Wednesday, August 20, 2014

Lazear on Labor

Ed Lazear has a very nice short column, Job Turnover Data Show Lots Of Churning, Little Job Creation on Investor's Business Daily.

Modern labor economists see employment and unemployment as a search and matching process with a lot of churn. The popular impression, echoed in most media discussion, is that there is a fixed number of jobs, and people just wait around for more jobs to be "created." That's what it may feel like to an individual, but that's not how the economy works. Lazear's column puts in one very short space some of the better ways to think about unemployment.

The central fact of labor markets is huge churn, not a fixed number of lifelong jobs:

Tuesday, August 12, 2014

CON at it again.

An intriguing news item, University of Chicago's Plan to Add 43 Hospital Beds Quashed by the State by Sam Cholke about the University of Chicago's attempt to expand its hospital. And one more of today's costs-of-regulations anectodes.

In researching "After the ACA" about supply-side restrictions in medicine and health insurance, I became aware of CON ("certificate of need") laws. Yes, to expand or build a new hospital, in many states, you need state approval, and those proceedings are predictably hijacked politically. For once, they came up with an unintentionally appropriate acronym.

Immigration reading

Does Economics 101 Apply to Immigration? by Robert VerBruggen, a review of George Borjas' new book Immigration Economics.

The question is central to the immigration debate. If new people come in, do they depress the wages of competing workers here, and if so how much? "But it's 'suprisingly difficult' to demonstrate that this actually happens, according to the famed Harvard labor economist George Borjas. Very good review, need to read the book.

Of course, protectionism 101 still applies. If cheap Chinese sneakers come in, do they depress the profits of competing sneaker producers here? Yes. Does that mean we wall off trade? No, but neither ignore its distributional consequences.

FDA and the costs of regulation

The Wall Street Journal has had two recent articles on the FDA, "Why your phone isn't as smart as it could be" by Scott Gottlieb and Coleen Klasmeier on how FDA regulation is stopping health apps on your iphone, and Alex Tabarrok's review of "Innovation breakdown," the sad story of MelaFind, a device that takes pictures of your skin and a computer then flags potential cancers. The FAA's ban on commercial use of drones is another good current example.

One of our constant debates is how much regulation or the threat of regulation is slowing economic growth.  Over the weekend, for example, Paul Krugman, finding the New York Times itself too soft on libertarians,

Sunday, August 10, 2014

Anat Admati profile in the New York Times

Source: New York Times
When she talks, banks shudder. A very nice profile of Anat Admati by Binyamin Applebaum in the New York Times.

The article got most of the big points right. Banks don't "hold" capital, they issue it.
“The industry has benefited from, and sometimes encouraged, public confusion. Banks are often described as “holding” capital, and capital is often described as a cushion or a rainy-day fund. “Every dollar of capital is one less dollar working in the economy,” the Financial Services Roundtable, a trade association representing big banks and financial firms, said in 2011. But capital, like debt, is just a kind of funding. It does the same work as borrowed money. The special value of capital is that companies are under no obligation to repay their shareholders, whereas a company that cannot repay its creditors is out of business."
Look for the usage "banks hold capital" in the vast majority of financial press, including newspapers that should know better, for a sense of how pervasive this fallacy is.

The article mentioned the argument that equity costs more than debt, got right that much of that is due to debt subsidies and the difference between private and social cost:

Friday, August 8, 2014

S&P economists and inequality

The article starts with interesting comments about business economists have to know a little bit about the many tribes within the world of economics. There are the academic economists...many labor in the halls of academia for decades writing carefully vetted articles for academic journals that are rigorous as can be but are read by, to a first approximation, no one. 

Wednesday, August 6, 2014

QE and interest rates

Source: Wall Street Journal
In an August 3 article, the Wall Street Journal made the graph at left.

The US and UK have done a lot of "Quantitative easing," buying up long-term government bonds and mortgage-backed securities, to the end of driving down long-term interest rates. Europe, not so much, and the WSJ article quotes lots of people imploring the ECB to get on the bandwagon.

It's a curious experiment, as standard theory makes a pretty clear prediction about its effects: zero.  OK, then we dream up "frictions," and "segmentation," and "price pressure" or other stories. Empirical work seems to show that the announcement of QE lowers rates a bit.  But those theories only give transitory effects, and there is no correlation between actual purchases and interest rates. (p.2 here for example.)

So back to the graph.

