Thursday, June 24, 2021

Even Finance Professors Lean Left

You may have thought of finance professors at business schools as likely to be a fairly conservative lot, or at least to include a good number of them. You might think finance would be an exception to the growing political monoculture in US academia. You would be mostly wrong.  

Emre Kuvvet tracked down the party affiliation of finance professors in the top 20 US departments, and wrote up the results in "Even Finance Professors Lean Left


Berkeley has more Republicans than Chicago? I think numbers are low because so many faculty are not US citizens. It's initially striking  how many finance faculty are not even registered to vote, but I suspect that this reflects the large number of non-US citizens in finance departments. 


Here come the millennials... Or, maybe Churchill was right about hearts and brains. 

Journal editors: 

Not even the JFE can manifest many Republicans! 

Of course this is a striking amount of political diversity by the standards of the rest of most universities. 




Thursday, June 17, 2021

Garicano's conversations with economists


Luis Garicano has just posted a very interesting free e-book, "Capitalism after covid: Conversations with 21 economists." I was honored to be one of his interviewees, video here. Luis has a VoxEU column summarizing conversations, and twitter thread if you like reading such things. Luis is a great interviewer. 

This is not an endorsement of all the ideas! Luis found a wide spectrum of ideas, and I think that is the strong thing about the project. You can see how really smart people, on top of the latest academic research, come to still widely different conclusions about the current state of affairs and directions we should go. Though Luis is a pretty free-market Chicago guy, he did not impose that view which I find admirable. 

In particular, referring to the VoxEU column, I would take issue with 

The bulk of the shock was absorbed by the public sector budget. 

That the world could produce such a massive, coherent, and rapid economic response to the pandemic had a lot to do with the consensus that quickly emerged among economists on how best to respond to the unprecedented shock...

Unlike during the Great Financial Crisis, when there was an often-acrimonious debate between economists arguing for austerity and those arguing for stimulus, the priorities were clear: 

Central banks should be concerned with maintaining financial stability and providing limitless liquidity to debt markets. 

Governments should prioritise the maintenance of household incomes through generous support for workers’ incomes, albeit with different approaches in the US and Europe: significant expansions of unemployment insurance in the US and the general deployment of ‘Kurzarbeit’ in Europe.  

Governments should provide ample liquidity facilities to firms, making it possible for them to emerge as undamaged as possible by the lockdowns. 

Finally, large, debt-financed public investments would be needed to support the recovery. 

I  disagree loudly with just about all of this, and thereby especially enshrining these expedients as "consensus" ready to be deployed at even larger scale in the next pandemic. 

If there is consensus on anything it is that our governments completely bungled the public health aspect of this crisis, with the exception of a few countries like South Korea and Taiwan. The FDA and CDC are particularly at fault for blocking testing and vaccines. 

Why did covid produce an unprecedented economic collapse, while the 1958 and 1918 flus produced nary a blip of GDP? Because of the completely overdone business lockdowns. The economic shock was caused by the government not by the virus. What good did it do to run up government debts by trillions in order to send checks to retirees and people who were happily working? I'm sure everyone likes more money, but that has nothing to do with covid. Apparently half of expanded unemployment was stolen (I even got notice someone trying to file in my name). " large, debt-financed public investments would be needed to support the recovery." Consensus on that please? Not from here. The recovery is doing fine on its own, and adding more to the abstract sculpture taking place in the Central Valley under the auspices of a high speed train from Bakersfield to Modesto is not going to help. And why is nobody even thinking moral hazard? We now have enshrined a system in which nobody may lose money in a recession, asset prices will be propped up by central banks. Why not lever to the hilt? Why keep some cash around, as there will be no more buying opportunities? 

But that Luis interviews such good and prominent economists and finds support for this sort of boondoggle policy is interesting. 

Tackling inequality. Over the last few decades, inequality in household income and wealth has increased dramatically in the West.  

This is simply not a fact. (See Grumpy coverage of Austen and Spinter here.) Inequality in pre-tax pre-transfer income has increased. Who cares about that? Inequality of mark-to-market wealth has increased as founders stock values have risen. Who cares about that? 

Several interviewees explain the progress economists are making in tackling these problems. Atif Mian argues that to reduce inequality, policies must focus on achieving more equitable growth through a significant increase in public investment, and second, on addressing some of the legacies of the imbalances, particularly through an increase in the progressivity of taxation. 

