Friday, December 14, 2012

Triple alignment: The Age of Aquarius

...when Jupiter aligns with Mars ...
Three sources point toward a triple alignment in 2016.
First the Fed promises to hold interest rates at zero through 2015. In other words, don't expect much before then.
Second, the IMF has a nice study of US real estate markets in its background studies for the 2012 Article IV Consultation with the U.S. Taking household formation, the depreciation of housing, new construction rates and vacancy rates, they see housing markets recovering in ... 2016.
Finally, my own projection from the rate of job creation relative to the growth of population -- the normalization of age-specific employment to population -- points to 2016 as the point of covergence with "normalcy."
According to Wikipedia,
Traditionally, Aquarius is associated with electricity, computers, flight, democracy, freedom, humanitarianism, idealists, modernization, astrology, nervous disorders, rebellion, nonconformity, philanthropy, veracity, perseverance, humanity, and irresolution.
OK, I'll settle for a level of unemployment that gives new graduates a shot at a job. The Euro meltdown, the Chinese real estate bubble, and Congressional intransigence can all delay the advent of the new age. However, the closer we get to 2016, the greater the chance that our own domestic dynamics dominate.
Unfortunately, we're only at the start of 2013. So we've three more full years to go. We may not count this as a lost decade. Scant consolation.
...mike smitka...

Friday, November 16, 2012

Employment Rates and the Recession

The Great Recession entailed a huge rise in unemployment; that is easy to track, as it is prominently featured in the monthly Bureau of Labor Statistics releases and is soon thereafter up on the St. Louis Fed FRED data site. Almost as well known is the rise in workers on (involuntary) short hours. That sort of correction is standard, reflected in the "U-6" series of "alternative measures of underutilization."
During the current US recession workers also dropped out of the labor force in unprecedented numbers. While that is a major component of adjustment to business cycles in Japan (and unemployment a smaller component), that has not been the case for the US. During the 2001 recession, employment as a share of the population for the middle of the labor market (ages 30-54) fell by 1.7 points. In contrast, between January 2007 and January 2010 the ratio fell by 5.1 points.
During the past decade, however, the age composition of the population shifted markedly; above all, the baby boomers are now entering retirement. This makes it more difficult to summarize in a single number. But it also turns out that the dynamics across different cohorts are quite different. My own prior was that the Great Recession led to a wave of early retirements, which would show up as a drop in the ration of employment to population. In fact, the ratio rose rather than fell.
This brief note focuses on presenting the data.

Friday, November 9, 2012

Finessing Norquist

Republicans can have their cake and eat it too
The "fiscal cliff" is in reality a slope that gets steeper and steeper. We need to strike a deal in early January, before the economy gathers downhill momentum, but there is room to maneuver. This opens up the possibility that Republicans can have their cake and eat it too. Once January 1st arrives, the "temporary" Bush taxes cuts will have expired. Any final package will reasonably provide a cut to the post-January-1st level of the alternative minimum tax. It will probably include other minor adjustments. So what asked to vote, what Republicans can say "aye" to a package that contains tax cuts and not tax increases.
Object to this as sophistry. Fine, but sophistry is better than demagoguery!
Have Americans given Obama a mandate? Well, he's been pretty clear about raising the rather low tax rates the truly rich face, rates significantly lower than what I pay. He won the election. So people had an opportunity to say "no" and ... didn't.
Locally, my House district re-elected the Republican incumbent, Bob Goodlatte, against token opposition, a virtually unknown Democratic candidate running for office for the first time. Goodlatte won by the expected wide margin. Does that mean that he has a mandate? I don't think so; a mandate comes only when you've contested against a serious candidate, and the voters chose you. Even then, few people vote on a single issue, and few elections are decided on a single issue. Goodlatte is good on constituent services, and has done a modest job of lobbying for local pork. Did we elect him to bring home more bacon for all, or to procure a piece of choice filet mignon for the few? I rather think the former.
We can step over the edge of the "cliff" and still step back. That provides room for creative and constructive bargaining. Lets hope our putative leaders in Washington, Republican and Democratic, are up to the task.
...mike smitka...

Wednesday, November 7, 2012

Confirmations and Continuity

...Obama is already on the ground and running...
Despite all the verbiage spilled this election, I've encountered no mention of the challenge that faces every new president of naming top administrators – secretaries, undersecretaries, assistant secretaries and deputy assistant secretaries, plus Executive Office staff, from the direct assistants to the president to the Council of Economic Advisors and other appendages. New Presidents also face a steep learning curve on operational matters, from dealing with intelligence briefings and to establishing personal ties (or not!) with key Congressional leaders.
The "Plum Book" drawn up every 4 years as an aid to new (and incumbent) presidents lists 7,996 positions subject to presidential appointment. While in practice many of will be filled through routine promotions of senior civil servants, in 2008 some 1,141 positions required Senate confirmation. Unless they both want to stay and an incoming president chooses to leave them in place -- as President Obama did in 2009 with Robert Gates as Secretary of Defense -- there is then no one to sign off on regulatory approvals and staff changes and so on until the Senate approves them. Making appointments takes months; confirmation the majority of candidates takes the better part of the year, particularly when the Senate objects to the initial nominee.
An incumbent who is re-elected need not spend time learning the ropes. (Hopefully they will also reflect on successes and failures during their first 4 years!) While many appointees will choose to move on before 2016, a second-term president likewise needs spend little time on personnel issues or other transition tasks.
So unlike 2009, when he faced transition tasks in the midst of a financial crisis, Obama is already on the ground and running. Of course he had the overhead of the election campaign, and so perforce was faced with performing two full-time jobs the past year or so. Crises (and routine tasks) kept intruding. On TV he appears visibly tired, for good reason. Our electoral system imposes a burden on maintaining efficient government operations. We've lessened that burden for the next four years, to our benefit.
...mike smitka...

Friday, November 2, 2012

More Employment

...more important is employment to population...
The data for October 2012 – the last "big" data release before the election -- are now available on the Bureau of Labor Statistics web page and on a select basis as graphs on the St Louis Fed FRED database. I do look at unemployment and other metrics, but here want to highlight the employment to population data, which avoids "noise" that comes from people dropping in and out of the labor force -- that is, I look at employment/population not employment/labor force. This measure also has the advantage that it automatically adjusts to population growth (unlike overall employment measures) and, when is disaggregated, is neutral to changes in the age composition of the population (such as the aging of the baby boom cohorts).
The data show a steady improvement in the economy. All data below are as a percent of population (or change in percentage points in the comparative rows). As with all employment data, there is some noise from month to month. In addition, these data aren't seasonally adjusted. But it's one more picture of our slowly improving economy, a process that whoever is president for the next four years can little to improve but that will by 2016 have brought us close to "normalcy".

age bracket














Oct 2012














12 month average














change vs avg














vs Oct 2011













vs Oct 2009

...mike smitka...

