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.