Well, if you are a grumpy follower you will find there a well articulated points to disagree with. The US already has the most progressive tax system in the world BTW. And back to more high speed trains to nowhere.. 

Stefanie Stantcheva discusses how to design better taxes and how to improve people´s understanding of those issues. Oriana Bandiera highlights a significant shift in our understanding of poverty that implies that social assistance programmes, that traditionally were designed to subsidise consumption, should shift to being geared towards investment. Esteban Rossi-Hansberg discusses the concentration of talent and economic activity in cities and the extent to which the ‘Zoom revolution’ will upend this concentration and wonders whether that would be desirable, given the potential loss of positive externalities of physical proximity.

But here are some good-sounding innovative ideas, to give you a sense that economists don't just line up on typical left-right spectrum. I need to read those. 

Containing the new leviathan.  It is quite likely that, after the unprecedented policy response to the pandemic, governments will grow permanently larger, leading to an increase in interventionism and, potentially, crony capitalism, as Daron Acemoglu argues. Different countries will sharply diverge in their response to this “critical juncture”. The ones who better succeed will introduce stronger democratic institutions to keep governments in check, as both Acemoglu and Lucrezia Reichlin argue. We also need to improve the way public organisations are managed, a focus of the interviews with Raffaela Sadun and Carol Propper.  Wendy Carlin explains how balancing this larger role for the state requires building a stronger and more resilient civil society – strengthening the ‘third pole’.

This all sounds really interesting. Economics and economists are most interesting when out of the political boxes! 

Tackling climate change. ... Reducing carbon emissions, as Michael Greenstone explains in his interview, must be the only priority – not to be confused with delivering the goodies to voters. 

Voters and interest groups. Mother Gaia does not care if the electric car charging stations and solar panels are made in the US by union members or made in China at a tenth of the cost. 

Yet, after the pandemic, as Nick Stern argues, investing in tackling climate change is the best way to invest for the post-pandemic recovery. 

I will not pre-judge, but if this is more broken windows fallacies and create more jobs by using spoons not shovels, I will be skeptical. 

In sum, this looks interesting throughout and a good view into the spectrum of analysis that economists are bringing to contemporary issues. 

The list of interviewees is 

Debt sustainability

Markus Brunnermeier: Let’s compare the central bank to a race car
John Cochrane: Throwing money down ratholes
Jesús Fernández-Villaverde: Economists and the pandemic
Agnès Bénassy-Quéré: How to design a recovery plan

Tackling inequality

Oriana Bandiera: Overcoming poverty barriers
Stefanie Stantcheva: Taxes and social economics
Esteban Rossi-Hansberg: Will working from home kill cities?
Atif Mian: The savings glut of the rich

A more balanced globalisation

Dani Rodrik: Globalisation after the Washington Consensus
Pol Antràs: Is globalisation slowing down?
Michael Pettis: Trade wars are class wars

Containing the new leviathan

Daron Acemoglu: The Great Divergence
Wendy Carlin: The Third Pole
Lucrezia Reichlin: Democratising economic policy
Carol Propper: Targets and terror
Raffaella Sadun: Management for the recovery

Promoting innovation and curbing the power of digital giants

Philippe Aghion: Is ‘cutthroat’ capitalism more innovative?
John Van Reenen: The Lost Einsteins
Fiona Scott Morton: What should we do about big tech?

Combatting global warming

Nicholas Stern: Zero-emissions growth
Michael Greenstone: The real enemy here is carbon

Sunday, June 13, 2021

Meritocracy

Adrian Woolridge wrote a thought-provoking essay titled "Meritocracy, Not Democracy, Is the Golden Ticket to Growth," advertising a forthcoming book. 

Meritocracy, the secret sauce of growth?  

To Woolridge, meritocracy is the secret sauce of prosperity: 

The surest sign that a country will be economically successful is not the health of its democracy, as some liberals like to think, or the leanness of its government, as some free-marketers imagine, but its commitment to meritocracy. Singapore is a soft authoritarian power. But it has transformed itself in a few decades from a poverty-stricken swamp into one of the world’s most prosperous countries, with a higher standard of living and a longer life expectancy than its old colonial master, because it is perhaps the world’s leading practitioner of meritocracy. The Scandinavian countries have some of the world’s largest governments and most generous welfare states. But they retain their positions at the top of international league tables of prosperity and productivity in large part because they are committed to high-quality education, good government and, beneath their communitarian veneer, competition; in other words — meritocracy.

