Last Build Date: Sun, 30 Apr 2017 11:06:33 -0500Copyright: Copyright 2017
Sun, 30 Apr 2017 11:06:33 -0500
During 2008, the Fed became increasingly concerned about high inflation, which was partly driven by rising oil pr ices. This caused them to refrain from rate cuts between April and November, resulting in an unintentional tightening of monetary policy. They were focused on inflation when recession was the real threat. In retrospect, the Fed should have focused on NGDP growth, which was slowing during 2008.
What will be the next example of economic policymakers fighting the last war? Perhaps fiscal policy. I don't have much confidence in the Keynesian view that the stance of fiscal policy has a big impact on the business cycle. But let's say I'm wrong. Here's what I expect to happen:
1. The President and Congress will enact deep tax cuts and increases in military spending, which will cause the deficit to balloon. Entitlement spending will also rise as boomers retire.
2. The deficit will rise to unsustainable levels, with the national debt steadily increasing as a share of GDP.
3. By the time the next recession is on the horizon, there will be a political backlash against expansionary fiscal policy. Policy will tighten and become effectively pro-cyclical.
I hope that I am wrong, but this is the danger I see from running a series of large budget deficits when the unemployment rate is 4.5%. What will we do if unemployment rises to 7.5%?
Sat, 29 Apr 2017 23:49:36 -0500
"I cannot fail to speak of the grave risks associated with the invasion of the positions of libertarian individualism at high strata of culture and in school and university education," the Pope said in an message sent to members of the Pontifical Academy of Social Sciences meeting in the Vatican and subsequently shared with Breitbart News.This is from Thomas D. Williams, Ph.D., "Pope Francis Warns Against 'Invasion' of Libertarianism," Brietbart, April 28, 2017.
I'm assuming throughout that Williams is quoting the Pope correctly because I can't find the original source. If not, then much of what I say may not follow.
Which universities is he referring to? Yale? Berkeley? Middlebury? I think the Pope and I are perceiving the world very differently. I don't mean our values are different, although that's probably true too. I mean that what we think is factually true is different. He perceives a university system in which libertarians are becoming important. I perceive one in which the left, with whom he seems often to agree, is dominant. At least one of us is wrong.
Francis said that libertarianism, "which is so fashionable today," is a more radical form of the individualism that asserts that "only the individual gives value to things and to interpersonal relations and therefore only the individual decides what is good and what is evil."
According to this mentality, all relationships that create ties must be eliminated, the Pope suggested, "since they would limit freedom." In this way, only by living independently of others, of the common good, and even God himself, can a person be free, he said.
Here's what I wonder: does the Pope actually know any libertarians at all?(5 COMMENTS)
Fri, 28 Apr 2017 10:49:56 -0500The title of this post is actually two questions in one. One issue is technical, why don't wages rise to restore equilibrium? And the second is sociological, haven't we all been reading that there are no longer jobs available for non-college men? And yet, there really does seem to be a shortage of construction workers. Here's just one article of dozens that I have read: As the Dallas Morning News notes, between 2012 and 2016, wages for Texas construction workers rose 21.2 percent, compared with 12 percent for all construction jobs in the U.S., and 2.2 percent for all jobs in the state. In Collin County, home to Plano and McKinney, construction workers make $98,000. And that was before the new administration began its immigration crackdown. The Dallas-Plano-Irving metropolitan area is short about 18,000 construction workers--about 20 percent of the total. Which means that many homebuilders literally can't find people to do the job, and the rest must attempt to pass on higher costs to their customers. [Update: Ben Cole sent me some data suggesting the $98,000 figure is misleading---perhaps "fake news". Actual construction wages seem to be much lower.] You can find similar articles about shortages of skilled factory workers, truckers, and many other blue-collar professions. So what's going on here? Let's start with the technical issue, why doesn't supply and demand (S&D) restore equilibrium? The problem here is that most labor markets are at least modestly monopsonistic, whereas the S&D model only applies to perfect competition. For instance, suppose a construction company paid its existing workers $26.50/hour. Also suppose it decided that it wanted to double the size of its workforce, because of growing demand for new houses. Under perfect competition there would be a long line of workers, just as good as the existing employees, willing to work for $26.50/hour. In the real world, however, there is a very limited number of potential employees in any given labor market. To attract more workers, you need to raise the wage rate. OK, but then why don't firms raise the wage rate to attract those new employees and eliminate the shortage? Here's where the monopsony model comes in to play. For reasons of employer morale, if you raise the pay of new hires, you need to raise the pay of existing workers. Otherwise the existing workers resent the higher wages of the new hires. Even worse, they'll jump ship to trying to get higher wages at a competitor firm. If paying a new worker $27.50/hour forces you to raise the pay of each of your 50 existing workers by $1/hour, then the true cost of that worker is not $27.50/hour, it's $27.50 plus $50, or $77.50/hour. At that price you may refrain from hiring the new worker, and keep looking for someone willing to work for $26.50/hour. When a reporter stops by, you tell her that you face a "shortage" of workers, even though there's someone willing to do the job for $27.50/hour. That's what monopsony is all about. That's actually the easier question to answer---a shortage is indeed possible, despite the fact that is seems inconsistent with simple S&D. But what about the other question? During the Year of Trump we read 1000 articles about the plight of America's blue-collar workers, especially non-college men. Why aren't they willing to do construction jobs in Dallas paying $98,000? That's more than many college professors make. If both spouses did that sort of work, the family income would be in the top 5%. Why the shortage? Tyler Cowen linked to an interesting study today: A poll from the National Association of Home Builders (NAHB) of young Americans ages 18-to-25 shows that almost no millennials want a career in construction -- a high-paying industry. 64 percent of these millennials said they wouldn't even consider working in construction if you paid them $100,000 or more. 74 percent of young adults know what career field they want to pursue, and of these millennials, just 3 percent want a career in con[...]