Tuesday, August 5, 2014

Renewing Prosperity, The Op-Ed

For its 125th anniversary issue, the WSJ asked "If you could propose one change in American policy, society or culture to revive prosperity and self-confidence, what would it be and why?" Oh, and you have 250 words. I asked my son what to do. He answered quickly, "wish for more wishes." That's pretty much what I did.

My answer, along with some great other essays here at the WSJ. (WSJ asks us to hold off reposting for 30 days, which is why it's here now.)

Limit Government and Restore the Rule of Law

America doesn't need big new economic ideas to get going again. We need to address the hundreds of little common-sense economic problems that everyone agrees need to be fixed. Achieving that goal requires the revival of an old political idea: limited government and the rule of law.

Our tax code is a mess. The budget is a mess. Immigration is a mess. Energy policy is a mess. Much law is a mess. The schools are awful. Boondoggles abound. We still pay farmers not to grow crops. Social programs make work unproductive for many. ObamaCare and Dodd-Frank are monstrous messes. These are self-inflicted wounds, not external problems.

Why are we so stuck? To blame "gridlock," "partisanship" or "obstructionism" for political immobility is as pointless as blaming "greed" for economic problems.

Washington is stuck because that serves its interests. Long laws and vague regulations amount to arbitrary power. The administration uses this power to buy off allies and to silence opponents. Big businesses, public-employee unions and the well-connected get subsidies and protection, in return for political support. And silence: No insurance company will speak out against ObamaCare or the Department of Health and Human Services. No bank will speak out against Dodd-Frank or the Securities and Exchange Commission. Agencies from the Environmental Protection Agency to the Internal Revenue Service wait in the wings to punish the unwary.

This is crony capitalism, far worse than bureaucratic socialism in many ways, and far more effective for generating money and political power. But it suffocates innovation and competition, the wellsprings of growth.

Not just our robust economy, but 250 years of hard-won liberty are at stake. Yes, courts, media and a few brave politicians can fight it. But in the end, only an outraged electorate will bring change—and growth.

Macro debates, the oped

This is a a Wall Street Journal Op-Ed, on supply vs, demand in understanding slow growth. WSJ asks that I don't re-post the oped for a month; a month has passed so here it is for those of you who don't subscribe to WSJ.

The underlying paper is The New Keynesian Liquidity Trap, for those wanting more substance to some of the claims about New Keynesian models.

They didn't want the graph, but I think it illustrates the point well.

The Op-Ed, [with a few cuts restored and one typo fixed]:

Output per capita fell almost 10 percentage points below trend in the 2008 recession. It has since grown at less than 1.5%, and lost more ground relative to trend. Cumulative losses are many trillions of dollars, and growing. And the latest GDP report disappoints again, declining in the first quarter.

Sclerotic growth trumps every other economic problem. Without strong growth, our children and grandchildren will not see the great rise in health and living standards that we enjoy relative to our parents and grandparents. Without growth, our government's already questionable ability to pay for health care, retirement and its debt evaporate. Without growth, the lot of the unfortunate will not improve. Without growth, U.S. military strength and our influence abroad must fade.

Hedge Funds

I recently stumbled across the FT Alphaville collection on hedge fund performance.

The latest, "The hare gets rich while you don't: back the passive tortoise" reviews a Nomura report covering the performance of "alternative investments," private equity and hedge funds. (The report is here, alas behind the FT's very confusing paywall.) A while ago I put together a class and talk covering hedge fund literature, but haven't updated it in a few years so reviews with updates are particularly interesting.

The fact that hedge funds and private equity have a lot of beta -- often hidden by infrequent or inaccurate marking to market -- remains true:

Saturday, August 2, 2014

Work and Jail

I have run in to some interesting recent readings on the nexus between work, or the lack thereof, jail and drugs.  In case you didn't know, the numbers are staggering.

The table below, from The Prison Boom and the Lack of Black Progress since Smith and Welch by Derek Neal and Armin Rick, gives the fraction of black male high school dropouts employed, and below that the fraction that are institutionalized -- mostly in jail.

So, bottom left, in the last census, 19.2% of 20-24 year olds were employed, and 26.4 (!) percent were in jail. Read up, and it was not always thus. Of the cohort born in the 1930s, at the same age, 68% were employed and 6.7% were in jail -- in a society and criminal justice system that was, whatever our current faults, much more overtly racist. The numbers for older men are just as shocking if you haven't see these before.

