Questions

The guy who fixes my lawn mower has a lot to say

The guy who fixes my lawn mower says

I have one rule that applies to every machine that comes into my shop: I have to know why it's doing what it's doing before I can fix it.

I think the people who work on fixing the economy need a rule like that, too. I have a rule like that. I said as much just the other day:

I would want to figure out which of the [so-called causes] perhaps contribute [to the problem] and which is the driving force that created the problem in the first place. Because if you never solve the original problem, you never solve the problem.

I s'pose the powers that be would say they have rules like that, or better ones. Maybe. But I sure don't see it.

Oh, you know, they probably have rules like that for things they don't understand. They're very careful about such things, in their own way, with their models and all. But when it comes to things they think they understand, they consistently go with the dumbed-down drivel. Again, they'd probably say they have those things worked out already, so they don't need a rule like you might need if you're fixing a lawn mower.

But the economy changes. And this means that the cause of a particular problem may not be the same as it was the last time you had that problem. Especially after an event like the Global Financial Crisis of a decade back, you have to test every assumption.

"I have to know why it's doing what it's doing before I can fix it."

Joe Walsh?

From Joe Walsh... retweeted by netbacker:

See, I don't buy that shit.

Say what you want about Trump being a "con man" who "doesn't care about anything but himself," a man who is reckless and incompetent and a liar. It's all ad hominem: a fallacious argumentative strategy whereby genuine discussion of the topic at hand is avoided by instead attacking the character, motive, or other attribute of the person. It may all be true, what Walsh says, but it's still a fallacious argument. And that's not the worst of it.

Walsh says Trump "is placing this country in real danger" -- that's the conclusion of his fallacious ad hominem argument. So it's not like Walsh is saying Trump has all these character flaws AND he's placing the country in real danger. Walsh is saying Trump is placing the country in real danger BECAUSE he has all these character flaws. Walsh leaves out our economic troubles, which are the real danger to our country.

This suggests to me that Walsh, just like Trump and those who came before, really has no idea how to resolve our economic difficulties and so simply avoids the topic. Either that, or he's just trying to ride a wave of popular opinion.

Home Project

Doing a little work around the house to keep the wife happy. Went to the hardware store to get some screws. Came to $4 and change. I reached for my credit card, then noticed the $5 bill in my wallet. Handed the five to the guy at the register and said "Real money".

"Don't see much of that around here," he said. Even when he tallies up at the end of the day, he said, it's mostly credit card receipts, hardly any cash money. "There's a huge amount of debt in this country," he said.

As I left, the next guy in line stepped up to the counter. "23 trillion dollars," he said, "but who's counting."

Yeah, okay, but $23 trillion is just the Federal debt. Debt other than Federal is $23 trillion plus $23 trillion, plus half another $23 trillion. And nobody's counting but the creditors.

Don't be fooled by the theory of Homo recriprocans

By way of Economist's View, at Economic Principals: The Practice Turn by David Warsh. Mark Thoma quotes the first paragraph:

It being August, and, unable to contribute anything worth saying about trade wars and currency politics; inspired instead by reading Joel Mokyr’s account of how a distinctive passion for useful knowledge emerged and flourished in Europe before spreading around the world, I lit out for the library to have a look at Mokyr’s preferred sources on the evidence of choice-based cultural change. The economic historian has underscored why evolving preferences, social learning, and its diffusion, are among the most interesting topics in all of social science.

I quote the second:

In Mokyr’s index, anthropologist Robert Boyd and economists Samuel Bowles and Herbert Gintis are at the head of a column of other cultural evolutionists and evolutionary psychologists who argue that humankind is an inherently cooperative species. If in fact, in the view of experts, Homo recriprocans is gradually replacing Homo economicus (as Bowles and Gintis once put it), that development would certainly be news.

Economic Man is evolving into Reciprocating Man? Never heard of this before.

Wikipedia:

Homo reciprocans, or reciprocating human, is the concept in some economic theories of humans as cooperative actors who are motivated by improving their environment through positive reciprocity (rewarding other individuals) or negative reciprocity (punishing other individuals), even when without foreseeable benefit for themselves.

This concept stands in contrast to the idea of homo economicus, which states the opposite theory that human beings are exclusively motivated by self-interest.

Yeah, I dunno, maybe like humans on Star Trek. Or like players of that "collaborative" video game, The Castles of Dr. Creep.

