Monday, November 28, 2011

We need a Peter Thiel conservatism

Peter Thiel has some weird ideas. He thinks there was a "collapse of art and literature after 1945." He wants to live on a floating libertarian utopia made from trash, like the guy in Snow Crash. He'll pay you $100,000 to quit college. But he also has some very good ideas about where to take the conservative movement.

As I see it, modern American conservatism is suffering from a severe deficit of ideas. Back in 1980, the year of the Reagan revolution, the movement was brimming with initiatives. Cut income taxes. Deregulate industries. Get tough on inflation. Get tough on crime. Spend a bunch on the military to scare the Soviet Union. Bust unions. Get tough on drugs. Teach kids not to have sex before marriage. Put Christianity back in public schools.

Fast forward three decades, and that brand of conservatism has lost its raison d'etre. Some of its ideas succeeded, some failed, most had mixed results, but almost none of them has anywhere left to go. Tax rates are already unsustainably low. Stagflation has given way to a liquidity trap. 2.3 million of our people are behind bars. Private-sector unions are a memory, as is the USSR.

So when you ask conservatives for ideas these days, they can make only three suggestions. Cut income taxes EVEN MOAR. "Drill here drill now" (i.e. shut our eyes really tight and wish we were Saudi Arabia). And the third idea... ... ...the EPA? No, that isn't it...oops.

Which is where Peter Thiel comes in. In a brilliant (and only occasionally kooky) article in the National Review, Thiel claims that we are experiencing a long-term slowdown in technological progress (Tyler Cowen's "Great Stagnation"). Without a steady upward march of new inventions and higher productivity, he believes, the world will revert to a zero-sum game:
The technology slowdown threatens not just our financial markets, but the entire modern political order, which is predicated on easy and relentless growth. The give-and-take of Western democracies depends on the idea that we can craft political solutions that enable most people to win most of the time. But in a world without growth, we can expect a loser for every winner. Many will suspect that the winners are involved in some sort of racket, so we can expect an increasingly nasty edge to our politics. We may be witnessing the beginnings of such a zero-sum system in politics in the U.S. and Western Europe[.]
This rings true to me. The middle-class society that liberals have struggled to create seems liable to degenerate into class warfare when the pie stops growing (note that in the U.S. it has been the rich who have initiated and won this class warfare in recent times).

Thiel also recognizes that tax cuts, the conservative movement's magic cure-all-that-ails-ya, are an unsustainable short-term palliative rather than a long-term efficiency booster:
A mischievous person might even ask whether “supply-side economics” really was just a sort of code word for “Keynesianism.” For now it suffices to acknowledge that lower marginal tax rates might not happen and would not substitute for the much-needed construction of hundreds of new nuclear reactors.
Hmm, you don't say!

And then, at the end of his rant, Thiel slips in the paragraph that has the potential to change American conservatism:
Let us end with the related question of what can now be done. Most narrowly, can our government restart the stalled innovation engine? 
The state can successfully push science; there is no sense denying it. The Manhattan Project and the Apollo program remind us of this possibility. Free markets may not fund as much basic research as needed. On the day after Hiroshima, the New York Times could with some reason pontificate about the superiority of centralized planning in matters scientific: “End result: An invention [the nuclear bomb] was given to the world in three years which it would have taken perhaps half a century to develop if we had to rely on prima donna research scientists who work alone.”... 
Today a letter from Einstein would get lost in the White House mail room, and the Manhattan Project would not even get started; it certainly could never be completed in three years. (emphasis mine)
HALLELUJAH. Public goods FTW!!!

Peter Thiel recognizes and admits what doctrinaire conservatives have been loath to admit: government is not always and everywhere the problem. Sometimes, when externalities and public goods exist, government is the solution.

Conservatives, wedded to the drown-government-in-a-bathtub approach that worked so well for them in the 80s, have since been forced into taking the untenable, indefensible, goonball-"libertarian" position that public goods don't actually exist - that the unfettered market will provide plenty of basic research, infrastructure, etc. But regulation has been slashed, non-entitlement spending has been slashed, tax rates have been slashed, and essential government functions have been privatized...and, if Thiel and Cowen are right, innovation and progress have still slowed down. The Grover Norquist dog is no longer hunting.

What America needs is a conservative movement that does not simply replay yesterday's greatest hits. In the upcoming decades, one of our most pressing priorities (as Thiel recognizes in that article and elsewhere) is going to be finding an energy source to replace cheap oil and coal. This monumental task may not be (probably will not be) accomplished efficiently without massive government spending on basic research and new infrastructure. If conservatives, terrified of deviating even slightly from the Grover Norquist canon, stand in the way of this research, then either liberals will own the future, China will save us, or - more likely - our country will simply settle into a long, grumpy decline.