Friday, October 26, 2012

The Chimera of Energy Indepence much are Americans willing to pay for independence?...
Planet Money has a nice segment today [Oct 26] arguing that Energy Independence Wouldn't Make Gasoline Any Cheaper. They use interviews in Canada, a net energy exporter, to make the case: prices there are neither cheap nor stable.
A simple Econ 101 framework helps. Why would a country be a net exporter (such as Saudi Arabia or Iran) rather than a net importer such as the United States? The obvious answer is because we're not the low-cost provider. Ergo we buy from people who are.
So first, the only way we can obtain "independence" is if we are willing to pay more for energy. Listening to the presidential debates, however, the framing clearly equates independence with low prices. That can't happen, barring a technological breakthrough that can be quickly commercialized. Solar power? Well, Arizona has plenty of sunshine days and lots of comparatively empty land. But getting power from there to the rest of the US would be a challenge. And Saudi Arabia? -- they've even more empty land and more days of sunshine. Shipping the energy would remain the issue. But we might still not be the low-cost provider.
Second, how about price volatility? Lessening that requires that we add layers of regulation, specifically that we prohibiting exports and imports. Energy markets are global, else we'd not worry about the Middle East. If global prices go up, then so will US domestic prices unless we prohibit exports. If global prices fall, then we have to prohibit imports lest firms turn to cheaper sources. Neither presidential candidate proposes any such thing.
Then there's the red herring of regulation. We have anecdotal evidence that we in fact err on the side of minimalism: remember BP Horizon? More generally, you'd have to make the case that we are stricter than other countries, in a way that keeps us from drilling. Now local petroleum geologists assure me that there are reserves in really, really deep water and in the far Arctic. Neither are low-cost sources, both because of the difficulty of drilling and the additional challenge of getting oil from wellhead to refinery. The barrier to greater supply – greater "independence" – remains low prices.
You'd flunk Econ 101 if you didn't also mention the demand side. Not a hint of such from either Obama or Romney. Even the general public understands that demand-side policies require paying a higher price for energy.
So how much are Americans willing to pay for independence? My guess: not one penny.
...mike smitka...
Indeed, how much are we willing to pay for sanctions on Iran? – my hunch is "zero". But sanctions are working in an economic sense: production is down over 1 million barrels a day, enough to move the price we pay at the pump. Neither candidate was willing to point that out.

Thursday, October 11, 2012

How Fast is Job Creation?

...age composition matters...
How long recovery takes depends on the rate of job creation relative to the growth of the working age population. It turns out that age composition matters. In 2005-6 the economy needed roughly 125,000 a month to keep unemployment from changing; by 2008, when the Great Recession began, that rate had fallen to 102,000. Continued shifts – more people at the retirement end of their working life – pull that down to 71,000 in 2012. It then drops to 65,000 in 2013-14 and 62,000 in 2015-16. Cumulated over 2008-2016 that's a 5 million difference relative to the steady employment growth of the previous decade. (Addendum: Nowhere in the data does the shortfall get anywhere near the 23 million unemployed Romney repeated time and again in the second debate. He can't be very concerned about the issue if, after 7 years on the campaign trail, he has no grasp of basic data.)
So first I calculated the expected normal level of employment, correcting for demographics; details are below the chart. I then calculated trend job growth (a simple regression using data from January 2010, the rough nadir of the recession, through Sept 2012). On that basis we return to normal levels of employment in fall 2018. If we naively take the faster average growth since summer 2011 (the light blue in the graph), we recover in time for the next midterm elections. That's a sharp contrast to the naive straight-line projection of required employment growth, which doesn't get us back on track until far into the future or (under the optimistic light blue scenario) late 2018.
I don't believe the optimistic case – we face headwinds but no tailwinds.  Congress can mishandle the Fiscal Cliff; global growth is slowing. For the latter, the Europeans have yet to provide Greece and Spain a politically viable strategy for staying in the Euro zone. China's economy has slowed. Energy prices remain a drag, particularly on Japan which (due to the shutdown of most nuclear power generation) now faces a huge import bill for hydrocarbons. We are bit by bit moving out of the real estate bubble, as every quarter another 750,000 or so households will work out from being underwater on their mortgages, and as state and local government revenue stabilize. Nothing on the horizon will speed that process; neither presidential candidate has offered realistic proposals to address underlying issues.
Overall, however, this presents a far brighter picture than my previous calculations, which used the straight-line (blue) projections rather than the baby-boom-adjusted (red) projections. When I used the former, we were making almost no progress on closing the employment gap. But in fact we have made progress, even if it's less than we'd like.
A bit of tedium on my calculations. I began by pulling employment to population data from the Bureau of Labor Statistics, a bit tedious as you have to pull a lot of data series, and the series include 13 observations per year because they include an annual number. So I had to delete those. (Thank you Nisus Writer, for making that easy!) Then I graphed it in Excel to see if the data suggested shortcuts.
As it happens, most of the employment-to-population data show no trend over the two decades prior to the onset of the Great Recession. You can observe the impact of increased schooling at the young end of the age spectrum, and a modest rise in the share of people working in older cohorts, those age 60 and above. Even in those cases, most of the shift was before 2005. If we go back further, there were larger changes in schooling and in women's labor force participation, but those predate the 1990s. So with no trend going into the Great Recession – there is no upturn in the mid-2000s corresponding to the bubble – I could take the employment-population figures at the start of 2007 as the starting point.
I thus took the immediate pre-recession levels for 5-year age brackets, age 16-19, age 20-24 through age 70-74. (It would be wrong to stop at age 65, which is what most data sources do, because 18% of Americans are still working in their early 70s.) Note that in the Great Recession the share of people working fell sharply, particularly at younger ages (16-24) and among prime-age workers (those age 25-54). Hence for projections it's necessary to use the (stable) prior level as the reference point. That doesn't matter at older ages; the data show no wave of early retirement, if anything they show a very slight increase in labor force participation. (continued below graph...)
I then went to the US Census for population projections. The 2009 is the most recent, projection population by age for each year through 2050. I reduced these to the 5-year brackets used for the BLS employment-population data. To get the "normal" level of employment, I then multiplied the projected population in each 5-year bracket by the pre-recession employment-to-population ratio (for older workers, the most recent ratio) and added the totals. Since the Census doesn't provide monthly projections, I simply took the annual increment and spread it evenly across each month.
Presumably sometime soon we'll get projections based on the 2010 Census, but fertility rates change slowly, and even if the 2010 data are off, that will make a difference in the 16-19 age bracket only from 2026. Likewise, mortality was already very low in the age 60 bracket; the Census Bureau projects a continued drop in mortality, and that rate also changes slowly. So going out a decade won't lead to much error there, either, and its impact is further reduced because employment rates drop. The weakest part of the projection is immigration. Since that presumably has fallen with our Great Recession, it means that if there's an error, it's towards an overestimate of the population and hence of the number of jobs our economy needs to create.
One final note is that these data are for employment, and not full-time employment. That means it does it take into account those working multiple jobs, and those working involuntary short hours. I cannot track either by age bracket. Glancing at the data suggests no particular trends in multiple jobs; in contrast, there has been a sharp rise in the number of those "working part-time jobs for economic reasons". The latter means that I understate the amount of time recovery will take, because those jobs need to be converted back into regular jobs, on top of the need to create new jobs. Here's what that graph does: it pushes the recovery date out past 2020...
...Mike Smitka...

Thursday, October 4, 2012

But Romney Can't Work with Congress!

...Romney's plan is "work with Congress"...
Obama did not go for the jugular; he's not a street fighter. He did not try to get Romney to name a single one of the loopholes he would close -- there are lots, but the big ones are capital gains, home mortgages and charitable contributions. Without closing those, he can't deliver on his tax cut.
Oh, and if the loopholes are closed, in my case the reduction in the tax rate wouldn't be enough to offset the loss of the mortgage deduction, because I'm stuck with a house I can't sell plus the one I live in. So Romney is in fact promising to increase my taxes, and I'm middle class, as a professor I don't make it into the top 10%.
But the most disturbing component is something about which I've not seen a single comment. The core of Romney's plan, er, argument is "we'll work it out with Congress." I'm afraid that won't prove possible. The Tea Party adherents in Congress will prove no more flexible with Romney than with Obama. Indeed, the choice of Ryan will embolden them to dig in their heels. So I think the reality would be that Romney would not gain unity among Republicans on any of the crucial issues (other than repealing RomneyCare). Meanwhile, he will alienate the Democrats.
Now to the puzzlement of many, since he had a majority, Obama tried to sit down and work with Congress during his first two years. The result was many compromises but few votes in return -- and since the midterm elections, none. Working with Congress? -- we've been there and done that, and it didn't work.
The bottom line is that with both the Tea Party and the Democrats against him, Romeny will find it harder to work with Congress than President Obama, not easier. To put it bluntly, Romney will find it impossible. So what is his real plan, to dither for 4 years?
...with both the Tea Party and the Democrats against him [Romney's plan is] impossible...
...mike smitka...