By contrast, countries that have resisted meritocracy have either stagnated or hit their growth limits. Greece, a byword for nepotism and “clientelism” (using public-sector jobs to reward partisan cronies), has struggled for decades. Italy, the homeland of nepotismo, enjoyed a postwar boom like France and Germany but has been stagnating since the mid-1990s....

Democracy alone does not lead to growth, and likewise growth does not swiftly lead to democracy. Look at China vs. India, and many democratic, at least in the sense of leaders chosen by fairly free elections,  but poor countries around the world.

For a generation, political economists have been looking more deeply at institutions -- rule of law, property rights, etc. -- as a secret sauce. "Meritocracy" is a good buzzword for a different idea of what is centrally important. 

...countries that favor recruiting professional managers through open competition have higher growth rates than those that favor recruiting amateur managers through personal connections. America has the highest overall management score, followed by Germany and Japan. Rich-world laggards such as Portugal and Greece, and big emerging-market countries such as India, have a long tail of un-meritocratic and therefore badly managed firms.

The essay goes on, condensing much more evidence. 

It is plausible that meritocracy is especially important now, as businesses globalize and incorporate IT. The rising skill premium and larger reach of global corporations means that it is ever more important to match skilled people with the positions that require skill.

 His bottom line 

... The idea that there is a necessary relationship between democracy and growth rests on a false positive. The really robust relationship is between meritocracy and growth. ..

the evidence of economics is overwhelming: Meritocracy promotes prosperity, and dismantling meritocracy will reduce it. Those who support the current campaign against merit need to admit that they are opting for lower growth. 

I am not an expert on the huge political/economic literature on the correlates of growth. This sounds reasonable, but the Acemoglus, Barros, etc. of the world may have important things to say on the evidence. Still, it's a novel idea and let's follow it.

Saturday, June 12, 2021

Vaccine slowdown?

 


Source. Everyone seems tired of covid. And sure, inflation, debts, "infrastructure," competing voting narratives and so on are more fun. But covid is still with us. 

The graph summarizes what I've read in lots of news stories: vaccination is slowing down. There is plenty of supply, but we are running in to people who do not go get the vaccine. 

This strikes me as a tragedy. (Disclaimer: this is an exploratory post, and I'm anxious to hear about it from more knowledgeable people). It means covid will remain with us as an endemic disease, occasionally breaking out as immunity fades and covid evolves. We're on the 20 yard line, folks, it's not time to punt.

I'm pretty darn libertarian, but not about vaccinations. The US should be pushing for near universal vaccination. This is like finishing your dose of antibiotics. 

We do not have to jump to compulsion. Can we at least allow incentives? Vaccine passports sound like a no-brainer even to a libertarian. Allow me to disclose that I am vaccinated, and allow owners of private property like restaurants, bars, airlines, and so forth to demand proof of vaccination. That provides a nice incentive for people to get vaccinated. 

Our policy makers seem so completely deranged by the tiniest "equity" concerns that even this simple step is off the table. On NPR the fact that some disadvantaged groups refuse the vaccine means the rest of us can't have passports. Republicans are also refusing the vaccine, and nobody cares about that! Yes, some immunocompromised people can't get vaccines. Well, on that altar are we going to allow everyone else off the hook, or push to get others vaccinated so they don't infect immunocompromised people -- who shouldn't be going to bars anyway. This debate goes on and on, and time is wasting. 

Even the public messaging has faded away. Our nudgers in chief should be nudging like crazy -- go get vaccinated, people! 

 


I think my best moment as a blogger last year may have been my SIR model with behavior  that predicted the reproduction rate would settle down near one. When it's larger than one, people are more careful, including getting the vaccine. When it's less than one, people slack off. We are seeing a massive case of people, and politicians, slacking off of the one most important step, full vaccination. 

Eurosclerosis update

 


All pre-covid. European GDP per capita fell in the decade following the financial crisis. US growth was nothing to write home about, but things could be worse. The we-should-be-more-like-Europe crowd has some explaining to do. (The Word Bank's software misplaced the UK label; it is the red line on the top of the European group.) From the World Bank, HT Marginal Revolution.