Moving from a Norquist conservatism to a Thiel conservatism does not mean that conservatives must abandon all their principles. They can call for shifting spending from health care to research and infrastructure, instead of raising the money via taxes. They can call for greater deregulation of biomedical research (another critical area of research). And in no way does acknowledging the important role of government in the economy force conservatives to abandon their cultural principles - hard work, sexual abstinence, Christianity, pre-1945 art, or whatever. In fact, if conservatives feel the need, as Thiel does, to couch their substantive shift in a flurry of hippie-bashing and sneering at "political correctness," well, be my guest, guys! We hippies are big boys and girls, we can take it.

But the idea that "government is the problem" is well past its sell-by date. Peter Thiel recognizes this. Let's hope the rest of the conservative movement catches on.

Update: In general, though, Peter Thiel is a nut.

Friday, November 25, 2011

Federal income tax is the enemy of urbanism

Finishing my dissertation this year has forced me to come out of my troll-cave and interact a lot more with my econ department. And that has been a very good thing! There is so much cool economics going on at the University of Michigan that I didn't even know about that I've decided to start blogging about it.

Today's interesting nugget comes from UMich prof David Albouy, for whom I briefly worked as a research assistant a few years back. A lot of David's work is in urban economics, which - although I decided not to do my dissertation on it - is an area dear to my heart. I view the deterioration of America's big cities over the past 40 years as a national tragedy, especially after seeing how well big cities work in countries like Japan and Korea. Fortunately, urban economists like Albouy and Ed Glaeser have been leading an intellectual charge for more urban-friendly policies. 

David has zeroed in on one way in which our government stacks the deck against cities: Income tax. Here's the original paper, and here's a recent writeup in the New York Times. The basic idea is this: Income tax rates are based only on your dollar income, not on how much purchasing power your income represents. Since prices (especially housing prices) are higher in big cities, an income of, say, $60,000 will buy you a lot less in San Francisco than it will in College Station, Texas. But someone who earns $60,000 will pay the same taxes in SF as she would in College Station. This provides a big incentive to move from the big city to a small town.

The point is not just that this is unfair (as the Times article contends), but that it's inefficient for our economy. Why? Because people are productive when they live in big cities. Take a worker out of San Francisco and plunk her down in College Station, and chances are that she will add less value to the economy. 

There are several reasons that this is true. The first is transport costs; if our hypothetical worker makes Christmas tree ornaments for a living, then if she lives in San Francisco, she's going to be very near to a whole lot of paying customers. But if she lives in College Station, she's going to have to ship a lot of her Christmas ornaments to customers in Houston (two hours away) or Dallas (three hours away). That costs money, and reduces the worker's productivity. Transport costs are probably the reason we have cities in the first place.

Another reason is knowledge spillovers. A lot of cities are "industrial clusters". If our Christmas tree ornament maker lives in SF, she will be smack dab in the middle of the center of the U.S. technology industry. This means that she may hang out with engineers who will teach her how to design ornaments more efficiently using powerful software, or how to find customers and suppliers more effectively using the Web. And she may also interact with a bunch of art and design people, for whom SF is also somewhat of a mecca. That will also tend to increase her productivity, by keeping her on top of new trends and ideas in the design world.

So when the federal government levees the same percentage tax on San Franciscans that it levees on people in College Station, it is discouraging high productivity. Just how much this hurts our economy is anybody's guess, though David Albouy takes a crack at an estimate in his paper; the numbers come out substantial, though not huge. But the policy implication is clear: one way to help reverse America's urban decay, and to boost our economy over the long term, would be to tax people in big cities at lower rates.

Friday, November 18, 2011

Who Wins? A Taxonomy.

As a follow-up to my last post, here's my attempt at a taxonomy of "who wins" under various economic systems. You may perhaps detect a smidgen of a hint of bias, but pay no heed. ;-)

Hunter-Gatherer Society: No one wins.

Classical Slaveholding Society: Those who choose the right parents win, everyone else loses.

Feudalism: "Winning" means knowing your place, serf! Now be so good as to polish my boots.

Theocracy: "Winning" comes only in the next life. Now send us your money and you will be on God's good side.

Marxism (theoretical): Everyone wins equally! (details to follow...)

Marxism (applied): Everyone loses equally...but if we had just implemented it correctly, everyone would have won equally! (details to follow...)

Laissez-Faire Capitalism: Anyone can win big, if he works 0.001% harder than the people standing next to him!

Ayn Randism: The Ubermenschen would win if those darn Untermenschen just stopped their looting and mooching!

Nazism: The Ubermenschen will win, the Untermenschen will make lovely decorative candles.

Japanism: Everyone wins (as long as he is born with a Y chromosome, does well on his entrance exams, and swears lifetime fealty to a large famous corporation with good connections in the bureaucracy, mafia, and ruling political party)!

