to print more money in the future, which would raise the rate of inflation and make holding cash less attractive than spending it. 5. In the worst case, have the government step in, borrow money, and buy stuff, thereby rebalancing the economy as the private sector deleverages.

Brad DeLong lays out an agenda for dealing with economic slumps.

As you may note, even a politically-liberal economist like DeLong lists fiscal stimulus as a last resort. Sometimes, one can miss the nuances of others' opinions.

[denofcuriosity]

Krugman (Indirectly) Responds to Hans-Hermann Hoppe

Yesterday, I somewhat facetiously referred to economist Hans-Herman Hoppe as the worst economist ever for his ignorant remarks concerning what people like Paul Krugman (and the overwhelming majority of mainstream economists) believe regarding monetary stimulus. Krugman responded to Hoppe this morning (read the whole thing! It's short.). 

Here's an excerpt:

Aside from the silliness of the exercise, this little exchange is another illustration of a point I’ve noticed before: the way hard-right commentators assume that the other side must be their mirror image... They believe that deficits and printing money are always evil; liberals must be for deficits and money-printing under all circumstances...

...But obviously looking at what I actually write would just be too painful.

Anyway, thanks guys, you made my day.

[denofcuriosity]

To paraphrase an old line about Vietnam, sometimes it seems to me that we haven’t spent four years discussing the response to economic crisis; we’ve spent one year discussing the crisis, four times, with the discussion starting up each year as if nobody can remember or learn from what went before, and with constant repetition of the same old errors and fallacies.

Paul Krugman

[denofcuriosity]

Hans-Hermann Hoppe: Worst Economist Ever?

Ok, I don't actually have a ranking of economists, and I am not familiar enough with Hoppe's work to know if he actually would rank last on such a list. But, I did see this clip of him last week, and it seems to reveal that he actually doesn't understand anything about mainstream monetary economics.

To be clear, I am not hyperbolically labeling him as "worst economist ever" for disagreeing with mainstream economists. Rather, I am poking fun at him for not understanding what mainstream economists even believe! Watch the short (approx. 1min.) clip (my response below the video):

Here is Hoppe's challenge to those who think a Central Bank can "make society richer":

Explain to me how increase in paper pieces can possibly make a society richer. If that were the case, explain to me why is there still poverty in the world. Isn't every Central Bank in the world capable of printing as much paper as they want? ... I'm sure [people like economist Paul Krugman] cannot answer this type of question. Nobody can answer this type of question!

Krugman probably can't answer the question, because Krugman would not agree with the viewpoint you are assigning to him! I know of no mainstream economist who believes you can just print money and make people wealthier under any and all circumstances. Open up a Macroeconomics textbook used at any university, read through it from cover to cover and you will see zero mentions of unlimited printing of money "creating wealth". Hans-Hermann Hoppe: Greatest Straw Man Creator Ever?

Alas, under very specific conditions, the consensus view of mainstream economists is that monetary stimulus ("printing money") can lead to a better economic outcome ("create wealth"). To keep it simple, as Hoppe indicates that "technical details" are unnecessary by the use of his scary finger wiggling, when there is a shortage of money in the economy, resources that could be used will sit idle, i.e. unemployed labor, empty storefronts, vacant homes, etc. This occurs for several reasons, one of them being a market imperfection where it is much more difficult to decrease wages and, to a lesser extent prices in times of decreased demand. In other words, wages and prices are "sticky." 

If not for the stickiness, wages/prices would fall, and these resources would go back to being utilized. With stickiness, money can be printed to put these resources back to work up to the point that you start running up against supply constraints, i.e. low unemployment, open stores, occupied homes, etc. At this point, the economy no longer has the capacity to produce more in a timely manner. This will reveal itself with increasing inflation. 

Hans-Hermann Hoppe presumably does not believe in demand shortfalls, or at least does not believe that trying to fix them with monetary stimulus passes a cost-benefit calculation. I disagree, but these are valid points to argue. However, claiming that mainstream economists teach that monetary stimulus creates wealth under all conditions misrepresents their views so drastically that he deserves to be mocked and ridiculed.

This guy actually teaches taught economics at a university (correction: as ericphillipng points out in the comments, Hoppe left UNLV in 2008 and no longer teaches at a university. There are still websites, including hanshoppe.com, that list him as a current UNLV professor, but those appear to be inaccurate.). As the principal from Billy Madison said, "What you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul." 

P.S. By the way, a reference to this quote by Hoppe from Ron Paul during his weekly address was what brought me to the video above. I figured if Ron Paul was quoting him, then this must be the type of economic thinking a lot of people buy into.

[denofcuriosity]

Earlier today, Dan Mitchell of the Cato Institute advocated switching from GDP as the official measure of the economy to GDI (gross domestic income). He explains here (bolding mine):

But here’s the problem. GDP numbers only measure how we spend or allocate our national income. It’s a very convoluted way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub.

Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable?

Above, I have graphed both GDP and GDI since 1980. I'm not sure what good switching would do?