Sunday, September 23, 2012

Micro vs Macro

...the fallacy of composition separates micro from macro...
As I struggle with teaching senior majors a bit of macroeconomics, I am trying to think of ways in which I can distinguish the mindset of micro (the majority of our curriculm) from macro.
(Aside: for the present, I'm posting primarily on the course site on the publicly-accessible W&L WordPress server, at (and similar sites for Japan at and Industrial Organization at
One issue is data: if you take a skeptical view, that structural change in the US since 1980 is substantial -- look at changes in "openness" (trade shares, international financial flows), financial sector reforms (the nature of "money", the rise of multistate banks, and "shadow" banks), labor markets (education levels, mobility, less weight in unionized sectors, more in services) and demographics (more and older retirees hence greater transfers) -- then you may be reluctant to think that there is much to be garnered, indeed you may believe that much will be muddied, from using data older than 20 years. Since key macro measures are only available on a quarterly basis, you're thus stuck with 80 observations, which doesn't provide for much statistical power, particularly given the infrequency of shocks and major policy changes. Using multi-country panel data requires even stronger assumptions than (say) using data from 1962 on for the US. Those doing micro work tend to use datasets with hundreds, if not many thousands, of observations.
Then there are aggregation issues. The more disaggregated the model, the more convincing are microfoundations (though ironically those who use that term are often using models so aggregate that they are reduced to assuming representative agents with identical and unchanging preferences for labor vs leisure and today vs the future). These are present as well in micro markets, but are either more obvious or less severe, and typically both.
Most central, in my mind, is that the fallacy of composition separates micro from macro. A nice post on the Vox EU blog, "Micro success does not guarantee macro success," provides an illustration. They look at job search assistance programs, for which in the Danish case there are not only good data, but a randomized base that helps control for extraneous factors. Such programs do indeed improve the speed at which workers find new jobs, by about 10% over 3 months. Since such individuals then stop collecting unemployment and start paying taxes, it is extremely cost-effective.
However...such experiments are hard to replicate, because unless the demand for workers is adequate, the primary effect is to speed up who gets jobs -- those fortunate enough to be enrolled in the program -- but not to create extra jobs.
Basically, the normal statistical design takes those in a city who were chosen (randomly) for the program with those who were not. Most (though not all) of the effects disappear when those not chosen for the program are compared with those newly unemployed elsewhere. At first glance that's less clean because it's harder to control for various in geography and attendant local industry effects. However, it misses the point that the difference in the more typical control case doesn't preclude that it takes those (randomly) not chosen for the program longer to find a job. Furthermore, when extended to a wider share of those unemployed, employers are flooded with applications, while the ability of the employment office to taylor their help goes down. Indeed, past the point of including about 30% of those unemployed, the spillovers dominate, and the program ceases to be cost-effective.
Macroeconomics if full of similar examples. One household can increase their saving to provide for retirement; that won't shift asset prices, it won't shift the amount of consumption. So they can effectively transfer resources across time. We have that built in (fallaciously) into our economy, in the form of the Social Security Trust Fund. Unfortunately, we can't put doctors in deep freeze: medical services have to come out of contemporaneous production. So in order for retirees to consume medical services (and in the aggregate, other consumption goods), we who are working have to consume less. All retirement is fundamentally pay-as-you-go. The Trust Fund is meaningless; when the future comes, the idea is that it sells off assets. But it's not small in the economy. To do so requires us to save more (to buy those bonds) or to be taxed more (so the government can buy them on our behalf) or (but only in the short term) rolled over into general government debt.
I won't pretend this is simple to understand. But I don't pretend that macroeconomics is easy, either. It requires us to deal with aggregation and spillovers, which is not what we do in our day-to-day decision making. That requires abstraction and building models to check that we've aggregated consistently; it turns out to be very easy to play with ideas only to discover that they don't add up, that they are internally inconsistent (and not in a small way).
And then there remains the challenge of testing these abstractions against our scanty set of real-world data.

Thursday, August 30, 2012

No fiscal cliff?

The New York Times 29 August 2012 Economix blog, "Is the Fiscal Cliff a Big Deal?" by Casey Mulligan is faulty, because it misses an Economics 101 opportunity cost issue.
...cutting unemployment insurance won't increase employment; in an environment where jobs are scarce, at most it will shift who has jobs...
Now it's easy to find non-economists making this mistake, or comparable ones. The Republican platform worries that trimming the Department of Defense's budget will cut jobs and hurt the economy, but turns around and claims that the roughly half of the 2009 stimulus package that added jobs somehow didn't help the economy. However, absent very large changes -- in an economy with a labor force of 155 million, a million jobs one way or the other is not a large change, however much it matters to those million people -- if such effects exist, they are symmetric.
What Mulligan assumes is that such issues never exist. The issue of unemployment is that people aren't looking for work. So cutting unemployment benefits will actually lead to more people working. First, unemployment benefits are not that generous -- if you're on a tight budget, you really need more income. But in today's context that's beside the point, because the underlying rate of unemployment is high. Corrected for changes in the working age population, the gap from where we were before the recession started is 14.5 million jobs.
Let me give an anecdote. My son has hunted for a regular job for a year, with no "bites" -- other than to become a low-level fast-food supervisor. He does better doing landscaping for neighbors. But a few years back he had opportunities, but wanted to finish his college degree. Most of his friends are in the same position, job-hunting, though they may have part-time jobs that provide some income.
Now an anecdote is not data; it only helps you think about what might be going on. But it does suggest that we look at overall unemployment. After all, if you want to argue that collecting unemployment checks is what is holding the economy back, you have to explain the source of a sudden shift in ethics in early 2007 that led 10-plus million Americans to decide that sitting home was a nice option. Instead, we can look at job losses and mass layoffs, both tracked by the Bureau of Labor Statistics. Their data also show a rise in those "working part-time for economic reasons", that is, people who have had their hours cut but want to work more. If the mass laziness story is true, then we shouldn't see this happening, either -- we'd expect to see the number of people happily accepting part-time work also rising. The data show they're unhappily accepting such work because the alternative, unemployment, is worse.
Mulligan's analysis of why in fact the "fiscal cliff" won't actually hurt growth isn't worth a "mulligan" -- this analysis is too sloppy to be anything more than ideology wrapped in professional credentials; the Times shouldn't grant him another shot.
Incentives do matter -- my paid employment lies in trying to teach students that -- but they aren't the only things that matters. In this case jobs simply aren't there. So if someone enjoying life on the dole gets a job, that means someone else won't have a job. Unless employment opportunities increase, it's a game of musical chairs. That reflects the second main thing that I am tasked with conveying to students, that they calculate opportunity costs appropriately, without double-counting or missing something. Mulligan totally fails to ask whether opportunities have shifted; he would earn a 50% grade in Economics 101.
...mike smitka...

