Thursday, October 02, 2014

Thursday Roundup, 10/2/2014

Thursday Roundup is a bit more sedate today, since I'm temporarily laying off cocaine suppositories and peyote milk tea.

Me in Bloomberg View

1. It's a good bet that Japan will have to monetize its debt. That will be an interesting an unprecedented macroeconomic experiment.

2. John Cochrane shouldn't be so quick to dismiss concerns over income inequality.

3. It's possible that high Wall St. pay is due in part to compensating differentials.

From Around the Econ Blogosphere

1. Brad DeLong is absolutely on fire this week. In one epic post he explains why Bill Gross got 2011-2013 so very wrong. In another, he calls out and chastises a remarkable number of inflation-derping economists who have refused to admit they were wrong in 2011. Ahh, 2011, the year that the 1970s died.

2. Paul Krugman says that the reason he seems mean is that he only gets involved in debates that justify being mean.

3. Economists rediscover the endowment effect.

4. Matt Yglesias politely smacks down Scott Winship, who has made a career of downplaying trends he knows perfectly well are real.

5. Joe Stiglitz says that macroeconomics uses crappy microfoundations. Technically an NBER working paper instead of a blog post, but whatev.

6. Tony Yates has more gripes with John Cochrane's talk on inequality.

7. Cardiff Garcia reports on deflationary pressures around the world.

8. Scott Sumner vs. Matt Bruenig is a blog battle for the ages.

9. In case you wanted to read another debate about whether economics is a science, here is a debate between Adam Ozimek and a troll named Pascal-Emanuel Gobry.

10. Robert Waldmann claims that 1960s macro equations perform well out of sample to this very day. I'd be interested to see some quantitative evidence of that bold claim.

11. Stan Veuger's reflexive, hand-waving dismissal of Michael Strain's excellent column on infrastructure shows that some conservative derponomists just refuse to believe that public goods exist.

12. Josh Brown has written a magisterial epitaph for Bill Gross' tenure at PIMCO.


  1. bjdubbs1:51 AM

    It's the IPO cartel. The firms lock price cutters out of the syndicate (how can syndicates be legal?). But within the cartel, competition is fierce. The cartel is industry wide, not firm specific, hence the rents go mostly to the employees.

  2. Thanks for the link. I apologise for some twitter and gmail confusion about what I orginally casually wrote. I have read what I originally wrote -- it is that 60s era equations for consumption and investment work well out of sample (to try to be clearer for aggregate consumption and aggregate investment)

    What I meant (or at least what I think) is that the best equation for fitting and predicting consumption is a regression of consumption on personal disposable income, a few lags of personal disposable income and wealth.

    Later theories (that is the PIH really presented by Friedman in 1958 but not big in the 60s) suggest that these regressions are no good as they do not include anything about real interest rates or expectable future income. I find no evidence that those variables should be included.

    There is quantitative evidence on consumption at these links

    The 60s equation for investment was called the flexible axelerator. It just says investment/GDP is high when GDP growth is high and low when real interest ratesa re high. It fits very well

    Some quantitative evidence is at the link

    Finally it is also true that adaptive expectations augmented Phillips curves estimated with data up to 1973 work well out of sample .

  3. On link 11, in regards to the NR article, the comments section is the best. In fact, the National Review comments section is one of the funniest things on the interwebs. Red State's is fun too.

  4. Part I of my response:

    But in experiments, people do decline this gift, again and again. The Ultimatum Game, which is exactly the situation Cochrane describes, is one of the most-repeated studies in economics, and it shows that -- in some situations, at least -- people do care deeply about inequality in exactly the way Cochrane says they shouldn’t.

    Actually, this isn't exactly the situation that Cochrane describes. In the ultimatum game, one person has a check on the other person as, if the size of their proposed split is insufficently generous, neither player gets anything. In the scenario outlined by Cochrane, money is simply blowing around a room, and declining to accept the $10 will not mean that the other person won't receive their $100. In the ultimatum game the person with nothing has leverage while in Cochrane's scenario they have none.

    Now, the overall point that the inequality resulting from pure serendipity will no doubt anger some people is correct, but how much of inequality is due to such strokes of pure luck or fortune?

    But in any case, simply yelling at people “You shall not covet your neighbor’s house” is unlikely to achieve big results.

    Indeed, it is not. Instead we should just say "want your neighbor's house? Go earn the money and buy one yourself." Just because people want or demand something doesn't mean we are obligated to give it to them.