Perhaps we find acceptance and rejection of this idea of evolution in today's political perspectives. I don't pay attention to politics so I'm just guessing here, but maybe liberals accept the idea and conservatives reject it? Sounds about right to me.

I'd say it's not realistic to expect the rise of Reciprocating Man. It's not realistic to expect a change in human nature. So maybe Mokyr's Boyd and Bowles and Gintis think they see this change. I'd say, short and sweet, what they see is not a change in human nature, but a phase of human nature, a phase that occurs during the decline of civilization.

It could be that it isn't a change in human nature. It could be that human nature has always included the "reciprocating" feature, but this feature is ordinarily suppressed by the way the economy works. And then, in contrast to the economics of scarcity, the economics of plenty allow and encourage reciprocation. Could be, but I don't think so.

I think the economy runs in cycles, including those massive cycles that we call the rise and fall of civilizations. And I think that when you see something that looks like a change in human nature, it's probably just a phase of that massive cycle.

Both a lack of finance and a bloated financial sector. Both? Really?

At Stumbling and Mumbling, The Trade Deal Fetish. Chris Dillow writes:

As for what it is that is holding back exports, there are countless candidates – the same ones that help explain the UK’s relative industrial weakness: poor management; a lack of vocational training; lack of finance or entrepreneurship; the diversion of talent from manufacturing to a bloated financial sector; the legacy of an overvalued exchange rate. And so on.

If we were serious about wanting to revive UK exports, we would be discussing what to do about issues such as these.

In the one paragraph we have "countless candidates" that could have caused the problem. In the next, they are no longer candidates but issues and we should be "discussing what to do" about them. That's not my style.

I would want to figure out which of the "candidates" perhaps contribute to holding back exports, and which is the driving force that created the problem in the first place. Because if you never solve the original problem, you never solve the problem. And the more you change other things, the wrong things, in your attempt to fix the problem, the more you change the economy. And the more you change the economy like that, because of a problem you can't seem to solve, the less chance you'll ever have of making things better. But that's just me.

That's not why I'm writing today. I'm writing today because Dillow's list of candidates includes both "lack of finance" and "a bloated financial sector". Both? Really?

Dillow identifies the problem with finance as "the diversion of talent". I've seen the "talent" story before; it makes me want to puke. Apparently, finance is bloated with talent and somehow this is a problem. Why doesn't supply-and-demand fix that problem, I want to ask. If there is a shortage of talent in manufacturing (or elsewhere), why don't offers of better pay solve that problem? And if finance is bloated with people of talent, why do those people still get paid so damn much? Why doesn't pay for talent fall, if finance has too many talented people? The "diversion of talent" to finance is nonsense; it's not the problem.

I suppose the problem could be economic policies that boost the financial sector. Such policies skew the operation of supply and demand. Yes, I would go with this explanation. Of course, it means policy's favoritism of finance must come to an end. And it may mean, if finance could become dominant naturally and not only by the encouragement of policy, it may mean that policy would have to suppress finance a bit, always and forever. (Heaven forbid. I know.)

But if finance really is the problem that undermines UK export growth, then we must ask what is the problem with finance. The problem is obvious, but people seem not to want to see it: The problem with finance is cost.

In domestic markets, the financial sector absorbs income that would otherwise go toward spending that increases aggregate demand. The growth of finance (or let's say the excessive growth of finance) reduces aggregate demand. It slows output growth, job growth, and the improvement of living standards. Furthermore, if the solution to the problem of reduced aggregate demand is found in the growth of household debt, then the solution contributes to further expansion of the financial sector and is ultimately self-defeating. But these are domestic issues, unrelated to the growth of trade.

The cost of finance is one of the costs that must be counted when the costs of production are tallied. Other things equal, a large or "bloated" financial sector will generate more cost than a small financial sector. The cost of output will be higher in the economy with bloated finance, and its products will be less competitive in international markets.

Perhaps a comparison of financial sector sizes of the UK and Germany would help to clarify this issue. As a crude measure, consider finance as a share of GDP: 6.9% in the UK versus almost 4% in Germany. That's a difference of about 3% of GDP. Here's the crude part: If you think of finance as a cost rather than a product, you can estimate that prices of UK products are maybe 3% higher that German products, solely because of financial cost.

It would be better to compare private sector financial liabilities, if you have the data.