Tuesday, August 14, 2012

Paul Ryan: In all honesty, there's nothing there to critique

... [to] gut economically irrelevant...because it represents an unfunded mandate...
As an economist I place little credence in words, and so in all honesty I can do little to critique Paul Ryan. That's because his track record in Congress is minimal – in 13 years only 2 bills with his name have actually passed, and neither was substantive. True, he's put his name on many bills, but they've gone nowhere. So while he claims to be for sound budgets, as an economist I see no evidence of that in what he has accomplished during his 6-plus terms in the House. If anything, his voting record points the other way: he's cast an "Aye" for numerous budget-busting laws, including the Bush-era tax cuts and the Medicare prescription drug bill that expanded benefits but not revenues. Furthermore, he did support the Bush bail-out measures, a mark in his favor as putting things practical over things ideological. His track record is too thin to tell whether he is primarily pragmatic. Of course his telegenic persona conveys a different message, but it is a message without substance.
As to ideas, well, Ryan is allowing himself to be portrayed as a neo-fisc, the new breed of Republican fiscal conservatives who promise to balance budgets while cutting taxes.* To date the neo-fiscs have shown no ability to deliver. Yes, they've cut taxes. But no, they've not closed loopholes – Ryan's proclaimed preference – and no, they've not controlled expenditures. Ryan is true to neo-fisc form, in that he has not spelled out details on either front, except that he won't cut defense, hardly an example of controlling expenditures. Oh, he's promised to gut medicare, but that's neither politically credible nor economically meaningful. Why is it economically irrelevant? That's because it represents an unfunded mandate: we as a society don't tolerate emergency rooms refusing to admit car accident victims or nursing homes trundling elderly patients to curbside because they can't pay for their next day. Those costs will have to be loaded onto the charges for people with insurance. In short, the neo-fisc position consists of slogans and not fleshed-out policies; you can't label proponents ideologues, because you have to have ideas to be an ideologue.** can't label [neo-fiscs] ideologues because you have to have ideas to be an ideologue...
For Romney – surely he is in charge of his campaign – Ryan is a convenient mouthpiece, his value enhanced by his skimpy track record, because unlike the beach, it hides rather than reveals. Ryan is already energizing the disaffected on the right, who might otherwise sit the election out. Meanwhile that frees Romney to move toward the center, where the swing voters reside. He doesn't have much time left to do that, but there's also little evidence that people vote their pocketbooks; style seems to trump substance.
I've blogged on Japan and Economics about debt and deficits, choosing that forum because Japan's debt is far higher and thus less sustainable than ours. But Japan has also started to do something about it, passing an increase in their national sales tax (the final deal was hammered out on August 10th) when further budget cuts proved illusive.
* I will blog on Japan and Economics about debt and deficits, choosing that forum because Japan's debt is far higher and thus less sustainable than ours. But even in Japan it's not a crisis, and in addition Japan has started to do something about it, passing an increase in their national sales tax (the final deal was hammered out on August 10th) when further budget cuts proved illusive.
** My computer's dictionary would thus label such "demagogues:" politicians who "appeal to popular desires and prejudices rather than use rational argument." My sense is that campaigning via sound bites forces all candidates to rely on that game. Hence polls matter, policy analysis does not. My training as an economist however suits me only for the latter, and so that's what I blog.
Mike Smitka

Saturday, August 11, 2012

What Romney Thinks Matters

...our problem is strong growth!?...
Mitt Romney's choice of a vice presidential is puzzling. As I see it, Paul Ryan's primary strength is that he shares a name with Rand Paul. Ryan has never worked outside the Beltway; he's a pure Beltway insider. Obama at least worked before running for office, as a professor, as a lawyer and as a community activist. (Anyway who thinks Obama is a liberal needs to check where he taught, too -- not too many years ago the Republican Party might have thought he was a little too conservative for them!)
Back to Ryan. I looked at junior's budget proposal months back, and it didn't make dollars and cents -- the arithmetic simply didn't add up. He wanted to reduce the Federal government to 3.75% or less of the economy. But he also promised not to touch the military -- and the Department of Defense and related expenditures are a full 4.0% of our economy. And that's just for starters. I didn't see any point in spending more time on his proposal, but suppose I'll now be forced to read through it carefully. Not today.
In any case, Romney's choice does deliver a clear message, that he views our primary problem as economic growth so strong that it is driving wages up -- because if interest rates are zero, government debt costs our society nothing. As a Wall Street insider, Romney can't claim not to know that. Now wages are our economy's biggest cost. If they aren't rising, we can't have inflation. Food prices go up and down; so do energy costs. But both are modest slices. Ours is a service economy; what matters are not things solid and liquid, but how much it costs to pay someone to cook us a meal, or change a bandage, or set up an IT system.
So Romney must believe that unemployment is not a problem. Too much employment is the problem -- despite the 8.3% headline.
He's out of touch with the world in which I live, with a recent college grad at home, still unemployed. And hasn't Romney read the latest inflation reports from the Bureau of Labor Statistics? -- April, 0.0%; May, -0.3%; June, 0.0%. The average is deflation. For those of you who believe in conspiracies behind every door (and the doors at the BLS are kept locked VERY tight prior to announcements, listen to the August 3rd 2012 Planet Money podcast Keeping the Biggest Secret in the US Economy), well, the Billion Price Project that relies solely on private sector data tells a similar story: there are simply no signs of inflation.
Will Ryan help Romney pull in votes? I'm not a political scientist, and know neither whether Wisconsin is a close race nor whether Ryan is respected there. All I know is that his state is not on the "swing" lists I've seen. Otherwise, unless a VEEP embarrasses the main candidate -- I used to live in Ferraro's home district, and so know up close that some picks are underwhelming -- the apparent reaction of voters is "who cares?" Still, a junior House member doesn't seem an impressive pick.
Does Ryan appeal to swing voters -- well, I think not. I used to dance from party to party, but for a couple decades have lived in a Congressional district where elections haven't been contested, so I don't know whether I can still swing. (My blue suede shoes are Galabrier "Royal Robbins" rock climbing boots from the 1970s, so no, I can't dance.) Still, my gut feeling is that Ryan has no appeal even among moderate Republicans.
I'd like an alternative to Obama. But It doesn't look like the Republicans are providing one this time around.
Mike Smitka
CORRECTION: I do not follow who is whom among politicians, current and would-be. In the process I confused Paul Ryan with Ron Paul Jr (and hence Ron Paul Sr). In the first version of this page I mistakenly wrote that Ryan's strength was his father's name recognition. That is wrong; Paul Ryan's father died while he was a teenager.

Sunday, August 5, 2012

It's not just kids and retirees

...early retirement and education aren't "safety valves"...
At 8.3%, "headline" unemployment represents 1 in 8 would-be workers without jobs. Furthermore, we know that we're seeing not just high unemployment but also a big drop in the size of the labor force. That is, we've observed a big drop in the unemployment-population ratio.
OK, but isn't this just youth staying in school longer? And baby boomers who are retiring, or retiring early? After all, the unemployment rate for "prime" workers is 7.2%, rather lower than the July 2012 average of 8.3%. And if we're thinking of the impact on families -- kids -- high "primer earner" unemployment is more worrisome than that at the young and old ends of the age spectrum.
Now for the population as a whole employment has fallen more than unemployment has risen. Rephrased, the non-participation [in the labor force] rate rose, from 33.9% in January 2004-December 2006 to 36.2% over the 6 months ending in July 2012, a 2.3% rise. Relative to the base (66.1%) that's equivalent to a 3.5% rise in unemployment. If we add that to the headline rate we get 11.8%.
This sort of shift doesn't typify previous recessions. But perhaps this time around it's not the recession but long-term trends that happen to be showing up now. [See the graph below on the long-term trend.] In particular, we've far more youth in higher education, and baby boomers are in their early 60s. So it could be that large numbers of younger individuals are staying in school -- or, having grim job prospects, are enrolling in community colleges en masse. Meanwhile, for the boomers, while retiring before age 65 may be painful, it's feasible. And government workers and others can qualify for pensions before age 65, and don't have to wait on social security.
Unfortunately, the data show it's not just boomers and students: the shift for the prime age workers (age 25-54) is in fact is larger than that for the population as a whole. We're not in fact seeing a boom in schooling and early retirements.
In particular, during the bubble era 2004-7 prime age labor force participation rose by 1.4 percentage points, from a peak of 78.7% to 80.3%, and averaged 79.4% over January 2004-December 2006; over the last 6 months, through July 2012, it's averaged 75.7%. That's a drop of 3.7% (and an equivalent rise in the non-participation rate). Doing the same arithmetic leads to an adjusted unemployment rate of 11.9%. At one level it's not surprising; prime age workers (25-54) are a large proportion of the standard labor force (age 16-64), so the averages can't diverge all that much. Still, I'd hoped otherwise. But early retirement and education aren't "safety valves" that mute the impact of the Great Recession. That's not the case
...Mike Smitka...