Europeanism: We just need to define a better measure of "winning." Such as how many teenage girls are currently partying at my villa. Bunga bunga!

Tea Party Conservatism: Every Real American would win, if those lazy blacks and Mexicans stopped stealing our hard-earned money with All Those Government Programs. Now keep your hands off my Medicare!

Mushy Milquetoast Middle-of-the-Road Mixed-Economy American Liberalism: Everyone can win a reasonable amount, as long as they work hard and play by the rules. And if someone gets lucky or has a great idea they can win even more.

And the winner is...Ayn Randism!

Easy choice, right? :-)

Wednesday, November 16, 2011

Why conservatives can't get people to work hard

"A city is made of brick, Pharoah. The strong make many. The weak make few. The dead make none." - Moses

I'm a bit late to the party here, but I thought I'd offer some comments on Tyler Cowen's recent New York Times column about discipline and hard work. First, some excerpts:

[A]s someone from a conservative and libertarian background, I find that I am hearing too much talk about riches and not enough about values... 
Conservatives often believe that much of the poverty in the United States is an issue of insufficient discipline and conscientiousness...Yet how can such a culture of discipline be spread? [I]t has been argued that society should grant respect to business creators and to stern parents who instill discipline... 
But are such moves, when carried out, actually shifting popular culture in a properly disciplined and conscientious direction? Not really. In fact, in the United States, the red states, where conservatives are more powerful, tend to have higher divorce rates and weaker educational systems than do blue states... 
The counterintuitive tragedy is this: modern conservative thought is relying increasingly on social engineering through economic policy, by hoping that a weaker social welfare state will somehow promote individual responsibility. Maybe it won’t. (emphasis mine)
I think this is extremely insightful, and I am delighted to hear people beginning to say this.

See, this is one of the big problems I have with conservatism as an ideology: Conservatives really want people to value hard work and discipline (not to mention sexual abstinence), but they typically have no idea whatsoever how to get people to actually value these things! Like the military dad in American Beauty, they think that they can just beat their values into the populace...except instead of fists and feet, the cudgel they try to use is poverty. Without a welfare state, the thinking goes, people who slack off and party and have sex will be forced to live with the consequences of their actions; having been stung by the lash of economic hardship, they will see the light, toughen up, and go get a real job.

Sounds like tough love. No wonder people call the Republicans the "daddy party"! But unfortunately, this just doesn't work on most people. There are at least four big reasons I can think of, off the top of my head.

For one thing, people who want to party and slack off have too many outside options. They can turn to the black market (selling drugs, etc.). They can sponge off their families. They can sponge off their spouses. They can go to grad school.

For another thing, being poor in America, or any rich country, is just not that bad. Even if you work at McDonald's, you can probably afford plenty of junk food, a heated room, a comfy old couch, a CRT TV, some old video games, a cheap used car, beer, and marijuana, and you can probably find people to have sex with you. Not exactly the Ritz, but not exactly the pangs of privation either!

An even bigger reason that the "tough love" approach to social engineering doesn't work has to do with the nature of human motivation. In my life, I have experienced both positive motivation (e.g. the chance to have a future I want) and negative motivation (the fear of failure). The latter works much better in short-term crunch-time situations - for example, "I had better study really hard right now or I'm going to fail this econometrics test, and my professor will kill me on the spot."

But that kind of fear doesn't work very well over longer periods of time - for example, in getting me to finish my dissertation. Eventually, fear and panic just grind you down and impede your productivity. Far more effective over the long run is positive motivation. Thinking about things I want gives me a positive boost and improves my overall energy level, in addition to the incentive it provides. So if conservatives want to get people to work hard, beating them repeatedly with the lash of poverty is not the best way to go about it. You'll end up with a bunch of poor people who are too exhausted, harried, and depressed to pick themselves up by their bootstraps. Henry Ford is one person who understood this.

Finally, there is one more reason why the "tough love" approach doesn't end poverty. That reason is social preferences. When you structure society so that there are a lot of poor people, then the lifestyle of poverty becomes "the thing to do." There are just so many poor people around that poor kids don't come into contact with anyone else. Poverty then becomes their world, and their aspirations and desires do not escape the ghetto. They grow up thinking that gangsters, not successful businesspeople or professionals, are the Big Dogs of society. They have no idea that hard word brings middle-class prosperity, because they don't see any examples of that happening...but, even worse, they don't really want to become middle class. They want to succeed within the context of the subculture within which they are embedded (note to sociologists: I am just making up terms left and right here). To a poor kid, a rich kid's version of "success" might look kinda neat, but it's too weird and alien and remote to be worth the effort.

