tag:blogger.com,1999:blog-582368152716771238.post8720601641645649401..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: S&P economists and inequality John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger27125tag:blogger.com,1999:blog-582368152716771238.post-2825730992581679912014-11-24T05:33:30.538-06:002014-11-24T05:33:30.538-06:00Majors that stress quantitative aptitudes have a t...Majors that stress quantitative aptitudes have a tendency to have graduates with the most elevated lifetime income. The most astounding procuring majors are those in designing fields, <a href="http://steepster.com/hoshowskibrian" rel="nofollow">economic researcher</a>, operations and logistics, physical science, mass trading, and fund.Anonymoushttps://www.blogger.com/profile/17068761326781816876noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52785370130715530952014-08-18T00:01:37.942-05:002014-08-18T00:01:37.942-05:00Well put isomorphismes (and Manfred the Mantooth) ...Well put isomorphismes (and Manfred the Mantooth) (above).<br /><br />To me it's long seemed that most economists (with very few exceptions, such as Friedman and Cochrane) are employed either to justify the government's doing things to the monetary infrastructure that would get the rest of us put in jail (such as counterfeiting -- that is, printing extra money, resulting in some getting goods/services for free at the expense of devaluing the worth of a dollar to everyone else)), or to figure out the effects of the government doing so.<br /><br />Thus, in a true free-market society there would be much less demand for economists. (Only for the truly gifted, such as Cochrane and Freidman.) Which is why I was never interested in becoming an official ecomist.<br />Neal Reynoldsnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34830082916567380902014-08-11T20:17:10.950-05:002014-08-11T20:17:10.950-05:00Allysia Finley, writing at The Wall Street Journal...Allysia Finley, writing at <a href="http://online.wsj.com/articles/political-diary-s-p-hearts-obama-1407357820" rel="nofollow">The Wall Street Journal</a>, answers the question:<br /><br />“The ratings agency, which had accused the Obama administration of retaliating for its 2011 downgrade of U.S. sovereign debt, may be trying to soften up the White House before restarting settlement discussions. As the Journal reported last month, the government ‘had previously demanded more than $1 billion before talks broke down. It then filed a lawsuit in February 2013 seeking $5 billion.’ Embracing the White House's economic agenda may seem like a small price in comparison.”Glenhttps://www.blogger.com/profile/11304089773635357420noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7150496365770345172014-08-11T07:43:53.827-05:002014-08-11T07:43:53.827-05:00rewarded for "influence" among other aca...<i><br />rewarded for "influence" among other academics and increasingly in the media, rather than accuracy. Nor is this a criticism -- offering supply to meet demand is always a noble calling to a free-market economist.<br /></i><br /><br />So as long as money changed hands, the moral content of misdirection and lying is moot? Externalities....isomorphismeshttp://isomorphism.esnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48525271773129961782014-08-10T06:19:24.996-05:002014-08-10T06:19:24.996-05:00Google 'permanent income hypothesis' and &...Google 'permanent income hypothesis' and 'consumption smoothing.'Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26230395180260731482014-08-10T01:21:00.455-05:002014-08-10T01:21:00.455-05:00Okay, once I got over my snit about my bellbottome...Okay, once I got over my snit about my bellbottomed pants being disparaged...and my hair back then was wonderful...I wish I still had it....<br /><br />There is an interesting case study in history, regarding that left-winger Douglas MacArthur. Not once but twice (Japan and the Philippines) MacArthur instated land reform in conquested nations. <br /><br />There is an idea that a society could develop a very wealthy but ultimately decadent upper class that lets wealth go idle. Why develop property if you already have more money and women than you can use? Why the headaches?<br /><br />Could this explain decreasing new business formation rates in the USA? The huge increase in super-wealthy people who also engage in copious public sniveling? <br /><br />Actually, I doubt it (although Citigroup released some studies a few years back about "the plutonomy." Basically, they said that the wealthy control a lot more than before, and when the wealthy get cold feet the economy freezes up).<br /><br />We have reached an interesting era in which private-sector bank and rating agency economics are more "left" than academics! <br /><br />I still favor an elimination of corporate income taxes and a move to consumption taxes. But at some point the concentrations of wealth and income in the USA could be deleterious to overall economic growth. Are we there yet? Doesn't seem likely---but USA growth was very robust in the 1960s, when the Gini co-efficient was more equal and the top tax rate was 90 percent. <br /><br />My mind is not closed on this. Especially after that crack about bellbottomed pants. <br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-50497223823117285232014-08-09T11:46:01.388-05:002014-08-09T11:46:01.388-05:00I am sorry, but Milton destroyed many Keyensian th...I am sorry, but Milton destroyed many Keyensian theories with good humor and simple facts.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3384313726331167722014-08-09T10:50:23.596-05:002014-08-09T10:50:23.596-05:00One key conceptual problem I see:
