Work requirements

The debate over work requirements for social programs is hot and heavy. I'll chime in there as I don't think even the Wall Street Journal Editorial pages have stated the issue clearly from an economic point of view.  As usual, it's getting obfuscated in a moral cloud by both sides: How could you be so heartless as to force unfortunate people to work, vs. how immoral it is to subsidize indolence, and value of the "culture" of self-sufficiency. 

Economics, as usual, offers a straightforward value-free way to think about the issue: Incentives. When you put all our social programs together, low income Americans face roughly 100% marginal tax rates. Earn an extra dollar, lose a dollar of benefits. It's not that simple, of course, with multiple cliffs of infinite tax rates (earn an extra cent, lose a program entirely), and depends on how many and which programs people sign up for. But the order of magnitude is right. 

The incentive effect is clear: don't work (legally). As Phil Gramm and Mike Solon report, 

Since 1967, average inflation-adjusted transfer payments to low-income households—the bottom 20%—have grown from $9,677 to $45,389. During that same period, the percentage of prime working-age adults in the bottom 20% of income earners who actually worked collapsed from 68% to 36%.

36%. The latter number is my main point, we'll get to cost later. Similarly, the WSJ points to  a report by Jonathan Bain and Jonathan Ingram at the Foundation for Government Accountability that

there are four million able-bodied adults without dependents on food stamps, and three in four don’t work at all. Less than 3% work full-time.

3%. 

Incentives are a budget constraint to government policy, hard and immutable. Your feelings about people one way or another do not move the incentives at all. A gift of money with an income phase-out leads people to work less, and to require more gifts of money.  That's just a fact. 

What to do? 

Hoover Monetary Policy Conference Videos

The videos from the Hoover Monetary Policy Conference are now online here.  See my previous post for a summary of the conference. 

The big picture is now clearer to me. Phil Jefferson rightly asked, what do you mean off track? Monetary policy is doing fine. Interest rates are, in his view, where they should be. He argued the case well. 

But now I have an answer: The Fed has had three significant institutional failures: 1) Its inflation target is 2%, yet inflation exploded to 8%. The Fed did not forecast it, and did not see it even as it was happening. (Nor did many other forecasters, pointing to deeper conceptual problems.) 2) In the SVB and subsequent mess, the Fed's regulatory apparatus did not see or do anything about plain vanilla interest-rate risk combined with uninsured deposits. 3) I add a third, that nobody else seems to complain about: In 2020 starting with treasury markets, moving on to money market funds, state and local financing,  and then an astonishing "whatever it takes" that corporate bond prices shall not fall, the Fed already revealed that the Dodd-Frank machinery was broken. (Will commercial real estate be next?) 

Yet there is very little appetite for self-examination or even external examination. How did a good institution, filled with good, honest, smart and devoted public servants fail so badly? That's not "off-track" that's a derailment. 

Well, two sessions at the conference begin to ask those questions, and the others aimed at the same issues. Hopefully they will prod the Fed to do so as well, or at least to be interested in other's answers to those questions. 

(My minor contributions: on why the Taylor rule is important here, where I think I did a pretty good job; and comments on why inflation forecasts went so wrong at  1:00:16 here.)

Bradley Prize speech, video, and thanks

The videos and speeches of the Bradley prize winners are up. My video here (Grumpy in a tux!), also the speech which I reproduce below. All the videos and speeches here (Betsy DeVos and Nina Shea) My previous interview with Rick Graeber, head of the Bradley foundation. 

Bradley also made a nice introduction video with photos from my childhood and early career. (A link here to the introduction video and speech together.) And to avoid us spending all our talks on thanking people, they had us write out a separate thanks. That seems not to be up yet, but I include mine below. I am very thankful, humbled to be included in such august company, and not so boorish that I would not have spent my whole talk without mentioning that, absent the separate opportunity to say so. 

Bradley prize remarks (i.e. condense three decades of policy writing into 10 minutes): 

Creeping stagnation ought to be recognized as the central economic issue of our time. Economic growth since 2000 has fallen almost by half compared with the last half of the 20th Century. The average American’s income is already a quarter less than under the previous trend. If this trend continues, lost growth in fifty years will total three times today’s economy. No economic issue — inflation, recession, trade, climate, income diversity — comes close to such numbers.

Growth is not just more stuff, it’s vastly better goods and services; it’s health, environment, education, and culture; it’s defense, social programs, and repaying government debt.

Why are we stagnating? In my view, the answer is simple: America has the people, the ideas, and the investment capital to grow. We just can’t get the permits. We are a great Gulliver, tied down by miles of Lilliputian red tape.  

Walter Russell Mead and Grapes of Wrath Episode II

Walter Russell Mead has a nice essay in Tablet on California. This excerpt struck me. You too were probably dragged through "Grapes of Wrath" at some point in school, or you've seen the movie. But what happens next? Mead's insight hadn't occurred to me. Spoiler: 

Ma Joad might have ended up as the “Little Old Lady From Pasadena,” leaving her garden of white gardenias to become the terror of Colorado Boulevard in her ruby-red Dodge. Rose of Sharon would be a Phyllis Schlafly-loving Reagan activist reunited with her husband, now owner of a small chain of franchise fast-food outlets. 

A longer excerpt:   

 John Steinbeck’s The Grapes of Wrath chronicled the suffering of a group of bankrupt former farmers fleeing the Dust Bowl in Oklahoma to arrive, desperate and penniless, in an unwelcoming California.

Bob Lucas and his papers

My first post described a few anecdotes about what a warm person Bob Lucas was, and such a great colleague. Here I describe a little bit of his intellectual influence, in a form that is I hope accessible to average people.

The “rational expectations” revolution that brought down Keynesianism in the 1970s was really much larger than that. It was really the “general equilibrium” revolution. 

