(Dan here….lifted from Robert’s Stochastic Thoughts)

A New Pareto Liberal Paradox (reposted from 2004)

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Demographics, housing, and the economy

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The consumer edges closer to the precipice

Mortgage rates haven’t made a new low since 2013, and if anything are trending up, on the verge of breaking a 30 year trendline:

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Whither Social Capital?

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Higher wage growth for job switchers: more evidence of a taboo against raising wages?

Although wages haven’t been rising faster for the median individual, they have been for those who switch jobs. This distinction is important because the wage growth of job-switchers tends to be a better cyclical indicator than overall wage growth. In particular, the median wage growth of people who change industry or occupation tends to rise more rapidly as the labor market tightens.

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(Dan here…better late than not!)

by New Deal democrat

A better name for The Kids Today: iGeneration

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Paul Krugman demonstrates just how simple models can and should be. He presented a trade model on the New York Times opinion pages. He also apologised for extreme wonkishness, but I don’t think he had to. His aim is to find an example in which Trump’s tariffs on steel cause lower wages (also for steel workers). Here the trick is to make sure that everyone has the same income “not gonna get into income distribution today”. This means that a reduction in total money metric welfare implies a reduction of each person’s welfare (including workers in the protected industry).

This “itsy-bitsy teeny-weeny model” is a major demonstration of Krugman’s extraordinary ability to make models simple.

Imagine a world of two countries, Home and Foreign. (That’s an old-fashioned trade theory convention.) In both countries, labor is the only factor of production (not gonna get into income distribution today). There are two goods, cars and steel. Cars are a final good, sold to consumers; steel is an input into car production. I’m going to assume that both countries end up producing cars.

To keep down on notation, I’m going to do some sneaky things with choice of units (another old trade theory tradition.) We assume that in each country building a car requires one unit of labor (which amounts to measuring labor in units of how much it takes to build a car.) We also assume, using the same trick, that building a car also requires one unit of steel.

This leaves us with just two parameters to specify: the amount of labor it takes to make one unit of steel in each country. Call this a in Home and a* in Foreign (stars for Foreign is traditional.) And let’s assume that a* < a. That is, Foreign has a comparative advantage in steel production. Under free trade Home will import steel from Foreign. Let w and w* be the wage rates in the two countries, in any common unit. Then the cost of producing a car in Home will be w + w*a* (because we’re importing the steel) while the cost of producing a car in Foreign is w* + w*a* Since both countries will be producing cars, these costs will have to be equal, implying w = w*: wages will be the same. Now suppose Home imposes a tariff sufficiently high to induce car producers to use domestically produced steel instead. Now Home costs of car production are w + wa = w* + w*a* because car production costs must be equal. And this implies w/w* = (1+a*)/(1+a) <1 That is, to offset the higher costs imposed by the tariff, Home’s relative wage has to fall – the opposite of what you expect from a tariff on final goods.

My points (if any) are that it is equally easy to find and example in which tariffs on final goods can be bad for everyone in the protecting country and another model in which tariffs on intermediate goods are bad for workers in the country which doesn’t protect (and do not harm or benefit people in the country which does protect).

So model 2 in both countries, 1 unit of labor is needed to make 1 unit of steel. In the home country, 1 unit of steel and a units of labor are needed to make a car and in the forgeign country 1 of steel and a* of labor are needed with a*a. So with free trade all cars are made domestically. The real wage is 1/(1+a) in both countries. With steel tariffs, foreigners start making cars. Then their wage in cars is 1/(1+a*) < 1/(1+a). So it is about equally easy to get any result one wants.

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by Joseph Joyce  

A Guide to the (Financial) Universe: Part 1

A decade after the global financial crisis, the contours of the financial system that has emerged from the wreckage are becoming clearer. While the capital flows that preceded the crisis have diminished in size, most of the assets and liabilities they created remain. But there are significant differences between advanced economies and emerging markets in their size and composition, and those nations that are financial centers hold large amounts of international investments. Moreover, the predominance of the U.S. dollar for official and private use seems undiminished, if not strengthened, despite the widespread predictions of its decline. A guide to this new financial universe reveals a number of features that were not anticipated ten years ago.