Go Menzie! The truth will out

A comment from Bob Flood at Econbrowser:

10 US recessions since 1950 last abt 3 quarters…so unconditional prob in any quarter is 30/276 = abt 10%. So prob no recession 90% . Pretending they are independent events, prob no recession thru Jan 2021 = .9^5 = 60%. But there all sorts of conditional things going on and instead of the censored regression first-pass regressions seen here, I’d like to see some quarterly GDP growth regressions with the residuals saved and then drawn out of sample to see – in maybe 1000 or so runs – the current-state conditional prob of recessions over various horizons. Nice undergrad macro topic.

I could follow the first part of that no problem: Ten recessions lasting on average maybe 3 quarters = 30 quarters of recession out of 276; about 10% are recession quarters, so about 90% are not. And then 90% raised to the fifth power for 5 consecutive quarters: 0.9*0.9*0.9*0.9*0.9 = I get 0.59, call it .60, 60 percent. Oh and 276 quarters = 69 years; 69 years since 1950 = 2019. Check.

That much I get, and I can check his numbers and they look good to me. And everything makes sense until I get to the part about regressions. Mental block. No matter: I read to see if one day somebody says something that makes it all make sense to me.

Menzie Chinn responded to Bob Flood:

So boostrapping to evaluate the growth elasticity bounds. I tried some plain OLS to get the point estimate; one problem is that growth is trending downward over the past 50 odd years, so how to deal with that in a good-fitting but not overparameterized way. But agree it’s an interesting topic to assign.

OLS is "ordinary least squares" which I think is the simplest form of regression but I never had it in school and I dunno. So when I read Menzie's remark, most of it fades into fuzziness in my mind and I'm left with this right here:

growth is trending downward over the past 50 odd years

That's what I get. Let me repeat it:

growth is trending downward over the past 50 odd years

People don't say that. You almost never hear it. What you hear is that since 1948 (or whenever) average growth is 3.3% (or whatever).

Nobody bothers to point out that on a graph the average is always a flat line; flat in this case at the 3.3% level and since 1948. Apparently we are supposed to think "remarkable consistency!" when we hear "3.3% since 1948". But it is mathematical tomfoolery!

Are we to believe that growth is NOT trending downward over the past fifty years? No one says this explicitly, of course. But it seems we are expected to focus on the reliable 3.3% number, and not worry our little heads about any downward trend. Now, though, Menzie Chinn has let that cat out of the bag.

Go Menzie!


PS, If the 50-year downward trend is serious enough to mess up economists' regressions, it is serious enough not to be ignored.

PPS, According to what Menzie says, you evidently don't even have to do a regression to know that growth is trending downward over the past 50 odd years.

The stock and flow of debt

Recently I said:

The debt-to-GDP ratio goes up because GDP is a flow that starts every year at zero, and debt is a stock that starts every year where it left off the year before.

Let's look at that:

Graph #1: All Sectors Debt Stock (blue) and Flow (green) Compared to GDP (red)

The red line shows GDP, which begins every year at zero. The blue line shows the stock of debt, which begins every year where it left off at the end of the year before. The blue increases much faster than the red because the blue is a stock.

The green line shows the flow of debt. It increases almost not at all because the green is a flow. It starts at zero every year.

Of course, you could eliminate the red and blue lines from the graph, and let the green line expand to fill the plot window. Increases in the flow of debt would then be more apparent. But in context, as this graph shows, those increases are extremely small and they do not accumulate: In the green line, they do not accumulate.

A second look at the same data, this time as a percent of GDP:

Graph #2: All Sectors Debt Stock (blue) and Flow (green) as Percent of GDP.
The red line shows GDP as a percent of itself, for comparison.

The blue shows the stock of debt as a percent of GDP. The green shows the flow of debt as a percent of GDP. I am perfectly comfortable saying that the debt-to-GDP ratio goes up because debt is a stock (it starts every year where it left off the year before) and GDP is a flow (which starts every year at zero).

//

I am not saying debt isn't a problem. I think debt is not only a problem, but the problem of our economy, and the problem of our time. But the problem is not that debt exists. The problem is that debt accumulates.

Debt accumulates, so we have to look at it as a stock. You can't make the problem go away by looking at debt as a flow.

"Ideally," Cecchetti Mohanty and Zampolli say in footnote 17, "we would prefer to measure either a stock relative to a stock or a flow divided by a flow... Unfortunately, the limits of available data precluded both of these approaches."