Sunday, July 15, 2012

Was Tobin Right? – "the" Tobin Tax, that is?

...foreshortening the bubble by 6 months would have helped...
I'd headed from Wall Street to grad school in the fall of 1980 because of the eurodollar bubble I saw poised to implode around my bank and others. Lots of liquidity, regulation carried out with a wink and a nod – where I worked, the Bank of Tokyo, continued lending quietly despite a formal prohibition, a "quiet period", imposed by the Ministry of Finance on Japanese banks. How did BOT get around it? – well, they had two subsidiaries, one in California, one in New York, that were (legally) US banks. So regulations from Tokyo didn't apply. We didn't tell regulators what we were doing, and it seems they didn't ask.
In college I'd done math, history, languages but not a single course in economics. It was thus Jim Tobin – the late Nobel laureate who spent most of his career at Yale – who introduced me to macroeconomics. At that point the rational expectations revolution was just beginning, while many of today's standard econometric techniques were just being developed, so I had a foot in both schools. Tobin saw that we were exposed to as much as he could cram into a year, including finance and other areas that are now separate fields. It was a good grounding, full of wisdom, and an attempt to get us to think through stories, to learn the weaknesses of narrative and the weaknesses of formal models. He was suspicious of what he called "new classical" macroeconomics. Formal general equilibrium models were not robust – John Taylor showed that one simple tweak undid the initial "policy neutrality" models of last year's Nobel laureate Thomas Sargent (who, by the way, Tobin tried unsuccessfully to recruit to Yale). Of course "Jumpin" Joe Stiglitz was showing the same thing held true for a variety of simple equilibrium models, but that's for a footnote.*
But all of this is an aside, and ultimately I didn't stay on the macro side, partly because that seemed less central to understanding Japan, and partly because a whole group of students were doing the money-macro thing. In addition, I'd done some grad work in math, and deliberately gave it up. So I wondered whether I'd be any happier doing it a second time around. Too bad, perhaps, because I think my sense of the dynamics of bubbles turned out to be pretty sound – the bubble I saw clearly as an insider didn't actually "break" until the Latin American debt crisis erupted in 1984. In any case, I was iconoclastic enough to avoid the crowd, ultimately doing a dissertation with another future nobel laureate as chair, but those stories are for later.
Back to Tobin and macro. Over time the gist of macro gradually sank in, in all its variety; I only remember one thing as puzzling me, the "Tobin tax" on financial transactions. He foresaw financial markets as able to move money into individuals niches (say, an Iceland) in such volume as to sway the structure of the real economy, and able to move more quickly than real economies could respond. Except that it wasn't just tiny economies that were at risk, but subsets such as US real estate or (within the still inchoate EU) Spain. Putting a tax on transactions could shift traders away from short-term arbitrage (in today's markets, of potentially under a second's duration) and into assets that offered higher real returns over a longer time horizon. (Of course Tobin was a developer of CAPM, and so preached on the risk-return tradeoff and balanced portfolios, more poignant at Yale because in the go-go years of the 1970s endowment managers lost so much money as to put the institution at risk.)
Anyway, at the time I saw no benefit from a "Tobin tax"; I thought he was wrong, overstating the dangers, understating the costs of his tax. But he really did see the direction the world was moving – perhaps because, unlike economists of the past 30 years, as a grad student he had had to study economic history, including the era of global markets that started unravelling in 1914. Would a "Tobin tax" have prevented our current meltdown? Perhaps not. Leaning on central bankers to provide easy money wasn't even necessary, Greenspan and counterparts elsewhere needed little urging. But it would have slowed the rise, would have forced managers in financial institutions to step back and ask whether speculation should be allowed to develop into a core source of profits. And it would have generated much more information.
That lack of information should not be treated lightly. People really didn't know what was going on.
Let me illustrate that with a story from my banking days. Sometime in 1980 it fell to me to sound out peer institutions on their Brazil exposure. To do that I needed to offer information from my end, and so asked for and was given (in considerable detail) our own exposure: local lending, short-term trade finance ("letters of credit"), foreign exchange positions, cross-border "eurodollar" loans in various currencies. At that point BOT's position was on the order of $1 billion, not quite enough to bring down the bank, but enough to make a serious dent in its capitalization. We were reaching the point where we were reluctant to hold more Brazil paper directly, and if others were in a similar position … well, that would be it for Brazil.
So I called around to the then-reigning banks, Citi and Morgan and a few others most active in Latin America, where Brazil was perceived as the most successful and the best managed economy. Some banks gave me more info, some less, but to me the bottom line was clear: Brazil could still borrow, but at its then-current rate of burning through foreign exchange reserves, it wouldn't be able to do so for long. That was bad news: their economy was running on debt, fueled by a plethora of "big push" investment projects financed with international loans that weren't (yet) generating exports and hence the dollar revenue needed to "service" dollar-denominated debt. Needless to say, that big push also generated lots of jobs, and so was popular with the military dictatorship of the day, who (with hindsight justly) feared the impact on their hold on power should the economy slow. [Homework: trace analogs with German banks and Spanish resort property developers.]
The bottom line, however, is that banks were flying blind, unable to aggregate information in much detail. No one talked about private loans or foreign exchange business, which was quite profitable (we "scored" with VW in Brazil and used that to gain business with VW in Germany, all hush-hush). And even if we (and the Brazilian government) kept pretty good track of eurodollar originations, we (and we assumed others) tried to sell on paper to smaller, correspondent banks and get it off our own books so that we could keep lending. Foisting Brazil paper took time, and those in the making the loans to Brazil weren't necessarily kept in the loop by our own correspondent banking people. We had no idea about others; the borrower – Brazil – only knew who originally lent the money, not who currently held the "paper", the loan. Well, it turned out that other banks too were finding it harder to unload their eurodollar assets to smaller banks. By the time everyone knew that, however, it was too late: by the fall of 1980 the overwhelming majority of the loans that underlay the crisis of 1984 had been "booked".
Again, this time around many market participants were surely starting to have their suspicions. A Tobin tax would have forced greater clarity. Oh, not much. With real estate prices rising at 20+% per annum in places such as Arizona (to use US as an example), however, even foreshortening the bubble by 6 months would have helped.
...Mike Smitka...
* Note: to the best of my knowledge – I have not scanned the literature for a number of years – the uncomfortable truth is that this lack of robustness in small models is true for large models, too. There is simply no "law of large numbers" for general equilibria, where a simple model of an economy that is fragile to minor changes in assumptions gets things "almost right" when hundreds more markets are added.
In addition, the "dynamic" (forward-looking) general equilibrium models in current use rely upon convergence to a steady state as a solution technique. That assumption distinctly limits the ability to use such models to "test" whether fiscal policy works since it makes it hard to force the model to deviate from the equilibrium path.