Thu, 27 Apr 2017 13:33:21 -0500I've heard many arguments against homeschooling. Here's the worst:
Wed, 26 Apr 2017 15:46:00 -0500
In a comment on a recent blog post I wrote on United Airlines, The Original CC highlighted one of my sentences and wrote:
You seem to be the master of deescalation. Can you explain this interaction and what you said in a little more detail? We could probably all learn from it.
One guy got defensive but, because I didn't get angry back, cooperated.
Back to the United incident. Once I explained that my plane would leave in about 12 minutes from a different wing of the airport, the guy said, with a tone, "The door isn't even open yet." I answered, "Yes, sir, I understand but I'm trying to get as close to the door as possible when it does open." He seemed to get it because he said, "Oh, alright" and stepped back into his seat to let me pass. [These are my rough recollections. I could be off a little.]
My attitude that has worked for me from about age 30 on can be summarized as "Keep your eye on the prize." Someone on Facebook recently asked what one line of advice people would give someone about living his/her life. I answered, "In any conflict or issue of controversy, keep forefront in your mind what goal you want to achieve." What that will typically mean is that you don't escalate, you probably ignore insults, you let people save face when they back down, when they give you even some of what you want you thank them, and you don't gloat when you win, to name five.(9 COMMENTS)
Wed, 26 Apr 2017 10:17:07 -0500Ezra Klein has a good essay on the Singapore health care system. He starts off with the conservative case for the Singapore system, quoting the AEI: What's the reason for Singapore's success? It's not government spending. The state, using taxes, funds only about one-fourth of Singapore's total health costs. Individuals and their employers pay for the rest. In fact, the latest figures show that Singapore's government spends only $381 (all dollars in this article are U.S.) per capita on health--or one-seventh what the U.S. government spends. Singapore's system requires individuals to take responsibility for their own health, and for much of their own spending on medical care. Most of the essay is spent partially (but not completely) debunking the conservative view. For instance: According to the World Bank, in 2014 Singapore spent $2,752 per person on health care. America spent $9,403. Given this, it's worth asking a few questions about what Singapore's model really has to teach the US. Are Singaporeans really more exposed to health costs than Americans? The basic argument for the Singaporean system is that Singaporeans, through Medisave and the deductibles in Medishield, pay more of the cost of their care, and so hold costs down. Americans, by contrast, have their care paid for by insurers and employers and the government, and so they have little incentive to act like shoppers and push back on prices. But is that actually true? I doubt it. The chasm in total spending is the first problem. Health care prices are so much lower in Singapore that Singaporeans would have to pay for three times more of their care to feel as much total expense as Americans do. Given the growing size of deductibles and copays in the US, I doubt that's true now, if it ever was. (It's worth noting that, on average, Singaporeans are richer than Americans, so the issue here is not that we have more money to blow on health care.) I think he's overstating the case here (I find that even many of my small health expenses are heavily subsidized) but there is some truth to what he says here. And I think this points to the necessary first step in health care reform---getting costs down. Indeed Klein's basic argument is that the Singapore system is actually a pretty effective health care regime, but it would be hard to implement in America because the cost of health care is so much higher here. But this leads to what I see as the one major blind spot in Klein's article: Singapore's system is probably better designed in terms of how consumers spend their own money. But the lower overall prices make them much less exposed to health costs than both patients and employers inside the American system -- which suggests to me that Americans have at least as much incentive as Singaporeans to try to use their power as consumers to cut costs. The fact that that hasn't worked is, I think, a reason to believe we've gotten the lesson of Singapore's health system backward. Singapore heavily regulates both the pricing and provision of medical care to keep costs low (as do all other developed countries) and then, working off that baseline of low costs, has Singaporeans pay out of pocket in order to keep them mindful of how much they're spending. Unless Klein doesn't consider America to be a "developed country", the statement is flat out wrong. In America the government heavily regulates both the pricing and provision of health care to keep costs high. In America: 1. There are massive subsidies to employer provided health insurance. This leads to enormous consumption. My personal lifetime health care consumption has been at least doubled by various subsidies (including tax breaks), and it has not improved my health one iota. 2. There are huge regulatory barriers to the efficient provision of health care, at virtually every level of the system. It's too difficult to become a doctor. Nurses are prevented from doing too ma[...]