Fortunately, I'd say. For as our green line shows, when we pretend debt doesn't accumulate, debt doesn't look like a problem. Debt is a problem, though, because it does accumulate.

Discrepancies everywhere

From my old notes:

In Essays in Persuasion Keynes touched on the ideas of Professor Commons. Commons described three economic epochs--the Era of Scarcity, the Era of Abundance, and the Era of Stabilization. The era of scarcity, Keynes notes, was "the normal economic state of the world up to (say) the fifteenth or sixteenth century". The era of abundance occupied the seventeenth and eighteenth centuries and "culminated gloriously in the victories of laissez-faire". And in 1925 Keynes wrote that "we are now entering" the era of stabilization, identifying Professor Commons as "one of the first to recognize" it.

From Brad DeLong Introducing Partha Dasgupta

Back in 1800, nearly the entire world lived in dire poverty...

//

Which is it? Global poverty in 1800, or the glorious culmination of the era of abundance?

You could say that for us "the world" is the world, but for Keynes the world was only Europe, or only part of Europe. And maybe you'd be right. Still, DeLong's statement creates an impression that Keynes contradicts.

Or maybe you are thinking that compared to the way things are now, life in the year 1800 was a life of poverty everywhere, even Europe. But of course if we look back in time it seems that way. If we imagine ourselves in the year 1800, looking back in time, we would have to say that we were far better off then than those who came before.

"Back in 1800, nearly the entire world lived in dire poverty". Those words from DeLong are the first words in his "Introducing Partha Dasgupta" post. For me they put his whole post in doubt.

Maybe it's just a little oversimplification on DeLong's part. So?

Not about debt

From Roger Farmer, from a pretty interesting article:

It also matters, a lot, who holds the [government] debt. Large values of domestically held debt are simply a redistribution from future to current taxpayers. Large values of foreign held debt however represent a claim on the domestic economy by foreigners. Foreign held debt is much less benign than domestic debt.

Large values of foreign-held debt are a problem, Farmer says, but large values of domestically-held debt are not. I don't want to evaluate the validity of the statement or anything like that. I just want to note that Farmer distinguishes between domestic and foreign. And I want to ask why people don't make the same distinction when it comes to, say, Brexit.

Being separate from the EU is like having domestic debt. Being in the EU is like having foreign debt. Actually, it's like taking domestic and foreign debt, adding them together, and calling the result domestic. I think people should object to this in principle.

One is much less benign than the other.

RE: The two percent inflation target

From a speech by Stanley Fischer (PDF) on Woodford, Patinkin, and Wicksell:

Wicksell states that both inflation and deflation are evils, but that it is generally believed that what is most desirable is a situation “in which prices are rising slowly but steadily” (p.3). He likens the arguments for this viewpoint as reminding one “of those who purposely keep their watches a little fast so as to be more certain of catching their trains” (p.3). Rational man that he was, he dismisses such behavior ... as not being able to survive in the long run.

Yeah. The Clinton years

From Brad DeLong in Is Plutocracy Really the Biggest Problem?: No Longer Fresh at Project Syndicate:

As John Maynard Keynes argued in January 1937, “The boom, not the slump, is the right time for austerity at the Treasury.” Unfortunately, in the early 2010s, those of us who recalled this lesson were consigned to the margins of debate.

Yet, here, big-money influence was a secondary problem compared to the Democratic Party’s broader surrender to neoliberalism, which started under President Bill Clinton, but reached its apotheosis in the Obama era...

I like the Keynes quote. But I wanted to quote DeLong because he puts a date on "the Democratic Party’s broader surrender to neoliberalism": the Clinton years.

I'm convinced

At Conversable Economist, Limits for Corporate Bigness on Acquisitions, Patents, and Politics by Timothy Taylor.

Recommended reading.

I will probably write a follow-up "crit" of Taylor's article, but it won't subtract from how good the article really is.

Just a question

"Ideally," Cecchetti Mohanty and Zampolli write, "we would prefer to measure either a stock relative to a stock or a flow divided by a flow."

The debt-to-GDP ratio goes up because GDP is a flow that starts every year at zero, and debt is a stock that starts every year where it left off the year before.


This graph shows a stock relative to a stock:

Why does it go up?

Gervais

"Just because you're offended, it doesn't mean you're right."

- Ricky Gervais

"Who are you going to believe, me or the evidence of your own eyes?"

