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Previewing Blinder and Watson (2015)

by Mike Kimel

Previewing Blinder and Watson (2015)

Via James Hamilton at Econbrowser, I read about this paper by Blinder and Watson. From their abstract:

The U.S. economy has performed better when the President of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 presidential terms. This paper asks why. We find that the answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, and more optimistic consumer expectations about the near-term future. Many other potential explanations are examined, but they fail to explain the partisan growth gap.

Having co-authored a book on how Presidents performed on a wide range of issues, including the economy, it’s nice to see some high-powered academics stumbling on some of the same relationships we found. However, attributing very much to oil shocks doesn’t make sense. See, if oil shocks are a big driver, then depending on how one chooses to define an oil shock and the lags one selects, we should either have seen rapid growth during the tail end of the GW and start of the Obama administration (the price of oil was about $1.70 per gallon at the end of 2008 and start of 2009), or we should be seeing it now several years into our wonderful world of fracking. Since even Larry Kudlow stopped bleating about the goldilocks economy in December of 2008, I’m guessing it won’t come as a shock to anyone that the economy was pretty dismal in 2008 and 2009, and hasn’t been anything beyond mediocre at any point since.

So here’s what’s going to happen. Blinder and Watson are going to write another paper in which they tell us what is really driving economic growth. If I had to guess, it will come out November 2015. Let me give you a preview of that paper because it’s going to be one of the pivotal papers of the decade. The most important table in the paper Blinder and Watson will write in November 2015 will look kinda like this:

(click to enlarge)

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Real Businessmen Respond to Quantity Signals, Not Price Signals

Update:  “Lord Keynes” provides a great explication of Kaldor’s theoretical work on this subject.

Back in the day when I was running a high-tech conference company, we had a favorite (and actually rather cruel) interview question:

“What’s the best price for a conference?”

There was only one right answer:

“The price that makes us the most money.”

That answer encapsulates the position of almost every business trying to sell real goods and services. You have to choose a price, and you have little or no idea what sales differences will result from different choices. The implications are enormous — no other decision affects profits so powerfully — and you’re basically shooting in the dark.

Every business or product-launch plan I’ve ever seen has a huge dartboard right in the middle of it: How much, how many, will we sell? (“Well, it depends what we charge…”) In some businesses there are ways to do controlled tests of different prices and see how sales respond — Amazon being a brilliant example, and we did a a bit of it using direct mail with split runs — but most businesses (i.e. all of Amazon’s producers/suppliers) don’t have that luxury. You have to just choose a price with your best guess, based on various scraps of hard-to-interpret historical-sales and market data. It’s incredibly frustrating.

Which brings me to the point of this post: most producers are dealing (at least in the short term whose length varies with the type of business) with a fixed-price market. Once they’ve set their price, they can’t go changing it all over the place.

So: They’re not receiving any of the market’s supposedly informational price signals. They’re receiving quantity signals. That’s the information that producers derive from the market. Then maybe they change the price, and get more quantity signals. But again, those signals are always hard to interpret because you don’t generally have a controlled test to know whether the price is what drove quantity changes, or whether it was something(s) completely other.

Price is fixed, while quantity is very flexible. i.e. Analysts expected Apple to sell five million iPhone 5s in its first weekend. They sold nine million. Did the price go up? No. They rousted workers out of bed in China and filled the goddamn orders. When one of our conferences wasn’t selling well we couldn’t just lower the price, cause we’d piss off everyone who’d already signed up. If sales were good and it looked like we might sell out (there was simply no more room for hotel employees to place chairs), the last thing we were going to do was raise the price and risk stomping on that success. It’s very difficult for producers to derive prices signals from the market.

This is utterly unlike the market for financial assets, where price is infinitely and instantaneously flexible, while quantity — i.e. the number of Apple shares outstanding — is pretty much fixed and unchanging. (When you buy my Apple shares, the quantity or supply of saleable Apple shares is unchanged.)

In the market for financial assets, the price signal is (almost) everything. In the market for real goods and services, the quantity signal is (almost) everything.

There are lots of places to go with this thinking, but I’ll leave that to my gentle readers for the moment.

Thanks to Mike Sankowski for prompting this post.

Cross-posted at Asymptosis.

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Federal minimum wage graphics

Based on this report from the Economic Policy Institute Federal minimum wage increase comes this EPI info graphic pointing to some useful comparisons for general readers:

The inflation-adjusted value of the minimum wage is lower today than it was in 1968. If the value of the minimum wage had kept pace with average wages since then, it would be $10.50 today. If it had increased alongside productivity, it would be $18.75 today. And if it had increased at the same rate as the wages of the top 1.0 percent, it would be over $28 per hour.

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Trading the gdp away…2008

Stormy wrote in 2008 a narrative for the last few decades on trade…still relevent:

Trade means jobs; trade brings money into plants; trade surpluses ripple through the economy, providing not only wealth to employers and employees alike but also moneys into public coffers. Consider it “outside money” flowing into a town, county, state, or country.

Since the late 1970’s, that kind of “outside money” has not been flowing into public coffers or into the hands of the average worker, dramatically so in the last decade. Recently, our trade deficit has grown almost exponentially.

This trend is coincidental not only with the rise of public and private debt but also with NAFTA and China’s entry into the WTO. That the trade deficit is coincident with globalization itself is no accident. During the last ten years, trade as a percentage of GDP has become sharply and dangerously negative.