Tue, 25 Apr 2017 17:18:16 -0500
Adam Ozimek has written an article on Forbes.com titled "Libertarianism Needs To Become More Realistic." HT to Tyler Cowen. Although authors rarely get to choose their articles' titles, the title does seem consistent with his message. Ozimek is friendly to libertarianism, and so his suggestions should be seen as friendly amendments to the strategies pursued by some libertarians.
Here's his final paragraph:
Instead, people want quality of life, economic growth, and good government. All three of these can be helped on some margins by utilizing market forces, deregulating, and increasing freedom. Libertarianism should focus on these margins, and accept that the all-too-popular vision of radical freedom and minimal government at all costs is not wanted by enough people to actually matter. Realistic libertarianism would unabashedly accept limits of markets, and embrace in rhetoric, theory, and practice the first order importance of quality government, which on many margins trumps small government.
I agree that libertarians are in a minority. He gives strong evidence for this, focusing on a factor that many libertarians, and almost all libertarian economists, would accept: the evidence on voting with one's feet. If libertarianism were really popular, he argues, more people would be moving to New Hampshire and fewer people would be moving to Texas. So, yes, we are in a minority.
But what follows from that? Ozimek thinks we should give up trying to persuade people to be more libertarian.
Consider, though, two historical episodes where libertarians were in the forefront: the decriminalization of homosexuality in the 1970s and the anti-draft movement of the 1960s.
I remember returning to the University of Rochester from the national Libertarian Party convention in 1977, where I had allowed the Gay Caucus of the Libertarian Party to use my room for a cocktail party. When I told some colleagues about it, I got an icy glare. Now, I would bet, the reaction would be much different. What happened to change the landscape? I don't quite know. I do know that we were right to pursue this issue. More important, if Adam Ozimek were writing on this in the 1970s, what advice would he have given? It seems that he would said that we should give up.
Or the take at the anti-draft movement in which Milton Friedman, Walter Oi, and others were leaders in the mid-1960s. My impression is that the majority position was pro-draft. Would Adam Ozimek have counseled us not to pursue this?
I said above that I agree with some of his bottom line. Here's the part I somewhat agree with:
Instead, people want quality of life, economic growth, and good government. All three of these can be helped on some margins by utilizing market forces, deregulating, and increasing freedom. Libertarianism should focus on these margins
Tue, 25 Apr 2017 13:28:08 -0500What exactly does it mean to be "self-righteous"?
Mon, 24 Apr 2017 21:50:22 -0500
With all the negative publicity United Airlines has had lately, I want to share a positive. Yesterday morning, I was flying from Washington Dulles to LAX, with a short time for my connecting flight from LAX to Monterey. We boarded late because one of the runways at LAX was closed for construction and the LAX air traffic controllers were rationing landings. Our pilot explained that to us when we boarded and told us that even though we were not allowed to take off until about 9:50 a.m. (the flight was scheduled to leave the gate at 8:30 a.m.) he was going to go out and hope for a slightly earlier takeoff. We got near the runway and then he announced that we would wait 15 to 20 minutes, the seatbelt light would be turned off, and the flight deck was open for those who wanted to come up. There were about 30 New Zealand boys on the flight from some sports team and I thought there would be a rush to the cockpit. There wasn't. I'm convinced that almost no one listens to announcements any more because so much of it is boilerplate. Somehow I've trained my ear to not listen to boilerplate but to hear the new stuff. I quickly unbuckled my seat belt and headed to the front. I was the first one there. I talked to the pilot and second officer, who were both friendly, and took some pictures. The pilot invited me to sit in his seat and wear his hat. Thus the picture above.