The stats are there for all to see. FRED alone offers more than half a million US and international time series. It's not like the only number there is to look at is GDP.


In my recent The Washington Post I started with the production of things versus the enhancement of life, and ended up with the production of income versus the enhancement of life. My point was that when the Washington Post said "the production of things" what they really meant was "the production of income", and that there is not really much difference between the production of income and the enhancement of life.

If there was a problem with my argument it was that producing income doesn't do much to enhance life when half the income goes to the three richest people in America (or whatever that stat is).

Now, via Economist's View, along comes

• Who are you going to believe, me or the evidence of your own eyes? - Stiglitz, Durand, and Fitoussi

There’s no point telling somebody who grows more desperate as each bill falls due that the overall economic situation is improving or to take a broader, longer-term view. If what the expert says has little or no relation to what people feel or can see all around them, it’s inevitable that they stop believing the experts and the politicians they advise, and look for answers elsewhere. President Sarkozy of France recognised this, and in 2008 convened the Commission on the Measurement of Economic Performance and Social Progress, the so-called Stiglitz-Sen-Fitoussi Commission.

I remember Sarkozy. He was on 60 Minutes one time, interviewed by Lesley Stahl. She asked him about his wife (or something; I forget) and his response was that before the interview he had made it clear he would not answer questions on that topic. Stahl's follow-up was to repeat the same question. Sarkozy got up and left. I decided right then that I liked the guy.

The article, at VOX, is an acknowledgement (complete with links) of the 2009 report of the Stiglitz-Sen-Fitoussi Commission and two follow-up HLEG reports from 2018:

HLEG argues that we need to develop datasets and tools to examine the factors that determine what matters for people and the places in which they live. The production of goods and services in the market economy – something which GDP does try to capture – is of course a major influence, but even in the limited domain of the market, GDP doesn’t reflect much that is important. The most used economic indicators concentrate on averages, and give little or no information on well-being at a more detailed level, for instance how income is distributed among households. Once conclusion of the HLEG is then that we need more granular data that capture all components of income and wealth and how they are related to each other. We also need to complete and render more timely the datasets we do have, both by integrating administrative and other types of data (such as from surveys) that already exist, and redesigning national accounts to incorporate distributional aspects.

Sounds like the brass ring, doesn't it? The thing we always wanted, even if we didn't know.

Note that the excerpt mentions distribution twice.

They also say this:

Misleading statistics result in misguided policies. If governments think the economy is well on the road to recovery because that’s what GDP suggests, they might not take the strong policy measures needed to resuscitate the economy that they would take with metrics that inform on whether most of the population still feels in recession. If they do not have metrics on the extent of people’s economic insecurity, they may not take measures to bolster the safety net and social protection; they might even set about stripping away some social programmes.

Good one, isn't it? There can be no doubt that "misleading statistics result in misguided policies." I think the VOX article is very well written. But I don't like to be convinced by good writing. I like to be convinced by facts. I'm not comfortable when they say policymakers may "think the economy is well on the road to recovery because that’s what GDP suggests". I don't think that's what happens. I don't think policymakers are stupid. Lesley Stahl is stupid. Policymakers may use the "well on the road to recovery" thing when they are trying to convince us that the economy is well on the road to recovery, so that we'll go out and spend the money that actually creates the recovery. But that's not what the article says.

Nor am I comfortable when they say that these misguided policymakers "might even set about stripping away some social programmes." It sounds like something that was written for the Democratic National Convention. It is a mistake to bring politics into economic analysis, in my view. And anyway, in my first discomfort I pointed out that I don't think policymakers are misguided. They're not stupid, I said.

I think they don't know what to do to fix the problems. The policymakers who might set about stripping away social programmes don't know how to fix the problem. Nor do the ones who say the others are misguided by GDP. These are two political camps, looking at the economy as if it was a political problem. Well, maybe for politicians it is a political problem. But it does the economy no good to bring politics into economic analysis.

Here's the ending:

But having the right set of indicators is just the beginning. They need to be anchored in policy. If we want people to trust us, we have to show them evidence that is at least as good as the evidence of their own eyes. And we need to act on this evidence, designing policies that improve their lives. In this way we can close the gap between experts and ordinary people that are at the root of today’s political crisis.

Last two words: "political crisis". They think the economic problem is political.

I'm impressed by the writing. But I'm not impressed by the article.