So there are tons of reasons why simply smashing the welfare state doesn't instill poor people (or anyone at all) with good values. The beatings may continue, but morale will not improve. To conservatives, I say: If you really want people to value hard work and discipline, you've got to come up with a real, workable plan for achieving that goal.

What would such a plan look like? Loath as conservatives are to admit it, many liberals not only value hard work intrinsically, but have thought long and hard about what kind of social engineering would actually spread those values.

One basic idea is that hard work should be rewarded. Obvious, right? I mean, we're supposed to be economists here! People respond to incentives, and they are risk averse. A winner-take-all society is not very conducive to hard work; I'm not going to bust my butt for 30 years for a 1% shot at getting into The 1%. But I am going to bust my butt for 30 years if I think this gives me a 90% chance of having a decent house, a family, some security, a reasonably pleasant job, a dog, and a couple of cars in my garage. An ideal middle-class society is one in which everyone, not just anyone, can get ahead via hard work.

Liberals have tried hard to construct such a middle-class society. They came up with worker health and safety regulations, weekends, Social Security, labor unions, public schools, living wages, government-subsidized housing loans, grants and loans for college, earned-income tax credits, job retraining, and tax breaks for health care. Some of those ideas worked spectacularly, some failed. Many had mixed results. But the basic idea was sound: not just to give people handouts, but to make them feel as if they deserved what they were getting because of hard work.

Conservatives, meanwhile, are all too often divided on whether they actually believe that hard work works. Plenty of conservatives have undermined Cowen's hard-work-and-discipline bloc by saying that success in life is all due to natural differences in ability. These "I.Q. conservatives" see inequality as the natural order of things. They have focused on getting people to accept their place in society and learn to live with what they have, rather than strive to move up in the world. This is a very Old British sort of conservatism, a nobility-and-peasants ethos dressed up in the faux modernism of psychometric testing.

Conservatives need to look in the mirror and ask themselves: "Do we really want people to work hard and be disciplined? Or do we just say that in order to keep the peasants from getting restless, when deep down we believe that it's all about good genes?" Because if it's the former, conservatives should do some hard thinking about what actually gets people to work hard. And they should think about how to respond to those among their colleagues for whom it is simply the latter.

Is America's financialization China's fault?

This morning, as I read the latest big expose on the continuing financialization of America's economy (this one courtesy of the excellent Amanda Terkel), I once again felt the insistent tug of a question that has been worrying at my brain for quite some time now: What is the root cause of financialization?

Financialization is real, and has been huge. For a thorough discussion of the phenomenon and an overview of related research, see Wouter den Haan. But the basic story can be grokked in two graphs. First, here's the finance and insurance industries as a percentage of all value added in the U.S.:

Now here are finance-industry profits as a percent of all corporate profits:

When we see a shift this big, there are two natural explanations. The first is that financialization is a natural and inevitable part of economic development. The second is that something big in the global economy is causing the shift.

Intuition says it's a combination of the two. Most advanced nations see a shift toward "services" as their economies mature; this is even true of Germany and Japan, where manufacturing is almost a religion. And there is an intuitive explanation for this: as catch-up growth and "extensive" growth peter out, owners of capital place a higher premium on ferreting out new investment opportunities - companies with new technologies, companies with new trade opportunities, and investment opportunities in developing countries. The industry that sniffs out those opportunities for uninformed rich people is the finance industry.

But there is also reason to believe there are "shocks" at work. Go back before 1945, and you'll see finance making up a relatively high percentage of America's economy during the first two decades of the 20th century. This suggests that there are contingent factors at work...and the obvious culprit is globalization, which ballooned in the early 20th century, collapsed during WW2, and then began a long steady rise after the bombs stopped falling.

How could globalization enable America's finance industry to take over America's economy? We have all heard of the "demand-side" factor here - the idea that America, with its "deep" and "liquid" financial markets, simply has a comparative advantage in managing money relative to other countries, and hence other countries beat a path to our door to get our banks and hedge funds to manage their money for them. In this story, globalization mainly acts as an enabler; reducing barriers to international capital flows simply allows the world to access our financial markets.

This was the dominant story leading up to 2008, and I instinctively distrust any story that was dominant leading up to 2008. Since then, there have been rumblings of another story of why globalization might have caused financialization - a story about the supply of capital rather than the demand for returns. This is an extension of the "savings glut" story that Ben Bernanke was telling during the 2000s as an explanation for our trade deficit: China and other exporters wanted to pump up exports, so they kept their currencies cheap. This required buying a lot of dollar-denominated assets (in practice, this meant Treasuries), which flooded America with cheap capital. This simultaneously made American manufacturing less competitive, and created profit opportunities for American financial firms via low interest rates that let them lever up.

