Relevant and even prescient commentary on news, politics and the economy.

Costs and Benefits of Desire

Sandwichman at Econospeak

“Accounting for the facts that healthy foods are otherwise less desirable and that consumers already have some information about health, the net benefit to consumers possible from consuming healthier foods is 30-40% of the value of the gross health benefit from switching to the healthiest possible diet.”

What “facts”? A Reuters report on Monday told the story of the $5.27 billion in “lost pleasure” estimated in a U.S. Food and Drug Administration analysis of product labeling. According to the report, to arrive at that estimate, “the agency relied almost solely on a 2011 paper by then-graduate student Jason Abaluck.”

In all fairness to Abaluck, the paper strikes this reader as an earnest and diligent graduate student exercise in mathematical modeling. Of course quantifying the “otherwise less desirable” characteristics of healthy foods is sheer nonsense. But that’s not an issue for mathematical modeling. Do the conclusions follow rigorously from the assumptions? That’s all that counts. Assuming that healthy foods are otherwise less desirable… But why would you?

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Why You Probably Don’t Understand the National Accounts. In Pictures.

If anyone means to deliberate successfully about anything, there is one thing he must do at the outset: he must know what it is he is deliberating about. Otherwise he is bound to go utterly astray. Now, most people fail to realize that they don’t know what this or that really is. Consequently when they start discussing something, they dispense with any agreed definition, assuming that they know the thing. Then later on they naturally find, to their cost, that they agree neither with each other, or with themselves. That being so, you and I would do well to avoid what we charge against other people.

—Socrates, in Plato’s Phaedrus

A recent post of mine, How Do Households Build Wealth?, got a fair amount of attention (even a radio interview) because its takeaway graph seemed to surprise people (as it did me, when I put it together). Here it is again, presented more sensibly as a bar rather than an area chart. Click for larger.

Screen shot 2014-12-18 at 6.12.44 AM

Note: the revaluations shown here are not “realized” capital gains (which really only matter for tax purposes). They’re changes in asset values. If your portfolio’s value goes up by $20,000 this year, that bumps your net worth by $20,000 even if you don’t sell any assets. Ditto your house, but without the second-by-second reporting of prices.

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G and GDP during the current recovery

(Dan here update…other posts by Robert Waldmann on the issues can be found hereherehere, and here.)

G and GDP during the current recovery

update Stephen Williamson asks “Where’s the multiplier” (I have read only the title not the post). Since I regressed rates of growth on rates of growth, my coefficient of grGDP on grG = 0.339 is not an estimate of the multiplier. I am very traumetized to note that FRED seems to be down at the moment (normally this is 7:45 AM for me and I am asleep but I am in the Washington Area and it is 1:45 AM so I awake).

I looked up G and got in in 2008 (not an ideal year as G/GDP was high) I get $ 2.88 Trillion GDP was 14.58 trillion so my back of the envelope and based on 19 observations estimate of the multiplier is change in Gdp/Change in G = (grGDP*GDP)/(grG*G)= 0.339*14.58/2.88 = 1.716 which is surprisingly close to the IMF estimate of 1.5.

Of course even if one believed the conventionally calculated OLS standard errors (which is crazy) and assume that there are no omitted variables which is crazy, one would get an +/-2 standard deviation interval from 0.248 to 3.184 so basically I totally misled the computer about the data generatingprocess but it still understands that 19 data points can’t prove or disprove anything.

The point of my post is that the evidence, weak as it is, tends to support the Keynesian view, yet anti-Keynesians look at news about G and GDP and perceive evidence against the Keynesian view.

end update 1

Now I know what they were doing when FRED was down. They added 2014q3. I think they may have updated estimates of 2014q2 as well (or maybe the fact that they rounded growth rates is the issue)

Anyway the updated regerssion with 20 whole data points is

. reg grgdp grg if qtr>2009.5

Number of obs = 20

R-squared = 0.3220

grgdp | Coef. Std. Err. t
grg | .3618508 .1237726 2.92
_cons | .0071224 .0009988 7.13

grg is the growth rate of real government consumption plus investment (G) andgrgdp is the growth rate of real GDP

I can also include the third quarter of 2009 (which I call 2009.5)

. reg grgdp grg if qtr>2009.4

Number of obs = 21
R-squared = 0.2641

grgdp | Coef. Std. Err. t
grg | .3195651 .1223656 2.61
_cons | .0067221 .0009747 6.90

OK now drgdp is the change real GDP and drg is the change in G not the rate of growth (so I am estimating a multiplier)

. reg drgdp drg if qtr>2009.4

Number of obs = 21
R-squared = 0.2619

drgdp | Coef. Std. Err. t
drg | 1.639932 .6315393 2.60
_cons | 102.4702 15.13084 6.77

This is rather close to my back of the envelope calculation in update 1. It is also only very marginally more credible.