The following post examines graphically what has happened since 1960. The four following graphs, based on the Bureau of Economic Research’s “U.S. International Transaction Data” tell a story that is not pleasant. [See here.] In addition to the aforementioned data, I used the Bureau’s GDP data. [See here.]

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A few Keynesian model with multipliers

A few is more than two but not a lot. As noted below, I don’t have the gift which it takes to be simple. I really can’t manage 2 period models which illustrate my confused thoughts.

My last post (which was messy especially the math in plain ascii and spelling) noted that the government spending multiplier is greater than one if government spending is investment in productive public capital when private investment is stuck at the irreversible investment zero lower bound. I went on to vaguely argue that the multiplier is still greater if private investment is positive and public capital isn’t too close a substitute for private capital.

This time I will assume that public spending is not productive. It might be pure waste or it might provide utility for citizens as entertainment or something. I will assume that it won’t affect the marginal utility of private consumption. The model will work as if it is pure waste (but I will assume that it isn’t in some welfare comparisons). However, I will also assume that, even in the liquidity trap, private investment is positive

The bottom lines

There is a multiplier much larger than one in the liquidity trap. Partly this reflects capital formation corresponding to increased expected government consumption. In balanced uh shrinking the multiplier remains greater than one. The effect of government consumption on Net national product is one, the effect on Gross national product is greater than one.

ìEven if the welfare benefits of the government consumption are just equal to the disutility of the effort of producing it (which is less than the market price) government spending causes higher expected welfare, because it causes capital accumulation which is useful when the economy emerges from the liquidity trap.

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DFAS and 8 trillion dollars and more since 1996

Via Reuter’s Scot J. Paltrow Part 1

Defense Finance and Accounting Service, or DFAS (pronounced “DEE-fass”). This agency, with headquarters in Indianapolis, Indiana, has roughly 12,000 employees and, after cuts under the federal sequester, a $1.36 billion budget. It is responsible for accurately paying America’s 2.7 million active-duty and Reserve soldiers, sailors, airmen and Marines.

It often fails at that task, a Reuters investigation finds.

A review of individuals’ military pay records, government reports and other documents, along with interviews with dozens of current and former soldiers and other military personnel, confirms Aiken’s case is hardly isolated. Pay errors in the military are widespread. And as Aiken and many other soldiers have found, once mistakes are detected, getting them corrected – or just explained – can test even the most persistent soldiers (see related story).


Part 2

This account is based on interviews with scores of current and former Defense Department officials, as well as Reuters analyses of Pentagon logistics practices, bookkeeping methods, court cases and reports by federal agencies.

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A Two Keynesian Analysis of Multipliers.

First “two Keynesian” is a phrase which only I use. It means a new Keynesian model with two periods the present and next period and forever after when the economy is in steady state. I recently noticed that Krugman’s models, which are much simpler than models I can think up and which have clarified my thought , have this form.

Before going on, I note that I just can’t do it. I can’t present a model in which all of the assumptions which go without saying are unstated. So my “simplest” effort is pages long – only the gifted can make it simple.

The bottom line point is that in a simplest new Keynesian model, the fiscal multiplier is one only if government spending is not at all productive (it can cause pleasure or be pure waste)

OK… so new Keynesian assumptions include rational expectations, clearly defined objectives with consumers who care about nothing other than consumption leisure and real money holdings and firms which maximize shareholder value and, finally, some sort of nominal rigidity. There is some appeal to imperfect competition, but in practice, it is assumed that wages and prices are changed only occasionally and that in between such adjustments firms and workers meet demand at fixed wages (w) and prices (p). I am going to consider the very simple very extreme case of wages and prices which are fixed forever. The analysis will be a limiting case of not so totally unsophisticated new Keynesian analysis as a couple of standard parameters go to zero.
I guess New Keynesians are willing to admit that there are liquidity constraints, but I will assume that all agents are free to borrow or lend as much as they choose at the safe interest rate and that none ever go bankrupt. This means that, with the simple preferences and rationality and all that, new Keynesian models have Ricardian equivalence. A temporary lump sum tax cut (or increase) has no effect on anything. Because of this and too make things clear, I will assume that the public budget is balanced so spending is equal to tax revenues each period. There is no technological progress or population growth.

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Inflation expections, income expectations & financial repression

The Federal Reserve Bank of San Francisco published a letter titled, Consumer Inflation Views in Three Countries, written by Bharat Trehan and Maura Lynch. The letter explores inflation expectations among consumers in the UK, US and Japan. Basically the story is that inflation expectations by consumers are tied to the level of oil prices and recent inflation. Policy adjustments by a central bank do not play much of a role in determining their inflation expectations.

The inflation expectations of consumers are important to evaluate the spending and wage demands of consumers. If consumers raise their inflation expectations, they would bargain for higher wages, only if they have power to do so. Labor has little power nowadays to bargain for better wages.

So what the letter from the FRBSF is missing is a comparison between what consumers expect of inflation and what they expect from their own incomes. Simply put, if I expect inflation to be 3%, but expect my own income to rise at around 0%, then I feel I am losing ground… and I will be less likely to spend money. Surely it makes more sense to spend money now since prices are rising faster than I can keep up with them, right? No… Spending more money now would make me feel even more insecure.

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