Brad DeLong told a variant of this story in a blog post a couple weeks back:
The 4% of GDP trade deficit that we have on average run over the past decade is best viewed as yet another shift of the US economy into the insurance industry: in this case, a shift inro the "industry" of providing political risk insurance...the only reliable way we know for a poor country to become richer exporting low and relatively simple manufactured goods to the rich...That requires a low value look for the...currency. And that requires that the government manipulate the currency by buying large amounts of dollars...Developing country governments, especially in Asia, think that this political risk insurance policy is well worth buying...The question, however, is whether this American specialization in finance and in the sale of political risk insurance is truly intelligent. Are these the "industries" of the future? Or is this rather a path that leads to a dimmer future for middle-class America?
DeLong explicitly links the trade deficit to financialization. This argument has a lot of intuitive appeal to me - partly, I admit, because of my general dislike of China's currency policy. If China's mercantilism is causing our financialization, that's one more reason to fight back. It would be cool if I could write "The Occupy Wall Streeters should be demanding that we pass the yuan bill!"

But to be intellectually honest, I have to admit there are some obvious problems with the hypothesis. One is that, although the profit-based measure (second graph above) shows financialization exploding after 2000, the value-added measure (first graph), rose steadily since WW2 and then actually leveled off after 2000. So the correlation of Chinese surpluses with American financialization depends on what measure you use for the latter. A second problem with the theory is that there was also some degree financialization in the 1920s, when America was running big current-account surpluses (much like China is today).

So I'm left without a clear conclusion. Are there good studies out there that look at the correlation between a nation's capital flows and the size of its financial sector? I can't find any, but perhaps they exist. If you know of one, please let me know.

Sunday, November 13, 2011

A proposal for Greg Mankiw's Economics 10 course

First, let me say that I think it's a tad silly to walk out of a survey course because you think it's biased and incomplete, before you actually complete the survey course. How are you supposed to know what's left out before you know what's been put in? And how are you going to recognize bias without being well enough grounded in the field's methodologies that you can critically evaluate the ideas that the class left out? The fact is, Greg Mankiw's Principles of Economics is far to the "left" of the econ profession itself; it teaches Keynes but not RBC, and gives "supply-side economics" the half-page dismissal it deserves. If the kids who walked out of Greg Mankiw's introductory economics course had stayed til the end, they might have realized this.

That said, I do sort of sympathize with one point made by the kids. In their open letter, they say:
A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models. As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics.
This rings true to me. Economics is not physics or biology; there are very few modeling approaches that we really know work. Most of the time, we are still groping around in the dark, relying on our intuition, and taking clumsy stabs at first-pass models. For an upper-level textbook, this is just unwritten and understood; grad students, or even upper-level undergrads, understand that while what they're reading may be written in highly formal math-ese, it usually represents merely the stylized description of an idea that may at some point in the future prove useful for understanding the economy.

An intro textbook is different. Part of the job of an intro or survey textbook is to convey the state of the field to people who will probably not spend their lives as researchers in that field. Intro physics textbooks present Newton's laws in part because those laws work really really well, and thus provide a convincing demonstration of what physics can do. But an introductory economics textbook presents things like the  the AD-AS model, the Solow growth model, or the Keynesian cross - models that seem reasonable to our intuition, and for which there is some supporting evidence, but which come with much wider bands of "model uncertainty" due to our inability to test the macroeconomy in a lab. These are the best we've got, but they're no Newton's laws.

So I think an introductory econ textbook should work to convey that uncertainty. I've read every word of (an older edition of) Mankiw's Principles of Economics, and I've taught from the book as well. And while it does a great job of presenting the standard macro (and micro) models in simple and usable forms, it doesn't say as much as I'd like about the massive degree of doubt and ignorance that surround even these bedrock models (actually, I'm not sure what intro textbook does).

Greg Mankiw himself is certainly aware of the uncertain state of macro. In an article earlier this year, he wrote:

After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers.
I think this idea should be front and center in any introductory economics textbook. If we don't stand up and admit how little we know, plenty of tomorrow's businessmen and lawyers and professionals are going to graduate thinking that the macroeconomists have got it covered. And that could translate into false certainty in political debates, or even in business decision-making.

So anyway, here is my suggestion for Greg Mankiw's Economics 10 course: He should assign students each to report on one theory or technique that they believe is not covered in sufficient depth in the textbook, and to give a presentation on this topic. That would A) convey something about the diversity of ideas out there, as students have demanded, B) give students practice in seeking out and evaluating ideas, and C) make apparent the limitations of class walk-outs as a tool for widening the discussion.

(If I got that assignment, BTW, I'd talk about theories of financial bubbles and mispricings, like the DeLong et. al. and Abreu & Brunnermeier noise trader models, the Harrison & Kreps and Morris heterogeneous-beliefs models, and the O'Dean and Scheinkman & Xiong overconfidence models...)