MPC is almost a...One key conceptual problem I see:<br /><br />MPC is almost always discussed as MPC relative to income, ignoring MPC relative wealth (net worth) or assets (the left-hand side of the wealth balance sheeet).<br /><br />This is as much Keynes' fault as anyone's, as his consumption function is purely income-based. But it's also the fault of most Friedmanites, who essentially capitalize projected lifetime income as "wealth" ignoring the fact that projected lifetime expenditures must also be capitalized to arrive at a present value of wealth (again, net worth). For a large chunk of real-sector actors, that value (and current wealth) is at or near zero throughout their lifetimes.<br /><br />Some economic modelers have incorporated MPC relative to wealth/assets into their consumption functions (though often using the phony above-mentioned income-but-not-expenditures capitalization), but this approach is very much not a part of the mainstream discussion, or most economists' mental modeling -- notably true in this post. <br /><br />An added problem: the kind of representative-agent modeling implicit in this post, by its very essence, is incapable of modeling a complex system of heterogenous agents with wildly varying individual conumption functions -- which are inevitable even if you only consider wildly varying wealth endowments at birth. (Circa 60% of American wealth is currently inherited -- and rising.)<br /><br />These conceptual problem are compounded by the patient lender/impatient borrower mental model. Households don't borrow from the patient rich. They borrow from banks, who create funds ex nihilo -- and burn those funds when loans are paid off. (Friedman noted that banks have both printing presses and furnaces.)<br /><br />When there's more or less borrowing, so real-sector and financial-sector balance sheets expand/contract together, the real-sector players spend more/less. Neither causes the financial sector (the so-called patient lenders) to change their spending in an economically significant way. Banks are not optimizing or smoothing their lifetime consumption. Their reaction functions are nothing like those of "patient savers."<br /><br />If a large proportion of real-sector actors are chronically both income- and liquidity-constrained, and don't effectively smooth or optimize their lifetime consumption, the result is chronically less lifetime spending by that group, with little or no deferral of that spending into the future via financial intermediation. Abba Lerner: "In the long run we're always in the short run."<br /><br />There is clearly a large group that fits that description. Twenty percent of Americans approaching retirement have no savings, and a much larger percentage have almost none. This is much lower than, say, the Great Depression, but it's still a chronic economic condition that the representative-agent lifetime-income hypothesis (even the overlapping-generation version of same) rather sweeps under the rug.<br />Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24765647758053535602014-08-09T01:53:48.463-05:002014-08-09T01:53:48.463-05:00can you please explain (or link to an explanation)...can you please explain (or link to an explanation) of how milton freedman demolished the concept of "marginal propensity to consume". perhaps this is my ignorance, but the argument that the poor will consume a greater percentage of their income than the rich made sense to me.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82627710538206033482014-08-08T23:00:22.035-05:002014-08-08T23:00:22.035-05:00I need to read it first. I try very hard only to c...I need to read it first. I try very hard only to comment on stuff I've actually read, and life is short. I do notice this drumbeat coming out of the IMF more and more these days. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58621792123220732352014-08-08T22:59:14.948-05:002014-08-08T22:59:14.948-05:00As your reply indicates, you're beyond thinkin...As your reply indicates, you're beyond thinking about a single marginal propensity to consume that sticks through life. Some are "liquidity constrained" -- meaning they want to borrow now against a much brighter future. (You need the second part!). That has something to do with poverty, but not necessarily. That comes and goes too. We just got much more sophisticated than this whole discussion. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32914480570429689472014-08-08T20:14:27.033-05:002014-08-08T20:14:27.033-05:00“There is also "bad inequality" in which...“There is also "bad inequality" in which politically powerful interests make great fortunes rent-seeking and drive the economy to stagnation. (A conundrum not yet faced on the left: if rent-seeking is driving inequality, just how is giving the government more power to redistribute incomes, increasing the incentives to rent-seeking, going to help? High tax rates are catnip for tax lawyers, lobbyists, and rent-seekers.)”<br /><br />A most excellent point as well as a very uncomfortable question for those advocating a government privilege economy.W.E. Heasleyhttps://www.blogger.com/profile/00368333904571061995noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18645157028859185042014-08-08T16:42:10.635-05:002014-08-08T16:42:10.635-05:00Dear Prof. Cochrane: Greetings from a long-time re...Dear Prof. Cochrane: Greetings from a long-time reader but a first-time commentator. Re your entry today on S&P and inequality, you take apart S&P’s report, but mention the IMF only in passing. I take it you are referring to Ostry et al. “Redistribution, Inequality, and Growth” from last April. I have just read that report, which tries to separate out the effects of redistribution. Even as a layman, I can anticipate some objections to looking at aggregate redistribution, i.e. changes to the GINI Index. Just as there is good inequality and bad inequality, I suppose there is good redistribution (e.g. educating poor children) and bad redistribution (e.g. paying people to have low market incomes). But I would be most interested in your assessment of the IMF’s report. Larry O’NeillAnonymoushttps://www.blogger.com/profile/10945296944700217398noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76567294810093158352014-08-08T15:18:17.228-05:002014-08-08T15:18:17.228-05:00Friedman's model assumes no liquidity constrai...Friedman's model assumes no liquidity constraints. But poorer people DO have liquidity constraints. Therefore I would expect that Friedman's model would hold for the better-off (transitory changes in income make no difference to spending) but not for poorer people who face liquidity constraints. <br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52898342085208393052014-08-08T14:48:07.797-05:002014-08-08T14:48:07.797-05:00So what should S&P be doing?