The graph is in dollars, so part of the effect is that the dollar got more valuable relative to the euro. (Thanks to the commenters who noticed that I misread the graph caption. Blog post now fixed to reflect that.) 

Update

A correspondent sends along the following graph from IMF data. IMF data uses PPP adjustments, not straight conversion to dollars. So the exchange rate really is an issue in comparing US to EU growth.  


Relative inflation has not been that different between the two countries. 


At least by these measures, EU inflation has been only very slightly less than US inflation 

So indeed, the exchange rate is the major part of the difference between the two graphs. Whether PPP or actual exchange rates are "right" for this purpose I leave for another day. Certainly the average American's ability to buy European goods has risen relative to the average European's ability to buy American goods. Why exchange rates diverge so long from PPP measures remains, I think, a central puzzle. But thanks to blog readers for quickly pointing out that the Marginal Revolution graph isn't as immediately relevant as it seemed. 


Friday, June 11, 2021

Whither the Fed

I gave the UCSD economic roundtable lecture Friday June 11 on inflation and the future of the Fed. It summarizes quickly a number of themes from previous Grumpy writings, and if you enjoy videos you might find it fun. Youtube link in case the above embed does not work. 

I happened on the New York Fed website, proclaiming on its landing page that it is now

"...dedicated to understanding and finding solutions to the numerous forms of inequality that communities of color experience and working with communities in our District to address deep-seated inequities," 

in case you want documentation that the Federal Reserve is taking on inequality and racial issues. 

Slides available here

Thursday, June 10, 2021

The end of "the end of inflation"

This spring's spurt of inflation clearly already means one thing: The end of "the end of inflation." 

For 25 years inflation has seemed stuck on a downward trend. Those of us who worry about it seemed like end-of-the-world sign-holders that couldn't leave the 1970s behind. It's hard to buck the trend. A famous economist advised me to give up studying inflation -- inflation is 2%, he said, that's all you need to know. Apparently a new constant of nature. 

Well, apparently not. Inflation can happen, and there is an economics of inflation. Right now it's pretty obvious -- supply constraints both natural and artificial, coupled with rampant demand. 

Nobody is really sure where it will go. See the IGM survey for a good indication of how wide sensible consensus is on the issue. Maybe these are just temporary shocks, supply bottlenecks, a one-time price level rise from stimulus. Maybe it is the beginning of the 1970s, when exactly the same excuses were offered. 

I'll summarize my bottom line in thinking about this issue. 

1) The dynamics of inflation are roughly     

    inflation = expected inflation + inflation pressure   (*)

If people expect higher inflation next year, then sellers will be quicker to raise prices, and buyers quicker to pay higher prices.  The right measure of inflation pressure is more contentious. The unemployment rate or GDP gap (you will recognize a Phillips curve here) has been a pretty terrible measure. Take your pick of too-low interest rates set by the Fed, too much money, or too much debt and deficit. Whichever it is, if expected inflation remains "anchored," inflation comes back quickly once the pressure is off. If not, we're  in trouble as we have to bottle the expected inflation genie. 

The Fed seems to think that "anchoring" expectations comes from soothing speeches about how anchored expectations are. At worst they may say they have "the tools" to contain inflation should it break out, but they seldom say just what those tools are. I believe that expectations come from expected actions, not speeches, and better from robust institutional rules and commitments that force necessary but unpleasant actions when needed. At least, people must believe that the Fed is willing to repeat 1980 if it comes to that.  And raising interest rates will be much harder now, with a) 100% debt / GDP not 25%, so higher interest rates immediately hurt the budget b) huge reserves so the Fed will be seen to pay a windfall to big banks not to lend out money c) the too-big-to-fail banks will all lose a bundle if interest rates rise d) the current emphasis on inequality, as a recession will hurt the most vulnerable the most. 

2) In today's economy, in the end, inflation comes when people do not believe the government will repay debt. Beyond interest rates, the Fed changes the composition of government debt -- reserves vs. treasurys -- but not the amount of debt. Whether we hold treasurys via the world's largest money market fund (that's what the Fed is) or directly really does not matter. 