Thursday, November 10, 2011

No, a science major does not guarantee you a job...

Phil Plait of Bad Astronomy is someone I respect a great deal, and I love his blog. But in this post, he tells one of the most blatant whoppers I've seen on the web in recent memory. The title of the post is "Want a job? Study science." The idea is that if you had just gone into a scientific career, you wouldn't be unemployed:

I heard of a database of college majors compiled by the Wall Street Journal based on the 2010 Census. Looking at people who took those majors in college, it lists...the employment rate for that major. 
I took a look, and listed the jobs by the lowest unemployment rate, asking, essentially, "Which jobs had the best chance of getting you a job after college?"...I highlighted one in particular: Astronomy and Astrophysics. Note that it has a 0% unemployment rate; in other words, last year everyone who majored in these fields got a job!...But look at the list more carefully...four of these ten majors are science-based (pharmacology, astronomy, atmospheric sciences, and geological engineering — yes, that last is not technically a science, but is science-based). If we broaden our look to science and technology, the list grows longer (especially if you go beyond the top ten)... 
[L]earning science trains you in a way that makes you employable. I have friends who left astronomy after grad school and got jobs doing climate modeling, computer game server programming, economic forecasting, and more. Once you learn the methods of science, you’re better prepared for working in other fields as well... 
But here’s the irony: a lot of folks in the government claim they are all about making sure Americans have job opportunities...If you want Americans to have good prospects out of college, find good jobs, and contribute to society, it seems to me that teaching science and technology are the very things you should be supporting most. 
First, let me say: I absolutely support teaching science and technology, a lot better and a lot more than we are doing right now. This is absolutely 100% right.

BUT, the story Phil is telling is just not right. Not right at all. It implies the same thing that many conservatives are saying openly - that the root of unemployment is on the supply side. That our high unemployment rate is simply due to the fact that we're not teaching kids the right stuff, or maybe that kids are choosing wimpy majors. And that story is just wrong wrong-ity wrong. This has been remarked upon by Matt Yglesias and Ryan Avent already, but just to drive the point home, I went through the Wall Street Journal database that Phil cites, and found the following unemployment rates:

  • Genetics: 7.4% unemployed
  • Biochemical Sciences: 7.1% unemployed
  • Neuroscience: 7.2% unemployed
  • Materials Engineering and Materials Science: 7.5% unemployed
  • Computer Engineering: 7.0% unemployed
  • Biomedical Engineering: 5.9% unemployed
  • General Engineering: 5.9% unemployed
  • Engineering Mechanics Physics and Science: 6.5% unemployed
  • Chemistry: 5.1% unemployed
  • Electrical Engineering: 5.0% unemployed
  • Molecular Biology: 5.3% unemployed
  • Mechanical Engineering and Related Technologies: 6.6% unemployed

Compare these with a 5.0% unemployment rate for all bachelor's degree holders in 2010.

Earth to Bad Astronomy: your short-list of fully-employed science majors is totally cherry-picked. (Note: the previous sentence is overly cheeky. I didn't think it was intentionally unrepresentative.) Overall, science and engineering majors are suffering right along with everyone else in the country, because that is what happens when we are in an economic depression. And all those astronomers who have plenty of jobs? Guess what: they're employed because they work for the government. Yep, that's right, the same government whose ability to provide employment Phil laughs at. (Note: I was counting universities as part of the government, which is of course not precisely true. So, government or nonprofit. But the point stands: education, along with health, is the best field to go into right now if you want to be guaranteed a job.)

In other words, Macroeconomics: 1, Get-a-Haircut-and-Get-a-Real-Job-ism: 0.

If you want a job, consider not voting for politicians who think fiscal austerity is a smart move. And in the longer term, if you want a job, consider voting for politicians who will regulate the finance industry.

Update: Phil Plait responds. Yes, I definitely did get colorful with the phrase "cherry-picking"...I'm sure Phil didn't intentionally ignore all the science majors with high unemployment. And yes, universities are not entirely government-funded. He and I both agree, of course, that better science (and math) education would be a really good thing, and that conservative ideologues who want to take science out of school curricula are threatening the future of the nation.

Also, I'd like to point out that Phil's immediate acknowledgment of his oversight stands in stark contrast to how most bloggers, especially econ bloggers, usually respond when they make errors. I feel like there really is something special about the culture of scientists. I think economics could use a lot of that skeptcism and intellectual honesty.

Tuesday, November 08, 2011

Let them eat NGDP

This weekend, at an INET conference, Mike Konczal of Rortybomb made the excellent point that the econ blogosphere is probably adding more new policy ideas to the public discourse right now than academia itself. He identified NGDP targeting as the most important and dramatic example.