Macroeconomics until 1970 was sharply different from regular microeconomics. Economics is all about “models,” complete toy economies that we construct via equations and in computer programs. You can’t keep track of everything in even the most beautiful prose. Microeconomic models, and “general equilibrium” as that term was used at the time, wrote down how people behave — how they decide what to buy, how hard to work, whether to save, etc.. Then it similarly described how companies behave and how government behaves. Set this in motion and see where it all settles down; what prices and quantities result. 

Hoover Monetary Policy Conference

Friday May 12 we had the annual Hoover monetary policy conference. Hoover twitter stream here.  Conference webpage and schedule here (update 5/24 now contains videos.) As before, the talks, panels, and comments will eventually be written and published. 

The Fed has experienced two dramatic institutional failures: Inflation peaking at 8%, and a rash of bank failures. There were panels focused on each, and much surrounding discussion.  

Bob Lucas

I just got the sad news that Bob Lucas has passed away. He was truly a giant among economists, and a wonderful warm person. 

I will only pass on three remembrances that others will not likely mention. 

Bob was incredibly welcoming to me, a young brash and fairly untutored young economist from Berkeley.  

In the fall of 1985 I gave what was no doubt the most disastrous first seminar by a new assistant professor in the Department's history. It was something about random walks and real business cycles, and was going nowhere. Bob stopped by my office, and expressed doubt about this random walk stuff. He said, if you look at longer and longer horizons, GNP volatility goes down. At least I had the wit to recognize what had just been handed to me on a silver platter, dropped everything and wrote the "Random walk in GNP," my first big paper. Without that, I doubt I would be where I am today. Thank you Bob.  He and Nancy were kind to us socially as well. 

The first Lucas paper that I recall reading, while I was still at Berkeley, was his review of a report to the OECD.  I don't think anyone else writing about Bob will mention this masterpiece. If you get annoyed by policy blather, read this article. Reading it as a grad student, I loved the way he sliced through loose prose like warm butter. No BS with Bob. Only clear thinking please. I mentioned it later, and he laughed saying he wrote it in a bad mood because he was getting divorced. Like "After Keynesian Macroeconomics," Bob could wield a pen. 

Much later,  I attended a revelatory money workshop. Bob presented an early version of, I think, "Ideas and growth."  In the model, people have ideas, and bump into each other randomly and share ideas. Questioner after questioner complained that there wasn't any economics in the model. Why not put in some incentive for people to bump in to each other, or something non mechanical. Time after time, Bob answered each suggestion that he had tried it, but it didn't make much difference to the outcome, so he stripped it out of the model. Clearly, he had been playing with this model over a year, working to eliminate  needless ingredients, not to add more generality. It's great to see the production function at work. 

Bob is known as a theorist, but he had a great handle on empirical work as well. His Carnegie Rochester money demand paper basically reinvented cointegration, and saw clearly what dozens of others missed. "Mechanics of economic development" starts by putting together facts. "International evidence on inflation-output tradeoffs" 1973 makes one stunning graph. And more. 

There is so much to say about Bob the great economist, superb colleague and tremendous human being, but I will stop here for now. RIP Bob. And thank you. 

Update:

Ben Moll has a lovely twitter thread about Bob as a thesis adviser. Bob covered Ben's thesis draft with useful comments. Bob read my early papers and did the same thing. This encouraged a culture of comments. Though a young assistant professor, I took it as a duty to write comments on Bob's papers! And some of them actually helped. This was the culture of the economics department in the 1980s, not common. Bob helped quite a few people and JPE authors to see what their papers were really about, making dramatic improvements.  

The outpouring on twitter is remarkable. More remarkable, here is a man for whom we could celebrate every single paper as pathbreaking. Yet the outpouring is all about his wonderful personal qualities. 

A correspondent reminds me of one last story. Bob's divorce agreement specified half of his Nobel prize, which he paid. Asked  by a reporter if he had regrets, he answered "A deal's a deal." 

Next post, focused on intellectual contributions. 

FTPL 50% off sale

Princeton University Press has a 50% off sale on all books, including the (overpriced, sorry) Fiscal Theory of the Price Level.  The splash page also offers 30% off if you give them your email, but I'm not sure if they add. 

Missing mortgage contract innovation

From WSJ 

"Many Americans who want to move are trapped in their homes—locked in by low interest rates they can’t afford to give up. 

These “golden handcuffs” are keeping the supply of homes for sale unusually low and making the market more competitive and pricey than some forecasters expected.   

The reluctance of homeowners to sell differentiates the current housing market from past downturns and could keep home prices from falling significantly on a national basis, economists say."

What's going on? US 15 or 30 year fixed-rate mortgages have a catch -- you can't take it with you. If interest rates go up, and you want to move, you can't take the old mortgage with you. You have to refinance at the higher interest rate. It's curiously asymmetric, as if interest rates go down you have the right to refinance at a lower rate. 

As a result, yes, people stay in houses they would rather sell in order to keep the low interest rate on their fixed rate mortgage. They then don't free up houses that someone else would really rather buy. (In California, the right to keep paying low property taxes, which reset if you buy a new house also keeps some people where they are. And everywhere, transfer taxes add a small disincentive to move.) 

This is a curious contract structure. Why can't you take a mortgage with you, and use it to pay for a new house? Sure, mortgages with that right would cost more; the rate would be a bit higher initially. But fixed rate mortgages already cost more than variable rate mortgages, and people seem willing to pay for insurance against rising rates. I can imagine that plenty of people might want to buy that insurance to make sure they can live in a house of given cost, though not necessarily this house.  Conversely, fixed-rate mortgages that did not give the right to refinance, where you have to pay a penalty to get out of the contract if rates go down, would also be cheaper up front, yet people aren't screaming for those.