    But that doesn’t mean that people will never start to care about inequality. Maybe they will, and if they do, we should respect that preference just like we respect the desire for Lamborghinis.

    Maybe we should, maybe we shouldn't. If their concern about inequality stems from a correct sense that they are competing in a rigged game with little or no opportunity to improve their situation, that is bad and should be addressed. If it is simply a case of the opportunity existing but not wanting to work for it and instead desiring to take that which belongs to others, no, I don't believe we should respect that at all.

    Another thing that people probably care about is opportunity. People probably enjoy the feeling that they can get ahead if they work hard. But the farther apart the rungs get, the harder it becomes to climb the ladder -- at least, if people measure their success in relative terms, as many seem to do.

    But do they? For the sake of argument, let's say this is true. Who are people really measuring their financial success against? Is it against Bill Gates, Warren Buffett and other .01 percenters? Because after all, that's where the real inequality lies. Seems to me that, when comparing their welfare versus others, people measure against others like themselves -- friends, coworkers, former classmates, family members etc. way, way more than they do against the 1%, who they probably only encounter in life via TV and other media. Just as I doubt many Americans celebrate the fact they're doing better than someone in an African shanty town, I can't imagine that more than a handful of people feel more desperate or despondent because Bill Gates saw his wealth go up a few billion dollars more last year. That's not who most people are comparing themselves against. It's about keeping up with the Joneses, not keeping up with that rich guy sitting on a yacht you read about in a magazine.

    1. "That's not who most people are comparing themselves against."

      Are you just making that up? Or can you quantify it? Or can you even point to a paper from someone who has researched the subject?

  5. Part II:

    In a 1993 paper, Alberto Alesina and Roberto Perotti find that not only does income inequality tend to cause political unrest, it also seems to reduce investment.

    Well, that was 21 years ago -- so what have we seen since then? Has political unrest in the US increased as inequality has grown? That seems a hard case to make. Since 1980 we've only had one one-term president. We haven't had a riot on par with the 1992 LA riots since then (no, I don't think Ferguson really comes close). When income was more equal back in the 60s and early 70s we had a spate of political assassinations -- JFK, RFK, MLK, George Wallace, Malcolm X -- while I can't think of anything similar since Reagan was shot.

    That's not to say that it is impossible to imagine inequality and unrest being related. If people think that they face a rigged game with limited opportunity, it is easy to imagine this leading to anger and unrest. But if the inequality is more a reflection of choices, say one person dedicating themselves to producing a new good or service that benefits millions and makes that person wealthy while another decides to be a hippie and forgo income in exchange for a life of subsistence farming and being closer to nature, that seems much less likely to produce anger and instability.

    [T]here seems to be a real possibility that inequality can be bad for the health of a nation’s economy. And even if it weren’t, it may still be something that people care about. Inequality might not be the most pressing problem facing our nation, but it is a problem, and it can’t be dismissed as blithely as many would wish.

    This seems contradictory. One sentence states that "there is a real possibility that inequality can be bad" while the very next one much more definitively asserts that "[inequality] is a problem." So which is it, a possible problem or definitely a problem? Given the tenuous nature of the evidence presented in this column for viewing it as a problem, I'd opt for the former.

  6. Part III (have to split these up due to restrictions on the number of characters by blogger):

    Let me conclude with my own views on the matter. Inequality per se is most definitely not a problem. A village (a unit of analysis which is just as arbitrary as looking at countries) full of people who all live off of $5/day is not superior to one where some make $25,000, others $75,000 and a few more $250,000. If my boss gets a raise of 10% and I also get a raise of 10% -- thus increasing our inequality -- I am not worse off, just as I would not celebrate if each of us had our pay cut 10% which reduced our inequality. These should be obvious truths, yet it seems most (most?) of the leftist writing on the subject ignores this and applies little nuance to the subject.

    What is worth caring about is opportunity inequality. I am all for a serious conversation about that and measures to reduce it, such as easing barriers to starting one's own business, making college/higher learning more accessible (such as through cheap online courses) and reducing credentialism/the cult of the BA (we've come to a ridiculous place when advertisements for administrative assistance positions demand a college degree, which at least theoretically someone with a HS diploma should be able to do) and improving K-12 education (school choice seems like the definition of increased opportunity). Heck, I even see denser living and more walkable, more transit-friendly built environments as part of the solution so that the poor don't need to struggle with maintaining a running vehicle to get to and from jobs (some of the better paying jobs are in the suburbs where bus lines are much less convenient).