Inflation does not come from debt alone, but from debt relative to a credible plan and expectation that debt will be repaid. Expected inflation is anchored by the belief that  if inflation gets out of control our government will promptly put its fiscal as well as monetary house in order. Moreover, since our government has tragically borrowed short term, inflation comes when people believe that other people will lose this faith. Putting the fiscal house in order is not hard as a matter of economics -- a straightforward pro-growth reform of the tax code and entitlements. But our government has kicked that can down the road for nearly 40 years, and absolutely nobody wants to do it. It may have to come after the crisis, which will be much harder. 

None of this is very useful as a short-term forecast, which I do not offer. Both fiscal and monetary policy expectations, in this "regime-switching" moment, are volatile, not well anchored by decades of experience with a "regime," in the rational expectations tradition. I can offer then a summary of the forces at work, but those forces only emphasize how hard forecasting will be. If anyone could tell you for sure we would have inflation next year, we would already have inflation today. The logic of (*) is like the logic of a bank run or a stock market crash. That nobody can predict inflation well is proof of the theory. 

This spurt may pass, and expected inflation, reflecting faith in the ultimate sanity of US fiscal and monetary policy, remain anchored. This spurt may lead to a quick undermining of that faith. 

But at least the question is alive again, and a matter of useful economic analysis and debate. This for sure: The end of "the end of inflation" is at hand. 




Why won't banks take your money?

 Banks to Companies: No More Deposits, Please, says the puzzling headline at WSJ. 

Why would bankers not want to take any amount of deposits, park them in reserves at the Fed or short term Treasury bills, charge fees and a slight interest spread, and sign up for an early tee-time at the local golf club? Sure "net interest margin" or other metrics might not look good, but money is money and more money is more money. 

The answer: 

Top of mind for many big banks is a rule requiring them to hold [sic] capital equivalent to at least 3% of all assets. Worried about the rule’s impact during the pandemic, the Fed changed the calculation in 2020 to ignore deposits the banks held at the central bank, but ended that break this March. Since then, some banks have warned the growing deposits could force them to raise more capital, or say no to deposits.

This is a fascinating little insight into the crazy world of our Fed's risk regulation. 

Three inflations

 The latest inflation numbers are out, up 0.64% from April to May (7.7% annualized), on top of 0.77% (9.2% annualized) from March to April. . To get around the base controversy, I like to plot the level of the CPI: 


The graph suggests that  "reflation" from the pandemic recession was over last year, we had been back to the usual growth, and now we're embarked on something new. 

Inflation is not the same everywhere. For another purpose I broke inflation down to durable goods and services. 


Until about 1985, the three categories moved together. After that we saw a sharp divergence. Inflation depends on what you buy. Services got much more expensive, while durable goods actually saw deflation. The forces are familiar. The rise in skill premium has meant that people got more expensive, and some of that reflects also the rise in cost of businesses such as health care and universities which may have more to do with government payment. Durable goods got cheaper, thank you China, but also they got a lot better and the CPI decline reflects quality adjustments rather than lower sticker prices. (Nondurables and housing behave a lot like the average, so I don't show them.) 

Not all inflation is the same, and what you experience depends on what you buy and where you buy it. 


Now to the point: Where is the current surge in inflation coming from? I rebased the CPIs to 2018, and here they are. No surprise, the current surge of inflation is concentrated in durables.  Durables went up 3% April to May, a 36% annualized rate, on top of 3.52% March to April!  The others are rising too, interestingly, but not as spectacularly. It's also interesting that the big decline in the pandemic was among nondurables. This is all common sense. Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and "stuff" is now really getting hard to find and to produce. 

As Tyler Goodspeed points out, this inflation has wiped out the real value of recent nominal wage gains.

(For analysis, the "inflation" tag has several recent posts on the topic.) 

 

Sunday, June 6, 2021

What about Japan?

What about Japan? It's a question I often hear from advocates of fiscal expansion. Japan has huge debts and no crisis or inflation (so far). Doesn't that prove the US can borrow a ton more money painlessly? 

I offer two new points today: 1) Not every high debt country is so happy. 2) Just what did Japan get for all its fiscal stimulus? Indeed, I will start asking "What about Japan?" Japan seems a tough case for those who advocate that fiscal stimulus will save us from secular stagnation, or that huge spending programs bring prosperity in other dimensions.   