Karl Smith of Forbes thinks making the switch would lead to a more intuitive explanation of  stimulus (bolding mine):

Then we can talk about whether fiscal and monetary stimulus boosts wages and profits. When the discussion turns to nominal targeting, we can say Nominal Gross Domestic Income Level Targeting (NGDILT) ensures that total Wages and Profits grow at smooth steady rate. The distribution is of course subject to the laws of microeconomics, but we we are trying to make the total steady and predictable.

Is someone going to object and say they prefer an economy where total wages and profits are subject to booms and busts? Or that we should get-the-rot-out by letting both all wages and profits fall?

Will our real business cycle brethren find it so hard to believe that we think a sudden unexpected shortfall in all wages and profits might create some problems in servicing nominal obligations?

This might not be the effect Dan Mitchell was hoping for.

[denofcuriosity]

Why Average Rates Matter More Than Marginal Rates

Garett Jones has a very interesting blog post over at EconLog (bolding mine): 

When it comes to career choices or the state you'll live in or whether to have an extra child the marginal decision is very big, and a rational person will base that decision mostly on the average long run costs and benefits.  In cases like this, the official marginal tax rate won't matter nearly as much as the long run average tax rate.  

This isn't just a theory: It appears to be true for that most economistic of organizations, the multinational corporation...  

When making the go/no-go decision, corporations care more about their long run tax bill.  That's because the marginal decision is the go/no-go decision.  

Bringing this to the current political discussions over taxation, Jones points out that John Boehner has fought to keep marginal taxes from going up on the rich; however, the Speaker has shown some consideration of closing loopholes, aka increasing the average rate. Jones thinks this has it backwards! 

If average rates are what matter most to the economy, then it seems Boehner should rethink his position. Allowing marginal rates to go up likely won't have much negative economic effect, so long as the average rates the rich pay (including loopholes/deductions) are kept low. 

P.S. Here is an academic article by David and Christina Romer that found little evidence of economic impacts from marginal tax rate changes during the 1920s and 1930s.

[denofcuriosity]

This chart shows the extent to which families have to cut back on their food bill when they suffer a job loss. It can take years before the average household gets back to the level of food expenses prior to the unemployment spell. This suggests that families have to slash the budget on basics in times of unemployment, as the median unemployed person has under $250 in savings when she loses her job and bills have to be paid.

Keep in mind, this is even with Unemployment Insurance available. Perhaps the largest benefit of UI is helping to alleviate cutbacks on necessities, but it looks like it may not be doing enough in those regards.

[denofcuriosity]

The Upside of the Downside of Unemployment Insurance

One of the main arguments against overly-generous Unemployment Insurance is the disincentive for unemployed workers to go back to work. This effect can clearly be seen from the jump in people finding jobs right before UI terminates. Thus, the extension of unemployment to 99 weeks during the Great Recession likely added some to the unemployment rate. But, does that cost necessarily outweigh the benefits of UI?

In the absence of government support during an unemployment spell, immense pressure would exist for a person to take the first job offer that comes his way. However, this offer may be in a different field, pay very little, or require making a financially-burdensome relocation. 

The presence of unemployment insurance allows a jobless person to take more time in order to find a job that better suits them and/or offers better financial compensation. This makes sense for the person, but also for the economy in terms of optimal matching of people's skills to jobs and the creation of higher-paying jobs. It also makes sense that during a massive job-destroying recession like the recent downturn that unemployment insurance would tend to be more generous.

[denofcuriosity]

Natural Rate of Unemployment Up Around 6%, Still Room to Stimulate

In a paper last summer, four Federal Reserve researchers calculated that the natural rate of unemployment, historically around 5%, had risen to approximately 6% in the U.S. economy. The Federal Reserve's published calculations support this estimation:

The takeaway from such a finding is that the higher the natural rate of unemployment, the less that stimulative measures can do for the economy. However, with unemployment still up near 8%, there remains quite a bit more room to stimulate before inflation becomes a worry.

In addition to the the two-point gap between current unemployment and the short-run natural rate of unemployment, as the economy grows, the natural rate of employment should come down. For instance, generous unemployment insurance ranks as one of the more important causes of the increased natural unemployment rate. However, if demand stimulus creates jobs, then Congress will be more likely to stop extending unemployment insurance benefits. This will bring the natural rate down, allowing further room for stimulus. 

[politicalprof]

Want to fix the US’ long term debt? Fix health care pricing. 

From Ezra Klein

[denofcuriosity]

If and when self-driving cars really start taking off, it’s easy to see where the road leads. Firstly, they probably won’t be operated on the owner-occupier model that we use for cars today, where we have to leave our cars parked for 97% of their lives just so that we know they’re going to be available for us when we need them. Given driverless cars’ ability to come pick you up whenever you need one, it makes much more sense to just join a network of such things, giving you the same ability to drive your car when you’re at home, or in a far-flung city, or whenever you might normally take a taxi. And the consequence of that is much less need for parking (right now there are more than three parking spots for every car), and therefore the freeing up of lots of space currently given over to parking spots.