    It's notable to me that Thomas Piketty recently stated that "the main policy to reduce inequality is not progressive taxation, is not the minimum wage. It's really education." Yet listening to the left, what I mostly see is talk about raising taxes and the minimum wage, and much less so about expanded opportunity (which is what education is really all about). It's almost as though all this talk about inequality isn't really about raising mobility at all, but rather punishing the rich for its own sake. We need to have a conversation about raising people up (the hard way to address inequality) rather than taking others down (the much easier way to address inequality).

    1. tl;dr

      Maybe you should take a hint from the restriction on the length of comments.

    2. "some make $25,000, others $75,000 and a few more $250,000"

      Yeah, well, how about a village where some make $25,000, and one guy makes $250,000,000? You don't think there's going to be a tendency for the one rich guy to disrespect everyone else? You don't think there's going to be a tendency for the rich guy to claim that he earned every cent through hard work and everyone else is just lazy? You don't think there's going to be a tendency for the rich guy to go down and buy the land around the nice beach that everyone in the village had been sharing for the previous 80 years, and keep everyone else out?

  7. Anonymous7:31 PM

    Sometimes, I wonder whether people ever see the connection between policy and revenue. Yes, the path towards expanding opportunity is through education, health care and public health, etc. And where do you think the revenue comes to expand access to good education, to provide affordable health care, to improve public health (hint, it may just be through taxes).

    1. This argument, at least with regard to education, seems to presume that we are already at peak efficiency at that further gains can only be realized through additional resources. I see no reason to believe that is true.

  8. Is there a link to a free version of the Stiglitz paper?

  9. Whither the giant rabbits? Or is this yet another "Oh, Gromit, I don't want to be a giant bunny" con?

  10. Anonymous5:49 PM

    RE: Japan's government's debts and It's peoples debt.

    You wrote, I read:

    "But I’m not worried. In the end, a sovereign default is just an accounting exercise -- marking down the assets of some Japanese people and marking up the assets of others."

    Have you considered learning some accounting? Just a little? You might get stronger.

    Some of these Bloomberg readers understand the language of business, accounting.

    Would that be, marking down the assets ... and defaulting on the liabilities to "others"?

    Just an accounting exercise? Who are your friends in Japan? Maybe not the creditors?

  11. Anonymous5:55 PM

    Quote was from:

  12. Re: Japan Debt and these sentences: "A 2013 paper by economists Gary Hansen and Selahattin Imrohoroglu found that in order to put the debt on a sustainable path, Japan would have to increase tax revenue to 40 percent to 60 percent of GDP. That would be unprecedented; currently, the most taxed countries are Denmark and Sweden, which collect 44.7 percent and 44.3 percent of their GDP, respectively, in taxes. Fiscal consolidation would put Japan at or above this level. A 2011 paper by economists Takeo Hoshi and Takero Doi was a little more optimistic, putting the needed revenue at 40 percent to 47 percent of GDP. But much has happened since that paper was written to make the outlook more grim, so the higher estimates may be the better ones."

    You seem unaware that most developed country government sectors collect more than 40% of GDP. Japan recently measured at 42%. US btw at 41.6%.

    Look here, in the total government spending as % of GDP column (far right):

    If you don't trust Heritage there are other sources with very similar data. You'll notice they have a separate column for "tax burden" which is inexplicably much lower. You may be using something similar. I'm not sure what exactly they're leaving out of "tax burden" but since they count the US tax burden at only 25.1% of GDP it seems likely that column only counts central and/or federal government taxes.

    If Hansen and Imrohoroglu really wrote "have to increase tax revenue to 40 percent to 60 percent of GDP" than they were so fantastically vague I don't understand what they meant or why you quoted them. Even Hoshi and Doi's quoted "40 percent to 47 percent" is still an almost meaninglessly wide range. Both beg the question of what do they measure current revenues to be.

    A much clearer metric would be the percentage points of GDP of fiscal consolidation they believe are necessary.

    On a technical note, it's very important to take into account the portion of debt held by the central bank. The usual IMF stats on net debt do not, and most academics' measures of interest expense do not. But governments don't really pay the headline interest to their central banks. That is governments pay but CBs remit back their incomes minus operating expenses. In effect the government pays IOR on its debt held by the CB. Thus the actual interest expense is quite a bit less than a simple look at the interest expense line on the government's outlay table suggests.