1. Picking and choosing

Here, fresh from the April IMF Fiscal Monitor  is the list of top 30 countries sorted by debt to GDP ratios. I boldfaced larger countries. 


Yes, Japan is up there at 256% of GDP. The champion is Venezuela however. Sudan and Eritrea are not particularly known for economic prosperity. Greece and Italy are not held up as examples to follow either. Serial defaulter Argentina is behind the US already. 

If Japan is sustainable, that doesn't mean all large debts are sustainable. It means there's something different about Japan than the other countries on the list -- or ones now lower down on the list because they already defaulted or had crises. 

2. So what did Japan get for all that debt anyway? 


It was not always thus. Japan started borrowing heavily in the 1990s from a debt/GDP ratio of 63%. (For some reason the IMF does not have US data before 2002.) 



Those debts come from deficits, of 5-10% of GDP every year. Since 2006, the US has been behaving a lot like Japan, or more so. We only have less debt because the US ran surpluses through the 1990s. 

Japan has had perpetually low GDP growth, low inflation and zero interest rates since the 1990s. I view it as low "supply" growth, but it ought to be the poster child for "secular stagnation" fans. 

So I turn the question around: If massive deficits, including lots of "infrastructure"  are going to boost the US economy, why did they not do so for Japan? 

Update

In response to tweets about why is Japan different from the US,  

I did not want to repeat old points. Japan's debt is long-term, held by domestic people, pensions and central bank. US debt is short-term, held by foreign central banks and financial institutions. Our debt is much more prone to run, and a rise in interest rates will feed quickly into the budget. Japan also has accumulated assets from trade surpluses; we have the opposite. Japan's debt is held by old people and subject to estate tax. A lot of Japanese hold bank accounts, as mutual funds and similar investment vehicles familiar in the US are less prevalent. Bank accounts flow in to reserves, backed by Treasury debt. 

More importantly, Japan  does not have looming unfunded Social Security and Medicare, underfunded pensions, contingent liabilities (Fannie and Freddy guarantee most home mortgages, who is going to pay student loans?) bailout guarantees and more.

 Sustainability is about debt vs. ability to repay; about future deficits;  not debt alone.

Japan's slow growth for three decades comes from microeconomics, taxes, regulations, demographics, slow productivity, not money, stimulus, "aggregate demand." 

Thursday, June 3, 2021

Proxies

A correspondent asked for comment on the new ESG trend among asset managers. For example, BlackRock, and the recent Exxon upheaval with two new green directors (here, but cautionary WSJ coverage here, pointing out how empty the whole Exxon affair really is).  I'm sad to see even Vanguard (which has a lot of my money) going along on this...trend. 

Could you offer some thoughts about the trend of asset managers voting more critically this year? Are the big fund firms like BlackRock getting too far removed from the wishes of their customers? Other analysts say that BlackRock and other ESG-minded fund firms are only following the wishes of their younger investors who care more about those themes, maybe that makes it all ok?

My answer: 

As a private property fan, if the owners of a company want to spend its money on pointless virtue signaling, or important but unprofitable save-the-planet and cure-racial-injustice initiatives (depending on your point of view),  that’s up to them. I would rather get rid of the whole corrupt non-profit status anyway and see lots of organizations organized as corporations devoted to causes right and left. 

The issue here is representation. A very small minority is making these decisions on the behalf of a large and unrepresented majority. For example, if you have a company 401(k) managed by a plan, invested in a mutual fund, who hires out their proxy voting to a service, the decision to trade money for social good, and just what constitutes social good, is a long way removed from your preferences. (Me and Vanguard, for example.) 

Sunday, May 30, 2021

Brazilian Inflation

This marvelous plot comes from an interesting article, The Monetary and Fiscal History of Brazil, 1960-2016 by Joao Ayres, Marcio Garcia, Diogo A. Guillén, and Patrick J. Kehoe. The article is part of the Becker-Friedman Institute Project, complete with a big and now easily available data collection effort, and forthcoming book

If you want a deep historical and economic analysis of fiscal and monetary interactions, this is an amazing resource. And it summarizes historical episodes that North Americans just might want to know more about soon! 

(HT Ricardo Reis who pointed it out in a great discussion last week, that I will post as soon as it's available.) 