And boy was he right! NGDP frenzy has reached truly astonishing levels. I have my doubts that the Fed will actually adopt an NGDP target, but there is no denying that the blogosphere and much of the popular press has fallen for this idea like girls at my college fell for Thom Yorke back in 1999 (no I'm not bitter, why do you ask?). These days Scott Sumner says "NGDP" like Herman Cain says "9-9-9." Now, I am all for looser monetary policy, whether it comes in the form of an NGDP target or not. But NGDP has reached the point where, like Radiohead, its cult status is actually starting to annoy me. 

Take, for example, this post from Matt Yglesias (an extremely sharp dude) on how NGDP is the "actual thing":
[I]t seems natural to many people to take [real GDP and inflation] as “given” and understanding NGDP (= GDP + inflation) as somehow constructed and exotic. But actually NGDP is, relatively speaking, the simple quantity here. It measures total spending in the economy. You count everything, add it all up, and you’ve got your NGDP...Social construction enters the picture when we try to move from this nominal quantity to the allegedly “real” one... 
[W]e have all these different measures of inflation...[but it's]not directly measurable the way NGDP [is]...Nor is it particularly clear what, in principle, “real” GDP is measuring. Think up all the classic critiques of GDP as a measure of human welfare...When you shift from GDP to “real” GDP, though, you’re not measuring the total quantity of spending anymore.
I just don't think this is the right way of seeing it.

Matt's main point is that because inflation is mismeasured, real GDP ("RGDP") is also mismeasured. Sure, that's true (though of course NGDP itself is not measured with anything remotely approaching certainty). But that doesn't mean NGDP is "better" than RGDP. An accurately measured number is not necessarily more useful than a less accurately measured number, if the latter is something we care about and the former is something we really don't.

In terms of economic well-being, we do not care about NGDP. Or at least, we shouldn't. To see this, take the example of Zimbabwe. In 2007, Zimbabwe's NGDP grew at a rate of over 60,000%! No, that is not a typo. The "total quantity of spending" in Zimbabwe at the end of 2007 was more than 60,000 times what it was at the beginning of 2007. For real.

Anyone still think NGDP is the "actual thing"?

The problem with NGDP is that you can't eat it. It really is just numbers on a page. Normally, it is a reasonable approximation to a measurement of stuff we can eat. But when someone starts playing around with the numbers on the page, as in Zimbabwe's hyperinflation in 2007, NGDP stops being any kind of measure of stuff we can eat. 

In other words, NGDP has a potentially large source of mismeasurement in it, and that mismeasurement is inflation itself. When we try to take NGDP and recover some kind of measurement of how much eat-able stuff our economy produces (i.e., RGDP), we have to try to account for the mismeasurement represented by inflation. And of course we end up mismeasuring inflation, as Matt points out, but all that means is that we are mismeasuring our mismeasurement of RGDP. Inflation is still the first-order mismeasurement.

Actually, the world abounds with cases like this. It's easy to measure how many hours a worker sits in front of a desk, but hard to measure how much useful work (s)he actually accomplishes in that time. But it's the latter we care about, not the former.

Now, I am not saying that the U.S. is in danger of hyperinflation. It's not. Nor am I saying that RGDP is a perfect or even a great measure of human happiness. It's not. My point is that NGDP is not supposed to be a measure of how well the economy is doing. People who support NGDP targeting, like Scott Sumner, support it because they believe that NGDP is a good indicator of how much money we should print. Not because they think that NGDP is intrinsically good. 

NGDP may be less indirectly measured, but RGDP is still the "actual thing."

Like I said, I support printing money and buying stuff. And I think OK Computer was a rockin' album (and Kid A and The Bends were good too). But thinking of everything in terms of NGDP does not make all of macroeconomics suddenly simple and comprehensible and predictable. And Radiohead didn't save rock. Sorry, fans, but there it is.

Update: Scott Sumner agrees about Radiohead. Unfortunately, he says I'm "criticizing NGDP" and "missing several key points." Huh?? If you read the above post, you'll notice me saying:
My point is that NGDP is not supposed to be a measure of how well the economy is doing. People who support NGDP targeting, like Scott Sumner, support it because they believe that NGDP is a good indicator of how much money we should print. 
In Sumner's "rebuttal," he writes:
NGDP is...the proper indicator of nominal shocks...[it's]a nominal shock indicator, not an indicator of living standards.  I’d be the first to admit that RGDP, with all its faults, is a better measure of living standards than NGDP...[but NGDP is more] useful in developing optimal monetary policy.
Not to be excessively whiny, but is that not exactly what I just said???

So exactly what "key points" am I missing? And how on Earth am I "criticizing NGDP"? My gosh, people. NGDP is an economic indicator, not a fair damsel in need of gallant knights to defend her maiden virtue. Settle down!