I agree that I&#...So what <i>should</i> S&P be doing?<br /><br />I agree that I've never found the arguments about inequality and growth compelling. I always thought it would be something like: "Inequality redistributes income to patient people, which reduces growth through some kind of endogenous growth effect on entrepreneurship/research." But I've never seen anyone say anything like that.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72791915960045201762014-08-08T12:35:19.847-05:002014-08-08T12:35:19.847-05:00My thoughts exactly. Currying favor with the Crown...My thoughts exactly. Currying favor with the Crown.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67644495675482982322014-08-08T11:57:58.968-05:002014-08-08T11:57:58.968-05:00Resources (ie. spending) is not the problem. Chica...Resources (ie. spending) is not the problem. Chicago Public Schools spend $14K per student per year while suburban Napervillle spends $9K. CPS schools are typically in the bottom quartile while Naperville schools are typically in the top quartile. Incompetent teachers, administrators and parents are the problem. If you want to put a dent in income inequality, close failing public schools, issue vouchers and open more private charter schools. Too many inner city kids are "Waiting for Superman."Anonymoushttps://www.blogger.com/profile/03017184496780368088noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-91229395778920910572014-08-08T09:53:16.449-05:002014-08-08T09:53:16.449-05:00Professor, as for your question in your last parag...Professor, as for your question in your last paragraph:<br />"Why would the S&P put out such an awful report...."<br /><br />Maybe because S&P is a crony firm, who wants to make nice with the Feds. Thus, every now and then, their respectable business economists put out a silly report, just to prove to the Feds and the current administration that they are in line with the current Zeitgeist coming out of Washington DC.<br /><br /><br />Manfred the mamoothhttps://www.blogger.com/profile/07516724901598949627noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87952071121800489652014-08-08T09:49:23.563-05:002014-08-08T09:49:23.563-05:00Steve - if you are going to dispute Cochrane's...Steve - if you are going to dispute Cochrane's claim, the least you can do is to man up and back up your claim, instead of giving a terse "no".Manfred the mamoothhttps://www.blogger.com/profile/07516724901598949627noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-14842283569943105432014-08-08T09:45:12.061-05:002014-08-08T09:45:12.061-05:00Actually, yes, I do believe that. If you were to ...Actually, yes, I do believe that. If you were to properly normalize for difficulty of the problem, you would find that Chicago schools in bad neighborhoods are severely under resourced. But I agree that the wealthy don't want to throw a lot of money at the problem at least in part because they simply don't care enough about solving itAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39555305206000391772014-08-08T09:09:11.611-05:002014-08-08T09:09:11.611-05:00Do you truly believe the issue is not enough money...Do you truly believe the issue is not enough money going to the public educators of the great city of Chicago?<br /><br />Another thing these selfish wealthy tend to do.... Not throw good money after bad.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4665772476701351422014-08-08T08:54:28.439-05:002014-08-08T08:54:28.439-05:00I think the poor were smart to take the options of...I think the poor were smart to take the options offered to them by CountryWide et al: no downpayment and non-recourse means it's a cheap call option, and with some mortgages (reverse amortization) actually free! The FHA was promoting lending with only 3.5% down, and the $8k tax credit for buying a house less than $200k. A good realtor can apply the tax credit to last years taxes, making sure that the buyer actually gets the money right away, and the HUD was OK with using the $8k to cover the down payment. So it was often a free call option. <br /><br />The kicker: when it blew up, they were morally blameless, supposedly duped by evil bankers. Thus, Citi recently paid $7B in their latest installment for giving cheap mortgages that defrauded investors, and the Feds said they will use the fine for restitution for the borrowers! Add in the fact hat current Treasury Jack Lew was actually head of mortgages at Citi during this time, and you can see that our betters in Washington aren't the cure, they are the disease.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44078518646742841432014-08-08T08:35:05.749-05:002014-08-08T08:35:05.749-05:00"Didn't Milton Friedman demolish the whol..."Didn't Milton Friedman demolish the whole concept of "marginal propensity to consume" 70 years ago?"<br /><br />No.Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15642000508904780542014-08-08T07:59:08.052-05:002014-08-08T07:59:08.052-05:00I am just surprised you decided not to end your po...I am just surprised you decided not to end your post with this zinger:<br /><br />"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." ;-)<br /><br />Though, it admittedly is somewhat of a cliche to do so. Tobinoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13799709660676253752014-08-08T07:10:31.027-05:002014-08-08T07:10:31.027-05:00Yes, Irwin's analysis is superficial. But, you...Yes, Irwin's analysis is superficial. But, your rejection doesn't drive into the heart of the problem. Here are some basic points everyone should agree with:<br /><br />1. With declining marginal utility, wealth variance leads to below maximum utility in the cross-section just as it is in the time-series.<br />2. The prospect of inequality is necessary to motivate people to help others (ie: earn)<br />3. Wealth persistance is a problem because perception of it discourages people from playing the game once they are behind.<br />Fish Goldsteinhttps://www.blogger.com/profile/13864053986442147618noreply@blogger.com