Felix Salmon, speaking on the benefits of self-driving cars

[denofcuriosity]

Does Government Have a Role to Play in Poverty Reduction?: A Response to Hadley Heath (Part I)

On this blog and in my life, I generally try to give a fair hearing to different perspectives, look at the evidence to date, and offer some sort of conclusion. Today, however, is one of those days in which you watch someone present her side’s argument in such a negligent manner that it cannot be treated with anything less than a whole series of blog posts.

The argument I speak of comes courtesy of the Center for Freedom and Prosperity’s “Economics 101” video entitled “Free Markets, Not Redistribution, Is Best Way to Reduce Poverty”.

The speaker, Hadley Heath of the Independent Women’s Forum, begins by setting up “the Left’s” position on how to combat poverty, which she describes as using “so-called means-tested programs such as entitlements that redistribute wealth from the haves to the have-nots.” And, that “the Left” views people opposed to redistribution as “heartless and uncompassionate toward the poor.”

Her position: "big government" policies end up hurting the poor people they are created to help, while free-market capitalism is the "most compassionate economic policy approach to empower people at the bottom of the socioeconomic scale." As evidence for her thesis, she points out that social welfare programs create perverse incentives, and government programs "leave out the most important aspect of getting out of poverty, which is economic freedom and opportunity."

In following posts, I will examine the inaccuracies and misleading claims she makes in the rest of the video. But, for now I will just comment on the way she stages the debate of government redistribution vs. free markets.

First, the entire premise that we must choose between government redistribution and free markets creates a false choice. Sweden, Denmark, Austria, Finland, and Germany are all free-market economies that each spend over 20% of their GDP on social protection (i.e. income transfers and spending on pre-transfer income redistribution). The U.S., also a free-market economy, spends less than 10% of its GDP on social protection. Why should we fear that more spending on income transfers would transform the U.S. into something like Cuba or Greece and not Germany? The real world shows us that free-market economies and welfare states are not mutually exclusive conditions.

Second, Hadley creates a straw man when she describes Liberals' view on social insurance as mainly about redistributing wealth, with the implication that this is redistribution mostly for the sake of redistribution. President Obama described the purpose of a social safety net in very different terms during his second Inauguration:

We recognize that no matter how responsibly we live our lives, any one of us at any time may face a job loss or a sudden illness or a home swept away in a terrible storm. The commitments we make to each other through Medicare and Medicaid and Social Security, these things do not sap our initiative. They strengthen us. They do not make us a nation of takers. They free us to take the risks that make this country great.

As the President points out, and Hadley ignores, the main reason for social insurance is, as the name suggests, to allow society to pool resources in order to protect against unexpected emergencies that could strike any of us at any time. Knowing that you are protected from certain downsides allows people to take risks in the context of our amazing free market economy. If people can attempt to start a business knowing they will not end up destitute if it fails, they are more likely to leave their current job and become entrepreneurs. I imagine that Hadley favors greater entrepreneurship.

Finally, Hadley posits that the most important aspect of escaping poverty is the economic freedom and opportunity that comes with it. This is a subjective claim, so I can't disagree on a factual basis, but this seems incomplete to me. Yes, economic freedom and opportunity are great, but that does not strike me as "the most important aspect" of no longer being impoverished.

Rather, it would probably be shedding the anxiety over how to pay for your children's expenses, medical care, home repairs, loans, etc, and the gain of a greater peace of mind. Or, the fact that you and your children's health will drastically improve now that you can afford to go to the doctor or buy healthier food. But notice the obvious solution to curing these ills: having money to cover these expenses.

If Hadley were to admit that "no longer being poor" was the most important aspect of escaping poverty, then it would become all too clear that the government can play a straightforward, positive role by redistributing money from those who live life with little or no financial anxiety to those who live with great anxiety.

[denofcuriosity]

Against Small Business Fetishism

You may have noticed politicians have a special fondness for small business. It’s a prime example of how policy initiatives that bring Washington together in a bipartisan manner are often bad ideas (economists are essentially unanimously opposed to special treatment for small business). 

With all the attention paid on promoting small business, one would think that they are the true “job creators” in America. Well, that’s not quite accurate. Rather, it is young businesses. 

The reason why young businesses are job creators, rather than small businesses, makes a lot of sense. If a small business remains small after a decade or so, it is likely due to one of two reasons: the business isn’t very successful and likely never will be, or the business wants to stay small. Either way, one should not expect to see much job creation out of non-young small businesses.

On the other hand, look at start-ups. Start-ups are especially prone to the “sink or swim” dynamic, but in their first year they are almost 100% job creation. On net, start-ups create the most new jobs in the economy.

Young large firms are the other prime source of net job creation. This is also intuitive, since young large firms have proven themselves successful by having hundreds of employees within a short lifespan.

The next time you hear a politician going on at length about how we must give special treatment to small businesses on the grounds they are essential to the economy, just replace the word “small” with “young” and his words will be closer to the truth.