. reg rgdp rg qtr if qtr>2009.4

Number of obs = 21
R-squared = 0.9936

rgdp | Coef. Std. Err. t
rg | 1.792217 .4021076 4.46
qtr | 422.8802 22.19399 19.05
_cons | -840916.8 45806.65 -18.36

Above an absurd regression of real GDP and real G and a time trend. Do not do this at home kids. You may fail elementary econometrics if you let anyone see such an absurd regression. But the estimate is similar.

I think I understand where the anti Keynesians are coming from. They are thinking of an even more absurd regression with no trend. This corresponds to straw Keynesian who thinks government spending is the one and only cause of GDP growth. In fact real economists have noted that GDP usually grows and also ususally grows unusually quickly soon after it has declined. So one would expect positive GDP growth with no change in policy and, while adding a trend is totally absurd the regression without one is absurder

. reg rgdp rg if qtr>2009.4

ì Number of obs = 21
R-squared = 0.8645

rgdp | Coef. Std. Err. t
rg | -5.561926 .5050749 -11.01
_cons | 31850.86 1506.905 21.14

These last two regressions are grossly miss-specified and useless (especially the very last one in which I forced a coefficient with a t-stat over 20 to zero).

Now during the recession the pattern was completely different. I would say one can’t use regressions without considering a housing bubble bursting and a financial crisis. The regression starting in 2007q4 is based on the assumption that these shocks were irrelevant or uncorrelated with G.

Just for fun here is a multiplier with all the data available at FRED

. reg drgdp drg

Number of obs = 270
R-squared = 0.0185

drgdp | Coef. Std. Err. t
drg | .4559986 .2026528 2.25
_cons | 48.74642 4.39361 11.09

The government spending multiplier mostly not in a liquidity trap is about 0.5. Again this is the IMF estimate.

end update 2

Various non Keynesians have argued that the pattern of public spending and GDP in the USA during the current recovery (that is since June 2009) undermines the Keynesian hypothesis that the Government spending multiplier is positive. In particular John Cochrane and Tyler Cowen argue that, if Keynesians were right, sequestration should have caused at least a decline in GDP growth rates.

This shows they haven’t been FREDing. The Keynesian story refers to government spending, not US Federal Government spending. A substantial fraction of Government consumption plus investment (G) is done by state and local governments. An economist may not ignore the “50 little Hoovers” (P Krugman 2009) just because political reporters focuse inside the beltway (hey I’ve recently been inside the beltway for about one minute !).

As I note, sequestration did not have a noticible effect on G — it was anticipated (says my FedGov employed dad) and was a shift in Fiscal 2013 budgets which governed spending for the following 7 months. It didn’t cause a jump in Federal spending. It is impossible to guess when Sequestration occured from the time series of US real G.


In fact, during the recovery, percent growth of real G and real GDP are clearly positively correlated. This is exactly the evidence cited by anti-Keynesians. They are a few data points which form a very clear pattern (with an outlier 2014q1 due to weather).


Clearly the percent change in real G and real GDP are positively correlated.

Here is a scatter graph with a regression line


For what it’s worth (not much) STATA is convinced that the null of zero correlation is rejected by the data

. reg grgdp grg if qtr>2009.5

Number of obs = 19
R-squared = 0.2432

grgdp | Coef. Std. Err. t
grg | .3387477 .1449474 2.34
_cons | .6951767 .1133052 6.14

19 data points can’t prove anything, but the few data support the Keynesian hypothesis about as strongly as could be imagined. I am impressed by the unreliability of casual empiricism conducted by idealogues. Some people look at this period and see the opposite of what I see. Even now, I am shocked that economists didn’t bother to look up the data on FRED before making nonsensical claims of fact.

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On Smith On Cochrane On Keynesians

Noah Smith has an excellent post which is very critical of something John Cochrane wrote. I added a couple more criticisms in comments

Your post is very good as usual. I’d add a couple of things.

Cochrane wrote “With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. ”

Exactly which Keynesians predicted that sequestration would cause a recession ? I think that as a matter of good editorial policy, names with citations in support of all such claims should be demanded (I am not saying the WSJ must publish the names, just that a competent editor should demand that the author prove that the author can name such names).

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Investment and Interest Rates III What Taylor Rule ?

This is getting out of hand. A recent post received too many high quality comments. I discuss the discussion some here.