Wednesday, November 02, 2011

"NGDP targeting" means "print money and buy stuff"

The econ blogosphere is afire with talk of "NGDP targeting." I don't have a huge amount to add to this discussion, but this post by Greg Ip caught my eye:
[There is] flawed reasoning behind the newborn infatuation with nominal GDP targeting. Its advocates, which include my colleague, R.A. and Goldman Sachs, now include Christina Romer... 
A nominal target can affect expectations in two ways. First, it influences markets’ expectations of what the Fed will do, thereby amplifying monetary actions...But there are many, potentially superior, ways to achieve the same thing, such as a promise to keep short-term interest rates at zero for a specified period of time, to target bond yields, or to keep rates low until a particular inflation or unemployment rate is achieved...Second, a nominal target should encourage firms and workers to behave in a way that makes the target self-fulfilling. 
NGDP advocates base their arguments on a flawed premise: that with a different framework the Fed would have been less concerned about inflation and more about output, and would have thus eased more aggressively.

Basically (and yes, this is a simplifaction), what the Fed can do to affect the macroeconomy is 1) print money and buy stuff, and 2) convince people that it will print money and buy stuff in the future. 

Many people want the Fed to print money and buy stuff because they believe that printing money will increase economic growth and therefore reduce unemployment. Others don't want the Fed to print money and buy stuff, because they fear that this will lead to inflation. Political pressure from these two groups, but especially from the latter, tie the central bank's hands in practice, even though in theory the central bank is supposed to be independent and do whatever it thinks is best.

However, some people believe that the Fed doesn't always have to actually print money and buy stuff in order to boost economic growth. If the Fed manages to convince people that it will print money and buy stuff in the future, these people say, businesses and consumers will anticipate this and economic growth will rise in advance. Then the Fed won't actually have to print money and buy stuff, so the danger of inflation will be averted.

"NGDP targeting" is a way to convince people that the Fed is willing to print money and buy stuff. Specifically, it is a way to convince people that the Fed is willing to print as much money and buy as much stuff as is necessary for economic growth to rise. If the Fed says "we are now adopting an NGDP target," some economists think, people will believe that the Fed is willing to print quite a lot of money and buy quite a lot of stuff, and their reluctance to buy things will crumble.

There are reasons to be skeptical of this. The main reason is that people will probably not take the Fed seriously at first. After all, the Fed has proven pretty unwilling to print money and buy stuff lately, even in the midst of a long grinding depression. Why should people believe that the Fed's behavior has fundamentally and hugely changed?

They shouldn't, so what the Fed will have to do in order to make NGDP targeting work is to prove that it is not bluffing. The only way to do that is to actually print a bunch of money and buy a bunch of stuff. In other words, throw a few people against the wall to show it means business.

But everyone knows the Fed will probably not do this, because of political pressure from conservatives. As soon as the Fed started actually printing money and buying stuff, conservatives would howl, and the Fed would cut it out. And at that moment, everyone would know that the NGDP target was a lie, and it would be dropped.

How do we know that political pressure from conservatives is so strong? Well, ironically, one way that we know this is from the popularity of NGDP targeting itself! As Greg Ip writes:
There is, of course, one rather unseemly advantage to NGDP targeting, that Paul Krugman alludes to here: it is a surreptitious way of temporarily raising the inflation target without the toxic politics of doing so explicitly...One should normally be wary of a monetary policy that achieves its objectives through subterfuge, but desperate times call for desperate measures.
In other words, NGDP targeting is popular in large part because the words "NGDP targeting" are less offensive to the hard-money types, inflation hawks, Republican politicians, John Taylor's army of clone cyborg stegosauruses, etc. This is probably because A) "NGDP" sounds less scary than "inflation" or "printing money" to non-intellectual conservatives and B) the advocates of NGDP targeting focuses on the fact that it acts through rational expectations, which intellectual conservatives are supposed to like. 

That in itself tells you exactly how likely it is that an NGDP target would hold up if anyone called its bluff...i.e., very unlikely. Hence, it is very likely that the bluff would be called. Hence, knowing that the bluff would be called, the Fed will not adopt an NGDP target. Game theory in action.

I do think that "print money and buy stuff" is a good thing to try to get out of a recession. However, it strikes me as a bit farcical to think that the only way to implement this policy is to simultaneously A) convince businesspeople that the Fed is willing to print massive amounts of money, and B) convince Republicans that the Fed is not going to print massive amounts of money. It's just not going to work. Has our politics really gotten so dysfunctional that this is our best idea? Well, you can answer that one for yourself.

(Note: anyone who does not know the meme referenced in the Bernanke picture is either old, or obviously doesn't spend enough time surfing the web and getting into flame wars on Facebook...)