Mea culpa: my apologies for weaving too many threads in one short post. I intend to gradually expand this into multiple posts. But not tonight.
… what do I do when data demonstrate I've been wrong? I hope I change my mind …

Thursday, June 28, 2012

Romneycare -- so-called Obamacare -- ruled constitutional

...Romney opposing Romneycare...I find odious...
Healthcare costs are a millstone around the neck of the US economy: we spend twice as much as countries such as Japan, yet have over 50 million -- 1/6th -- of our population without coverage, have public health metrics surpassed by some developing countries, and have regions of the country with little local access to healthcare even for those with insurance. In the subcomponents of the CPI (Consumer Price Index), medical care is often the item rising the fastest.
Health care provision in the US is enormously complicated, a crazy-quilt combination of medical professionals, insurance systems -- which don't always treat preventive care -- hospitals that are non-profit and for-profit, medical practices that may be solo, a partnership with or without a nurse practitioner (rules for which vary by state), incorporated in a larger group, or employed by a hospital or health maintenance organization (HMO). Labs can be owned by doctors and hospitals -- despite the conflict of interest -- as well as by independent entities. Record keeping is not uniform, and health histories spotty; a doctor may not be able to get information from other doctors who have treated the patient in a timely manner, or be able to check what medications someone is currently taking.
Some of this comes from our history. Blue Cross began as an attempt to improve the financial system of Baylor University Hospital in Texas; it thus focused on surgery and other in-patient care. Universal coverage was initially delayed in the 1910s over whether it should be done at the state or the Federal level. In the late 1940s the issue was whether it would be handled through government, employers, or unions. Early insurance such as Blue Cross (and Blue Shield surgical coverage) varied from state to state, and by that time life insurers were also entering the field. (General Motors, for example, initially used MetLife, not the Blues.) Employers lobbied hard and successfully to be the ones in control of cash flow, but today they are running away as fast as possible.[Note]
All of this means that we can't have a one-size-fits-all policy unless we also force (for example) uniformity in one or more areas of our hodgepodge. At least some incumbents will see their business disappear, and the political path chosen by Romney in Massachusetts was to leave the actual provision of healthcare -- whatever piece it might be -- as is.
So back to the issues. One is lack of coverage; the other is expense. Private insurance systems face the challenges of adverse selection, that purchasers of insurance will be dominated by those who are older or in ill health and believe they'll need insurance. Those who are healthy are tempted to opt out. But doctors are socialized under the Hippocratic Oath. Our society as a whole is sympathetic. Hospitals can't throw a patient out on the streets to die if they run out of money. We have Good Samaritan laws; malpractice leaves providers exposed to legal liability. So that means that, covered or not, those who are seriously ill get treated. The cost then falls upon those who are insured. And then more people either cannot afford coverage (if you're on minimum wage!) or choose not to purchase it. Universal coverage avoids the downward spiral in coverage from moral hazard. Romneycare, enacted now at the national level, faced that issue directly.
Then there is moral hazard, the temptation of those, once insured, to be less cautious (e.g., auto collision insurance may make people less careful of how they park) or kin the case of medical insurance, to overuse it. Since fee-for-service coverage is the standard in the US, that really comes down to doctors providing too much care. It of course makes their practice (and hospital) more profitable, because patients aren't provided with a menu and asked to choose. (Just the opposite: we are bombarded with advertising urging us to pressure our doctors to provide more.)
This is particularly important at the end of life, when it is not unusual for a terminally ill patient to receive hundreds of thousands of dollars of care in their last week of life. We do have hospice -- my father chose that route, not wanting to die in a hospital, not wanting his suffering multiplied during his last day or two, and feeling it was just wrong to use all those medical resources simply because he had insurance. My mother, brothers and I concurred. Unfortunately many individuals refuse to face this issue, and in that case all it takes is one family member demanding "do everything you can." See for example a recent front-page article from the St. Louis Post-Dispatch End of Life Care, run while visiting St. Louis for a niece's graduation from her medical residency.
Then there is technology, were we clearly are facing diminishing returns. Cancer treatment has benefited above all from early diagnosis (which unfortunately is not easy with lung cancer, but is with the other most prevalent types of breast, cervix, prostate and colon cancers. Others -- blood cancers -- can often be cured, and then followed by bone marrow transplants. At least three family members have benefited from that, all at ages young enough to enjoy decades more of life. We can go on and on. But now we are at the point where new drugs as often as not merely improve on existing ones, and where better surgical diagnostic and surgical techniques allow us to address harder-to-treat heart conditions (which affect smaller and smaller slices of our population). It's hard to see how to handle this from the standpoint of ethics -- that Hippocratic Oath and its derivatives. Other countries do however try to see that new technologies are used only where there are very strong medical arguments in their favor, including likely years of remaining life.
The current Federal incarnation of Romneycare does little to address either moral hazard or the dilemma arising from costly new technologies. It will save us money, through better and earlier treatment, most relevant for younger patients. It thus leaves a lot to desire. However, it is a step in the right direction, and far superior to the alternative of doing nothing, and watch the insurance system continue to unravel as fewer and fewer employers provide coverage.
I have no answer to the puzzle of why the package is known by the sitting president's name, and not by that of his challenger, who in fact was the one to put it together with the help of a variety of Republican think-tanks (back when think-tanks actually did spend time thinking rather than generating purely partisan twitter "bites"). I can understand, sort of, the partisan logic that has Romney opposing Romney care in the context of the Republican primaries, though I think it odious. I can't fathom why the media is passive in the face of the effort to carry that into the general election.
...Mike Smitka...
Note: I wrote a paper on the history of healthcare at General Motors, presented at the Business History Conference in Milan Italy, the Society of Automotive Historians in Tugelo, Mississippi and published in Automotive History Review (2012).

Remember (not that many are old enough!) that until the 1940s there were no antibiotics and few other effective medications. Doctors could set bones, deliver babies and perform [by today's standards] simple surgery. Staying in a hospital cost less than staying in a hotel. The main focus of healthcare was thus the provision of sick time, because the main out-of-pocket cost of illness was lost income, not medical expenses.

Wednesday, June 27, 2012

Demographic First-Strike Capability

...economic's strength lies in testing perceptions against data...
In recent travels I encountered the claim that Muslims are aiming to overrun the rest of the world by ordering their women to open their wombs. The result, I was told, was that Muslim women average 8 children each, dooming the non-Muslim world to subjugation.
I was skeptical, because it goes against all the evidence from countries I study -- primarily the US, Japan and China -- about the behavior of women. Variation across the Islamic world is vast; strife in Iraq ought remind us these are not surface variations. So with several hundred million adherents someone, somewhere surely is advocating higher fertility as an Islamic duty.
But that doesn't mean that women are listening. China tries to restrict fertility to one child; despite draconian, indeed horrific measures to enforce it, fertility rates there remain above those of Japan and Korea. My hunch was that in their fertility countries that are heavily Muslim look little different from the rest of the world -- low and falling, particularly in prosperous countries.
Countries do collect this sort of data. Of course businesses want a good census to help in product planning, capacity planning and marketing. Fertility data are also valuable, necessary for governments to structure healthcare policy -- clinic construction, midwife training -- and budget for school construction. While data collection is a challenge in very poor countries, only a minuscule fraction of the world's population remain nomads.
So what do the data show? Egypt's fertility is below that of the Philippines; India's is above that of Bangladesh. The fertility rate of Indonesia, the world's most populous Islamic state, is at replacement level, as 2.1 children per mother are necessary to guarantee that on average at least one daughter will live to reproductive age. Radical Iran is below that level -- perhaps Americans don't realize that it is a literate and (relative to its neighbors) prosperous society.
Economists watch what people do, they don't rely on what they say. Men may talk the talk, if they're part of the increasingly unpopular ruling party. But words alone are impotent.
...words alone are impotent...
The real lesson is that fertility is falling across the world, no matter the religion, and that as incomes rise, fertility falls. Sub-saharan Africa remains anomalous, but if you want to look at the data – the World Bank has a nice web site for that -- you'll find that even there change is evident.
Mike Smitka

Wednesday, April 18, 2012

Affordable Housing as Source of Bubble

...policies to push home ownership weren't responsible...
Working papers are the place to go for recent research; journals are passe, too far behind the times to be my first resort.
A recent paper by Rubén Hernández-Murillo, Andra C. Ghent and Michael T. Owyang is a good example. Furthermore, as with most working papers, it's freely downloadable, though you'll need to have a subscription when it comes out as a standard journal article some years hence. Here I provide the title, abstract and a link. Of course (well, not all papers are that way) it's written with economists in mind and so even the abstract is heavy on jargon -- though their one-word summary is clear and says it all. Anyway, I'll translate...
Did affordable housing legislation contribute to the subprime securities boom?
No. In this paper we use a regression discontinuity approach to investigate whether affordable housing policies influenced origination or affected prices of subprime mortgages. We use merged loan-level data on non-prime securitized mortgages with individual- and neighborhood-level data for California and Florida. We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.
Let's crunch the data before and after policy changes to see whether the number of sub-prime mortgages changes, or the terms and conditions changed. We put in variables known to affect the mortgage market, which otherwise might obscure (or exaggerate) the effects of policy. Furthermore, we'll use really detailed local data to make sure we're comparing apples to apples, and don't by accident compare a region with lots of subprime mortgages to one with few. Finally, looking at those who all along would have qualified for subprime mortgages doesn't tell us much, or rather may obscure what is going on. For example, the number of such people may have increased reflecting changes in demographics and job markets. So we'll look at people around the margin, and not in the middle. The result: before and after are the same. Policy didn't do it.
Now that's what those who have "eyeballed" the data have long maintained. But we worked really hard to see if any of the reasons given that "eyeballing" was wrong held water. They didn't. No smoking gun. No evidence, period.
OK, maybe the authors wouldn't go quite so far ... but that's how I as an economist read the subtext of the abstract.
...Mike Smitka...
Link to pdf: (don't click if you don't want the actual paper!)