Sunday, July 27, 2014

Bair and Reserves for All

I think the Fed's new Overnight Reverse Repurchase Facility is great. Sheila Bair, in the Wall Street Journal, thinks it's awful.

I think it will enhance the stability of the financial system. She thinks it will lead to instability. Well, at least we agree on the important issue.

Thursday, July 17, 2014

Lucas and Sargent Revisited

The economics blogosphere has a big discussion going on over Bob Lucas and Tom Sargent's classic "After Keynesian Macroeconomics." You can start at Simon Wren-Lewis, Mark Thoma here and here and work back through the links.

A few thoughts here, as it bears on my WSJ oped from last week and my last post on EFG and how we do macro.

1. Views of Keynesian economics

Re-reading this paper, you will be struck about how much Lucas and Sargent praise Keynesian models, which you'd think it is their purpose to destroy.

They called the Keynesian revolution a "remarkable intellectual event." they continued

Sunday, July 13, 2014

Summer Institute

I just got back from the NBER Summer Institute. The Economic Fluctuations and Growth meeting organized by Larry Christiano and Chad Jones sparks some thoughts on where macro is and where we're going. (I also attended the monetary economics and asset pricing meetings, which were excellent and thought provoking too, but one can only blog so much.)


Friday, July 11, 2014

Summer Institute Dining

I'm at the NBER summer institute. By quirk of fate I ended up spending a week here, with my son, so we ended up exploring a lot of local restaurants. There's no NBER wiki for "summer institute restaurants" so we'll start one here. There is now a rent a bike stand right in front of the Galleria which makes getting some places a lot easier.

So, here are our best finds. Use the comments to post yours. Perhaps Cambridge locals will have good suggestions or comments on these.

Tuesday, July 8, 2014

A Legislated Taylor Rule?

John Taylor announces in his blog post, "New Legislation Requires Fed to Adopt Policy Rule'' that today (June 8)

.. the ‘‘Federal Reserve Accountability and Transparency Act of 2014” was introduced into Congress. It requires that the Fed adopt a rules-based policy. Basically, the Fed would have to report to Congress and explain any deviation from a "Reference policy rule,"
The term ‘Reference Policy Rule’ means a calculation of the nominal Federal funds rate as equal to the sum of the following: (A) The rate of inflation over the previous four quarters. (B) One-half of the percentage deviation of the real GDP from an estimate of potential GDP. (C) One-half of the difference between the rate of inflation over the previous four quarters and two. (D) Two.
Wow. John will testify at a hearing at the House Financial Service Committee on Thursday, along with Mark Calabria, Hester Peirce and Simon Johnson. This should be very interesting.

Questions for discussion:

One idea for renewing prosperity

For its 125th anniversary issue, the WSJ asked "If you could propose one change in American policy, society or culture to revive prosperity and self-confidence, what would it be and why?" Oh, and you have 250 words.

My answer, along with some great other essays here at the WSJ as "Ideas for Renewing American Prosperity."

I asked my son what to do. He answered quickly, "wish for more wishes." That's pretty much what I did.

Wednesday, July 2, 2014

Macro debates

Wall Street Journal Op-Ed, on supply vs, demand in understanding slow growth.

The underlying paper is The New Keynesian Liquidity Trap, for those wanting more substance to some of the claims about New Keynesian models.

They didn't want the graph, but I think it illustrates the point well.

Please follow the link for the oped itself.

Tuesday, July 1, 2014

Deflation Skeptics

Michele Boldrin, Giovanni Federico and  Giulio Zanella have an excellent essay on noisefromamerika, Should we worry about deflation? Maybe yes, maybe no. (If your Italian is rusty, Google translate does a fine job with it.) This matters of course, as deflation is the great European preoccupation at the moment.

They remind us that, although deflation was correlated with the Great Depression in the US and some other countries,
Source: "PIL" is GDP
that correlation is not universal. For example, in the late 19th century, deflation coincided with strong growth,

What's the difference?

Monday, June 30, 2014

Slok on Greek Wages

Source: Torsten Slok
Torsten Slok, prodigious producer of graphs, sends this one along.

A section of macroeconomics holds that nominal wages are sticky, pretty much forever. Hence, countries like Greece need their own currencies so they can depreciate them. Somehow this didn't produce great prosperity the first, oh, 147 times Greece tried it, but anyway, it's common to bemoan how terrible it is for Greece to be part of the euro because wages can't fall and it can't depreciate.

Or not, as the graph shows.