I wanted to make room for other people in line--as it turned out, there was only one--and so after a minute or two, I headed back. I saw almost everyone in first class as I walked back to coach grinning at me and I assumed that they were just enjoying my enjoyment of the opportunity. Wrong. The pilot came on the PA system and announced that his hat was missing. Sheepishly, I walked back and returned it. I'm so used to wearing a Golden State Warriors hat, especially during the playoffs, that I had only minutes earlier taken it off and put it in my backpack. So the hat on my head didn't feel unusual.
We landed at LAX at about 11:45 and I got on my phone and found out that my Monterey gate for my flight leaving at 12:20 was 88, and that the gate we were landing at was 70A. That meant a long walk, but I know the airport well and knew I could do it. The problem: another United flight was at our gate. So we didn't get to the gate until about 12:07 p.m. So when I saw this coming, I asked the flight attendant if she could announce that some people have tight connections so if you don't, please stay seated for a few minutes. She said she would and she did. But notice what I said above: few people listen. So, sure enough, as soon as the seat belt light went off, almost everyone in front of me stood, many in the aisle. I politely explained to those ahead of me that my flight was leaving in 10 minutes (it was now about 12:10) and asked if I could get ahead. One guy got defensive but, because I didn't get angry back, cooperated. I got off the flight at 12:12 p.m. and ran through the airport. The gate agent at 88 was waiting for me and I got on at 12:20 p.m. The big burly guy sitting next to me hogged the arm rest but I didn't care. I would be home by 2 p.m. and have the afternoon with my wife.
When we got off the plane, I thanked the flight attendant and pilot for waiting.
HT to my friend Eric Garris for using photoshop to lighten the picture.(6 COMMENTS)
Mon, 24 Apr 2017 17:00:52 -0500
The stock market behaved rather strangely in the period before and after the November elections. Before the election, stocks reacted negatively to each Trump surge in the polls, and stock futures fell late in the evening of November 8th, immediately after it became clear that Trump would win. Stock investors normally "root" for the GOP candidate. Indeed a GOP win in the presidential elections usually boosts stock prices by about 2% (although stocks actually have not done very well during GOP administrations.) To make matters even more confusing, stocks rallied strongly in the days and weeks after the election.
One possibility is that prior to the election investors were worried about Trump's call for protectionism and expelling illegal aliens. After the election, they were reassured that Trump would behave more pragmatically, and heartened by expectations that Trump would sign GOP tax cuts and also engage in deregulation.
A similar pattern occurred in the UK after the recent Brexit vote, where stocks initially fell and then rallied strongly.
One can discern two types of Trumpism. One type is very populist and nationalistic. Trump adviser Steve Bannon has been pushing for nationalistic economic policies and FDR-style spending programs to boost the economy. In contrast, Jared Kushner and Gary Cohn have a more internationalist perspective, and are more aligned with both Wall Street and the free market wing of the GOP.
Last night, Emmanuel Macron came in first in the French presidential election, and is now widely expected to win in the second round against Marine Le Pen. Think of Le Pen as being like the Steve Bannon side of the Trump administration. Le Pen is like Trumpism without the attachment of the GOP (or the UK Tories.) Like Trump, Le Pen is a nationalist on economics and immigration. Unlike Trump, she's also very left wing on broader economic issues.
The French stock market is up over 4% as I write this post, reflecting relief that Le Pen is not likely to win. While the election outcome was in line with the polls, the recent surge of a far left socialist had led to some concern that Macron would not even make it to the second round. Indeed four candidates ended up bunched together in the 19% to 24% range, with Macron being viewed as the most electable alternative to Le Pen. If Macron had not made it to the second round, the French stock market might well have plunged sharply, especially if the only two choices had been on the extreme right and the extreme left. (Le Pen is viewed as being on the right, despite her vaguely socialist views on government spending.)
To summarize, the recent market response to the French elections helps us to better understand the previous market reactions to Trump (and perhaps to Brexit.) Investors are less concerned by moderate nationalism if it is embedded within a "conservative" administration that it sees as relatively business friendly. But there is one additional factor in the French election that differs from the earlier US and UK votes. France is part of the eurozone, and a win for Le Pen might have cast doubt on the future of the single currency project. This may explain why markets rallied strongly all across the eurozone. Indeed, stocks in Italy rose even more sharply than in France, as Italy has been widely viewed as a potential domino if the euro should start to unravel.