The general view expressed in the discussion is that it sure looks as if non residential fixed capital investment as a percent of GDP expressed (nrfinvgdp) and nominal interest rates are positively correlated, because high non residential fixed capital investment caused the Fed Opem Market Committee (FOMC) to raise target interest rates.

The bit of evidence supporting this story is that the correlation is high also with the Federal Funds interest rate (ffi)which is basically whatever the FOMC wants it to be. This does not explain why the short term safe ffi is highly correlated with the rate on long term moderately risky Baa rated corporate bonds. Nor does it explain why the correlation of nrfinv/gdp and the Baa rate is even higher than the correlation of nrfinv/gdp and ffi.

One thing which I think has to be added to the old comment thread is that the correlation of nrfinv/gdp and ffi is much too high. It is easy to tell a story about why it is positive, but the fact that it is so very high does not correspond to the standard assumption about FOMC policy in conventional macroeconomic models.

That assumption is called the Taylor rule and is very very standard in the literature. The models are closed with the assumption that ffi is a function of lagged inflation and unemployment. This is alleged to be an empirical observation. Now the Taylor rule is not derived from an optimization problem — the standard assumption that private economic agents optimize is not extended to policy makers. Since the assumption that ffi follows a Taylor rule is not an assumption about objectives and rational maximization, I have long considered it to be the only equation in standard macro models which is not problematic.

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Investment and Interest Rates II

In the post below, I discuss a very strong correlation in the data which surprised me — a high ratio non residential fixed capital investment to GDP is correlated with high nominal interest rates on corporate bonds.

I think the discussion in comments was very interesting and I have promised to pull back 2 comments (I didn’t promise to pull them back above the jump).

In a third post on a correlation coefficient, I will get to my current thoughts on what is going on. Here some general thoughts (after the jump)

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Investment and Interest Rates

In a recent post, I noted that actual non-residential fixed capital investment doesn’t show the pattern one would expect based on optimizing models at all. Ugh that sentence was convoluted and so is the post it describes. In fact, the puzzling pattern is really very simple. Non residential fixed capital investment (nrfinv) is high when interest rates are high.


This graph Shows an extremely high ratio of nrfinv to GDP in the late 70s and early 80s, exactly when nominal interest rates were highest. It also shows high investment in the late 90s during the dot com bubble/boom and in the early 20th century at the same time as the even more dramatically high levels of residential investment. In particular, the correlation of nrfinv/gdp and Moody’s index of Baa rated corporate bonds (ibaa) is extremely high 0.77 over the whole sample of available data. Over the period 1947-1995 it is an amazing 0.916.

This correlation is strange for two reasons. First the sign is surprising. Other things equal, one would expect high interest rates to cause low investment. note the brick red curve in the graph is the Federal Funds rate — a policy instrument. Second the interest rates are nominal. Sooner or later, I will try to understand what was going on.

Another question is: why did I just learn about this pattern ? In 1995 the correlation using all available data was over 90%. Why wasn’t this noted even as a puzzling fact ? I can answer this question. I have been playing with nrfinv/gdp and ibaa off and on for months. I have noted positive coefficients on interest rates. I have thought that they have the wrong sign and must be spurious. I am not as respectful of conventional models as most macroeconomists, but I do reflexively avert my eyes from some summary statistics which are too ugly to contemplate.

Here is another version of the graph a couple of FRED commands away from which shows the strange pattern more clearly.

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Adair Turner understands better than Paul Krugman

After watching the new video with Adair Turner from a talk he gave at the Bristol Festival of Economics in November 2014, it is clear he understands the economic situation better than Paul Krugman.

While Krugman tries to understand if inequality even leads to more financial instability (link), Turner knows that it does and the mechanisms by which it does. Turner then gives recommendations on how to lean against the economic forces creating inequality. The mechanisms work around real estate financing. In the video, Turner explains how to control lending practices for real estate.

While Krugman pushes for more accommodative monetary policy and fiscal policy, Turner recommends less accommodative policy and much more fiscal type policies that enter the income stream directly, including some form of helicopter drop. Helicopter drop options, as Turner says, are tax cuts, more welfare expenditures or infrastructure spending. Turner does not like QE accommodation because the money did not enter the income stream directly.

While Krugman recommends strong accommodative monetary policy if there is fiscal austerity, Turner does not support such strong accommodative policy. He sees it as exacerbating the causes of our economic problems. Turner sees that accommodative monetary policy needs to be unraveled and replaced with policies that allow money to directly enter the income stream within the general population. In essence, Krugman puts too much faith in monetary policy, while Turner does not.

In all, Adair Turner is ahead of Krugman in understanding macroeconomic problems and their solutions.

An essential moment in the video is Turner’s answer after the 1:01:00 point, where he explains his view of appropriate monetary policy.

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