Has Unemployment Really Fallen?

...retirement is not the answer...
The Financial Times has a good April 17, 2012 article looking at the sources of continued high unemployment and declining labor force participation.
On the unemployment side, there are structural arguments—workers live in the wrong places, have the wrong skills—and cyclical arguments. The article finds a bit of both, with the suggestion that the latter is pretty strong.
A drop in participation can potentially mask far higher underlying slack in labor markets, as people give up looking for jobs, or return to school (and stop looking for jobs), or retire (and, duh, stop looking for jobs). But to be counted as "unemployed" in our monthly labor force survey you have to be actually job hunting, not merely job dreaming. My own calculations show participation has dropped 2.2%, using the average going into the Great Recession and the average of the past 6 months. If all those would in fact have temporarily given up on finding work and so are counted as unemployed, that would push the current rate from 8.1% to 11.5%.
Other countries use similar methods while differing in details, such as how recently you have to have undertaken concrete job search efforts. Japan uses two weeks, the US four, and so unsurprisingly Japanese unemployment tends to look low from a US perspective.
Technically they are NILFs, Not In the Labor Force. But how many of those who have officially exited the labor market retired according to plan? The higher that number, the less that this shift in participation matters.
A block of the baby boomers have now hit age 62 and thus can potentially begin collecting their Social Security pension. Leaving aside the possibility that many had no intention of retiring, how much of the bump in NILFs is due to people age 62 and above? I'm doing such calculations for Japan and will post those results in due course to my Japan and Economics blog. Unfortunately, comparable age-specific data are not publicly available for the US. The gist of the FT article is that (unfortunately) intended retirement is not the cause.
The recession, in other words, remains really bad. The graph below thus projects the pace of recovery in employment using pre-recession employment-to-population ratios. At the current pace, we'll be back to par in 2016, assuming the the rapid pace of recent months continues unabated for the next four years.
...Mike Smitka...
Note: Another component of the drop in participation is due to those who qualify for disability pensions and actually "retire" and start claiming them. While some of that is because of the onset of disability, some is a function of the difficulty for an older individual to land another job. leading them to drop out of the labor force (become a NILF) and claim a pension. Herman Schwartz, a political scientist at UVA, has looked at this in the European context, and finds strong evidence that in hard times (or when unfavorable adjustments are made in the rules of regular retirement pensions) those who claim disability increases, indeed increases a lot. Of course that means that people aren't naturally welfare cheats, to use current US labels: lots of people who could retire due to age or disability in fact don't. Most people prefer work to just sitting around...

Wednesday, March 7, 2012

Auto Bailout Redux: Warren Buffett was Bush who bailed out GM -- Obama forced it into bankruptcy...
Steve Rattner's blog points out a February 27th CNBS interview with Warren Buffet that affirms what David Ruggles and I have argued from the start on our Autos and Economics blog, and reiterated here: that the alternative to the government provision of DIP financing for an orderly Chapter 11 restructuring of GM and Chrysler (as though bankruptcy is a bailout!) was a catastrophic dissolution via Chapter 7 ("close your doors forever" bankruptcy). As Buffett notes, capital markets weren't functioning, and there were no sources of working capital for firms seeking Chapter 11. Indeed, he himself told one of those firms "no" -- and unlike banks, he was not constrained by liquidity concerns and depleted capital. Rather, everyone was hunkered down, and clearly uninterested in what a priori was a very risky venture.
Now it's not as though the reorganization was perfect; lots of dealers had their franchises yanked, which neither lowered operating costs at GM nor improved their sales. That seems to have resulted from the input of a consultant who had worked for NADA (the National Auto Dealers Association). Of course every dealer wishes for one less competitor, but that's a tension with every franchise system: what's good for the franchisor is not always good for the franchisee. With hindsight there might have been wiggle room on other terms and conditions. But it's hard to fault what was done from a real-time perspective. Indeed, the speed with which the Chapter 11 restructuring was consummated should give creditors in other bankruptcies, who often shell out staggering legal fees for years on end, food for thought. And speed was critical to the revival of GM and Chrysler, and for keeping suppliers and the rest of the domestic auto industry afloat.
Let me close with a personal reflection. We will continue to quibble over the appropriate role of government in our society. We will always find fault, too, because by and large government is engaged in providing services that can't be quantified or for which market prices aren't available -- economists and environmental scientists can construct models to delimit how much less pollution is worth, but that's a far cry from trying to figure out how much a gallon of milk is worth.
Overall, however, I've always been impressed with the service orientation of those in the public sector, from local school teachers (the biggest component of Leviathan, and certainly not in it for the money!) to individuals such as Mr. Rattner (who incurred a pile of legal bills for the privilege of serving). Kudos! -- our society would be poorer without them