Friday, May 28, 2021

NBER monetary economics is up to date

I just got the program for the upcoming NBER summer institute monetary economics conference program.  Who says academics aren't up to the minute on policy issues? This will be interesting. 


 


Thursday, May 27, 2021

r less than g seminar

 I gave an Economic policy working group talk at Hoover on Wednesday, on a little essay "r<g" with some earlier thoughts from "low interest rates and government debt" If the above embed doesn't work, it's on the Hoover webpage here.

Does an interest rate lower than the growth rate of the economy mean that debt is a free lunch, or at least a really cheap snack? I don't think so. Major points: the r<g scenarios of one-time borrowing or financing a small deficit are irrelevant for the US actual fiscal issues of perpetual huge deficits and exploding debt. I also grapple with the economics. An economy can have a well defined debt equals present value of surpluses, in which deficits must be repaid, yet show E(r)<E(g). The usual finite horizon discount factor tricks can blow up. Toward the end Markus Brunnermeier catches a subtlety important to my characterization of his work, which I will fix in the next draft, though the existing points seem to go through. (Thanks Markus for showing up and pointing it out.)  

I started with a bit of a snarky comment which I now regret, that r<g had fallen out of favor relative to "we have to pay for it, raise the corporate tax." I gather the big budget to be announced Friday moves discussion of "debt sustainability" away from debt to GDP ratios and to interest costs. So r<g, just how long it will last, and just what falls apart when it changes is like, will be back full force in the policy arena. 

Lots of r<g papers are being written with many subtle mechanisms. This is an effort to get to basics. 

Thursday, May 6, 2021

Weisbach advice

I got a chance to see the page proofs of Michael Weisbach's upcoming book, "The Economists' Craft."  This leapt out at me from the preface: 

A second observation I have made over the years is that, perhaps because of a lack of good advice, many scholars, both doctoral students and faculty members, constantly make the same mistakes. Far too many publicly circulated papers contain incredibly long, mind-numbingly dull literature surveys; introductions that go on and on before they tell the reader what the point of the paper is and why the reader should bother to waste her time on it; data descriptions containing insufficient detail for a third party to replicate the results; tables that are unnecessary, badly labeled, or hard to understand; or overly dry prose written in the passive voice and apparently designed to put the reader to sleep. In addition, many scholars manage their time so badly when giving presentations that they do not get to the main results of their paper until the last five minutes of the talk. Their presentations are often poorly designed, with slides that are incomprehensible or even unreadable owing to their use of fonts so small that participants sitting more than a few rows back cannot read them. Young faculty routinely mismanage their career by not having a coherent research agenda, not getting their papers to journals, or not making connections with people in their field who teach at other universities. Sometimes they do not even bother to show up for seminars in their field at their own university.

 So true. This book's contrary advice will be very useful. 

Monday, May 3, 2021

The price of indulgences, 2021

 


Source. My correspondent provides the answer: 

5bps: IVV (column #3) (iShares Core S&P 500 ETF)

15bps: ESGU (column #1)  (iShares ESG Aware MSCI USA ETF) 

30bps: LCTU (column #2) (BlackRock U.S. Carbon Transition Readiness ETF) “Sea change” quote from BlackRock here 

I have not independently checked, though the answer hardly matters. The fees and portfolios tell the story. Obviously any claim that this ESG portfolio will outperform after fees is ... strained. 

When I did my Senate testimony on financial regulation and climate change, someone (I forget who)  suggested that financial regulators need to really crack down on ESG, carbon, diversity, and other virtue claims by investment managers and large corporations. I heartily agree. Of course, we have different motivations.  I got the sense that the person suggesting it wanted to make sure companies really did keep all their virtuous promises. I think that being forced to document their virtue, with criminal penalties for securities fraud hanging in the balance, would show just how empty this whole exercise is. 

Update: To be clear, I'm all for the free market. If people want to pay 30 bps for glossy feel-good marketing materials (click the above link) attached to their S&P500 fund, more power to them and the producers of such materials. Of course, central banks who have spent 30 years bemoaning "bubbles," "overpricing" "speculative enthusiasms" might not want to be piling on to such efforts. Again. 


Thursday, April 29, 2021

Cruz on crony capitalism

Senator Ted Cruz wrote a blistering Wall Street Journal Op-Ed decrying CEOs who pander to Democrats by making profoundly uninformed public statements. He announced that he will no longer take money from their corporate political action committees. And, he states

This time, we won’t look the other way on Coca-Cola’s $12 billion in back taxes owed. This time, when Major League Baseball lobbies to preserve its multibillion-dollar antitrust exception, we’ll say no thank you. This time, when Boeing asks for billions in corporate welfare, we’ll simply let the Export-Import Bank expire.

Cruz' statement is unintentionally devastating. So what about last time? 

So there it is in front of us, in writing, from a major politician. Political support, and campaign cash bought $12 billion tax breaks, antitrust exemptions, and Ex-Im subsidies. From Republicans. So much for any public policy pretense. And if those CEOs just figured out who has the power to hand out goodies now, and the Democrat's demands for public obeisance as well as cash, well, it's a lot harder to object that the CEOs fall in line.  

Wednesday, April 28, 2021

Infrastructure and jobs

William Gropper, Construction of the Dam, 1938

To many on the left, it's always 1933. Building "roads and bridges" will "create jobs," soaking up the mass army of unemployed desperate for work that they seem to see. 

Driving around though, I notice that we build roads with big machines, not lots of people. And construction jobs are high-skill jobs, not people with shovels. "Shovel-ready" itself is a misnomer. Nobody uses shovels on a construction site anymore, they use a backhoe. Neither you, reading this, nor I, nor an unemployed Wal-Mart greeter or bartender could do much of anything useful on a road construction site. 

On a lark, I went to the Bureau of Labor Statistics to see just how many people are employed on roads and bridge construction. 


Latest

Feb-Mar change

Total nonfarm

144,120.0

916

Construction of buildings

1,689.3

17.8

Heavy and civil engineering construction

1,062.9

27.3

Water and sewer system construction

183.8


Oil and gas pipeline construction

134.9


Power and communication system construction 

211.3


Highway street and bridge construction 

338.3


Specialty trade contractors

4,714.2

65.0

For perspective, total nonfarm employment is 144 million people, up nearly a million in the last month. That's a lot, usually 200,000 is a good month. Well, we're recovering fast from the pandemic. In case you didn't hear the pounding of nails, building construction employees 1.6 million people, with 4.7 million more in the trades. (We're not so much building new housing as building in new places.) 



Total unemployment is 9.7 million right now, down from 23 million at its peak. 

Roads and bridges employ 338,000 people. The total is a half of this month's gain alone.  We could use some water construction here in California, though it's not going to happen, and with only 184,000 people employed there looks to be room to expand. 135,000 are building oil and gas pipelines. Uh-oh.

Tuesday, April 27, 2021

Inflation and expectations at NRO

Essay at National Review Online. 

Inflation: The Ingredients Are in the Pot, and the Fire Is On. (But will it boil?) 

John H. Cochrane and Kevin A. Hassett

The end of the COVID-19 recession is in sight. If the Atlanta Fed’s real-time estimate of 8.3 percent Q1 growth proves accurate, real GDP is only four-tenths of a percent below the all-time high from Fall 2019. And the vaccinated, post-COVID boom is on the way. Most people have money, and are ready to spend it. Yet unprecedented fiscal and monetary “stimulus” continues.

Is persistent inflation around the corner? Inflation and commodity prices are up sharply. The latest Michigan survey shows people expect 3.7 percent inflation next year. Shortages of everything from lumber to semiconductors have raised input prices for businesses, while the percentage of small businesses reporting that they cannot find qualified workers is at a record high. The ingredients are in the pot, and the fire is on.

But will the pot boil? Since 2008, observers have warned of imminent inflation, yet inflation has barely budged.

Inflation is hard to foresee, because inflation today depends in large part on what people expect of inflation in the future. If businesses expect higher prices and wages next year, they raise prices now. If workers expect higher prices and wages next year, they demand higher wages now.

Inflation has been so low for so long that most Americans understandably see persistent inflation as ancient history, and that any blip up today will quickly be reversed.

Yet faith that our government will take prompt action to reverse inflation seems increasingly unfounded.

The Federal Reserve’s new policy framework and its officials’ speeches are eerily reminiscent of the early 1970s, and repudiate the standard lessons of that experience. One may rightly worry that should inflation emerge, the Fed could repeat mistakes of the 1970s.