Thursday, February 16, 2012

Auto "Bailout" Redux: Sen. Romney was Bush who bailed out GM -- Obama forced it into bankruptcy...
Mitt Romney now thinks the bailout bad. At first I assumed that he'd used clever phrasing that could be given that spin, because as a former investment banker he should be familiar with more than just the basics of bankruptcy and restructuring. That is, it was a case of journalist sensationalism. But in fact he was clear, saying:
"The president tells us that without his intervention things in Detroit would be worse. I believe that without his intervention things there would be better." (Bloomberg of Feb 16)
Furthermore, this contrasts with his calls for more Federal assistance to the industry during his unsuccessful 2008 campaign.
Now there was a bailout of the industry under Pres. Bush, loans with no strings attached (or rather, "here's money to give you time to come up with a plan"). Pres. Obama was then faced with a choice of providing another bailout, or allowing General Motors and Chrysler to file for bankruptcy. We know his decision.
Back to Romney. Given how he made his hundreds of millions, he clearly is knowledgeable about corporate finance. So he should have no illusions – or maybe delusions – that at the time of the bankruptcy filings financial markets were not operating normally. To keep operating, however, a company needs to be able to borrow, to pay suppliers and workers, what is called DIP (debtor-in-possession) financing. Such financing was not available in private markets. Absent financing from the government, Chapter 11 bankruptcy would not have been possible.* Instead, what we would have seen was Chapter 7, an "orderly" dissolution of GM and Chrysler. Workers – both blue- and white-collar – would have lost their jobs immediately, along with their health care. Of course dealerships would have had no product to sell, and no ability to obtain continued financing – banks were nervous, and many large ones were themselves in trouble; car loans were already hard to find. Good luck, too, repairing a car. You'd be able to find brake pads, but not replacement body panels or computer chips or anything else that required "genuine" parts.
Suppliers were trying to stay afloat in the face of a 40% drop in sales; many were themselves in dire financial straits. (In fact, the final financing package made allowance that, authorizing GM to on-lend to suppliers.) They too would have been thrust into bankruptcy. This would have affected not just GM. First, over the past decade European and North American headquartered suppliers have done a fairly good job at penetrating the "transplant" makers, including Toyota. Had even a few mid-sized suppliers abruptly closed their doors, in all likelihood so too would have Toyota, Honda and BMW. While they may not have been thrust into bankruptcy, they would have put their workforce on unpaid leave, and left their suppliers without business. Indeed, as we saw with the March 2011 Tohoku Earthquake in Japan, the impact have stopped at our borders. Today's supply chain is interlinked on a global basis; in many segments in the parts business, US suppliers are the technological leaders, not Japanese ones. In the normal course of events plants in the US ship vehicle components and specialized materials around the globe (even if most production takes place nearer to their final customers in Germany, China and Brazil). We would have seen plants throughout the world facing temporary shutdowns.
As a result not just GM but also Toyota dealerships would have had no new vehicles coming their way. Furthermore, in 2009 banks themselves needed rescue; many had simply pink-slipped their entire auto finance operations. But many of Toyota's dealers also operate GM and Chrysler franchises. That Toyota technically was still in business would have been scant consolation as they watched their cars be (re)possessed** by their banks.
So to put it bluntly, all automotive-related production in the US, Canada and Mexico would have squealed to a halt in a matter of days, and most of the new car dealerships and portions of the vehicle repair business would likewise have shut down. Not just for GM, but for Toyota as well – with collateral damage to Canada (where banks were not up to their reserves in bad real estate loans) and manufacturing throughout the world. In January 2008 auto-related manufacturing in the US employed 950,000 workers; by April 2009 some 275,000 of those people had lost their jobs; the dealership sector shed 245,000 jobs. Had GM collapsed, another 500,000 manufacturing jobs and another 500,000 dealership jobs would have vanished overnight.
Conservatively – it doesn't attempt to measure jobs in steel and aluminum and paint, in trucking, and other sectors directly dependent upon the industry, much less local businesses that depend on such workers – this would mean 1 million jobs from the already depressed levels of Spring 2009. Of course losses by lenders to the industry would have amplified the "hits" to the banking sector coming from the mortgage sector and related derivatives.
Would Michigan be better off today? Let's assume that the above did not lead to a full-fledged recession on a national basis, and that we are seeing the tepid recovery of today (Feb 2012). Without GM and Chrysler, Toyota and Honda and BMW and Hyundai would be booming. Other than the Honda plants north of Columbus, however, none of these firms have plants within 3 hours of the metro Detroit area. In contrast, we would have seen virtually no jobs created in Michigan. And remember (well, none of us are that old…) that in the Great Depression the car companies didn't shut down – even if Ford and GM were employing fewer workers than in 1929. Unemployment in Michigan wouldn't just be percentage points higher than it is now, it would be higher than in the darkest days of the 1930s.
Back to Romney. That he thinks the State of Michigan would be better off without the so-called "bailout" is, well, inexcusable. His wealth suggests competence in the realms of high finance, of which bankruptcy is a piece. He knows enough of the auto industry to know that it is interconnected.
I wish he had the courage to stand by the truth. Instead he's turned his back on healthcare reforms that worked, and that the main part of Republican party supported not all that long ago. Yet attacking the ills of healthcare is one of two long-term issues facing our nation – our budget deficit can't be tackled without doing so, it is consequence not cause. He shows no boundaries on his willingness to pander. No, I take that back: he's not (yet?) renounced his Mormon heritage to become a Baptist.

• As in a standard bankruptcy, taxpayers and other large creditors took the equity stake when GM and Chrysler emerged from Chapter 11, rather than handing it to managers and bankers. Some apparently think we should have simply handed those shares to the banking system – apparently thinking they deserve additional lucre at our expense.
** Banks don't hold title, so they would be exercising a lien to take initial possession. The "repo" men hauling away cars wouldn't care.

Friday, February 10, 2012

Mock Convention Economics

Sen. Huckabee gave a speech at Washington and Lee on Friday, 10 February as part of W&L's quadrennial Mock Convention. I caught only a portion, in which he spoke of the role of values, that if all followed the Golden Rule, we would need no of government. What he said was thoughtful, at times eloquent, and certainly commensurate with my understanding of Scripture. But as a theory of government it is incomplete.
Certainly our brokenness is central for criminal law and the like; if sin were only skin deep rather than reaching to the core of our beings, the world would be a different place. But that represents but a small part of what a modern government does. In a modern economy, government is about our finite nature rather than our sinful nature.
Leviathan is above all local, not Federal. Government is first and foremost dominated by educating our children, and then by attending to the needs of our cars, providing us with water and taking care of our, uh, sewage, and with the exigencies of accidents. At the Federal level the largest function is addressing the side effects of aging, in particular the poor ability of markets to allocate resources over long time horizons in the face of high levels of uncertainty.
Trying to address these in a purely private manner presents insuperable challenges. Society benefits from a citizenry who are literate, numerate and engaged. Should a parent teach their child to read? send them to high school? – if it is left up to a market system, then the financial constraints that families face (after all, children come early in life, incomes peak later in life) and the uncertainties of the gains from education (does buying a college education really pay off?) would mean that we would regress to the 19th century, when illiteracy was pervasive.* And remember that education is not "bankable" – absent loan guarantees, who would lend money up front on the chance that years later Johnny or Julie would get a good enough job to repay with interest? This isn't a matter of sin – the issue persists even with an underlying willingness to pay.
Then there are simple efficiencies. Sewage treatment is costly, but less so if households can use a common system. Fire protection is hard to run on a pre-paid basis, and impossible on a fee-for-service one, billing a resident and their neighbors after a house burns down. Some of this stems from the challenges of coordinating the whole thing – setting up a membership system, convincing people to join, billing, and so on. Plus (rightly or wrongly) there is wide divergence of how much these services are worth. Government provides a one-stop-shop, while the political process tries to arrive at an acceptable compromise given the diversity of perceptions and preferences among society. But Americans are pretty good at team sports, and at management. All impressions to the contrary, over time we've improved the efficiency of government: despite a more complex world, and a far greater range of government services, it's no greater share of the economy now than it was in the 1950s.
So government does serve as a response to human brokenness. But it is also a response to our finite natures, to the costliness of information, and to the costs of coordination. The more complex a society is – the richer a society is – the greater the number of such issues, and also the greater the (market) value of our time. We simply can't be bothered with each and every issue, we don't have the knowledge, we don't know where we stand – and when we do, we seldom are so concerned as to be willing to spend time to work out our differences.
Of course this also means that government almost never gets things right.** Should we complain? No, we should get involved, while realizing that it's the unusual committee that votes our way all the time. That's what our forefathers did in rebelling against the British. It wasn't over taxes – after all, the first act of the new Congress was to levy one on tea. It wasn't over a failure to provide a legal system and courts, what we did there was pretty much to continue what the British had put in place. It was over voice. The Mock Convention hopefully instills a practical experience with that in Washington and Lee students that they will carry over into decades of active citizenship.
* Footnote: Now with guarantees, banks do lend, but students aren't good judges of whether for them education makes financial sense, plus they may simply prove unlucky, graduating with a degree at a time when no one is hiring. The track record of "manpower planning," of forecasting which skills will be in demand years down the road, is poor. So is any other attempt to predict the future. Would-be students are no more prescient than the experts. Markets don't work very well, can't work very well: without public provision our education levels would be abysmal. [If you never looked at a school or university budget, you may not realize that even private education is highly subsidized, with deductible charitable contributions, property tax and endowment income exemptions. Nor do we tax operating surpluses. (No, no! – "surpluses" are not profit.)]
** Footnote: Arrow's Impossibility Theorem shows this to be a general issue: all voting rules have defects. To rephrase this, no one ever seems to agree with me, and I get overruled in ways that are unfair–or are unfair to others. Arrow in fact has a second Impossibility Theorem, his proof of the existence of Walrasian general equilibrium, which is a necessary foundation for thinking that prices are good signals of scarcity. He in fact showed that the restrictions necessary for markets to work well and deliver the "right" prices are, well, too restrictive for the real world. And that's without factoring in either our finiteness or our sinful nature.