Philp R. Lane of the Central Bank of Ireland and Gian Milesi-Ferretti of the IMF in their latest survey of international financial integration (see also here) provide an update of their data on the size and composition of the external balance sheets. Financial openness, as measured by the sum of gross assets and liabilities, peaked on the eve of the crisis, and for most countries has remained approximately the same. But its magnitude differs greatly amongst countries.  Financial openness in the advanced economies excluding the financial centers, as measured by the sum of external assets and liabilities scaled by GDP, is over 300%, which is approximately three times as large as the corresponding figure in the emerging and developing economies. This is consistent with the large gross flows among the advanced economies that preceded the crisis. However, the same measure in the financial centers is over 2,000%. These centers include small countries with large financial sectors, such as Ireland, Luxembourg, and the Netherlands, as well as those with larger economies, such as Switzerland and the United Kingdom.

Some advanced economies, such as Germany and Japan, are net creditors, while others including the U.S. and France are net debtors. The emerging market nations excluding China are usually debtors, while major oil exporters are creditors. These net positions reflect not only the acquisition/issuance of assets and liabilities, but also changes in their values through price movements and exchange rate fluctuations. Changes in these net positions can influence domestic expenditures through wealth effects. They affect net investment income investment flows, although these are also determined by the composition of the assets and liabilities (see below). In many countries, such as Japan and the United Kingdom, international investment income flows have come to play a large role in the determination of the current account, and can lead to a divergence of Gross Domestic Product and Gross National Income.

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I’m teaching “Economics for Non-Economists” this semester. This is an interesting experiment, and is strongly testing my belief that you can teach economics without mathematics so long as people understand graphs and tables. (It appears that people primarily learn how to read graphs and tables in mathematics-related courses. Did everyone except me know this?)

Since economics is All About Trade-offs, our textbook notes that minimum wage increases should also mean some people are not employed. Yet, as I noted to the students, in the past several decades, none of the empirical research in the United States shows this to be true. (From Card and Kreuger (1994) to Card and Kreuger (2000) to the City of Seattle, in fact, all of the evidence has run the other way, as noted by the Forbes link.)

Part of that is intuitive. If you’re running a viable business and able to generate $50 an hour, it hardly makes sense not to hire someone for $7.25, or even $9.25, to free up an hour of your time. The tradeoff is that your workers make more and your customers can afford to pay or buy more. Ask Henry Ford how that worked for him.

The generic counterargument (notably not an argument well-grounded in economic theory) was summarized accurately by Tim Worstall in one of his early attempts to hype the later-superseded initial UW study for the Seattle Minimum Wage Study Team.

[T]here is some level of the minimum wage where the unemployment effects become a greater cost than the benefits of the higher wages going to those who remain in work.

This seems intuitive in the short-term and problematic in the long term, even ignoring the sketchiness of the details and the curious assumption of an overall increase in unemployment (or at least underemployment) if you assume a rising Aggregate Demand environment. To confirm the assumptions would seem to require either a rather more open economy than exists anywhere or a rather severe privileging of capital over labor.*

On slightly more solid ground is the assumption that minimum wage should be approximately half of the median hourly wage. But then you hit issues such as median weekly real earnings not having increased much in almost forty years, while a minimum wage at the median nominal wage rate suggests that the Federal minimum wage should be somewhere between about $12.75 and $14.25 an hour. (Links are to FRED graphics and data; per hour derivations based on the 35-hour work week standard for “full-time.”)

So all of the benchmark data indicates that reasonable minimum wage increases will have virtually no effect, and none on established, well-managed businesses. The question becomes: why would that be so?

One baseline assumption of economic models is that working full-time provides at least the necessary income to cover basic expenses. Employment and Income models assume it, and it’s either fundamental to Arrow-Debreu or you have to assume that people either (a) are not rational, (b) die horrible deaths, or (c) both.

If you test that assumption, it has not obvkiously been so for at least 30 years:

The last two increases of the Carter Administration slightly lag inflation, but they are during a period of high inflation as well; the four-year plan may just have underestimated the effect of G. William Miller. (They would hardly be unique in this.)

By the next Federal increase, though—more than nine years of inflation, major deficit spending, a shift to noticeably negative net exports, and a couple of bubble-licious rounds of asset growth (1987, 1989) later—the minimum wage was long past the possibility of paying a living wage, so any relative increase in it would, by definition, increase Aggregate Demand as people came closer to being able to subsist.

The gap is greater than $1.50 an hour by the end of the 1991 increase. The 1996-1997 increase barely manages to slow the acceleration of the gap (to nearly $1.70), leaving the 10-year gap in increases to require three 70-cent increases just to get the gap back down to $1.86 by their end in 2009.

Nine years later, almost another $1.50 has been eroded, even in an inflation-controlled environment.

Card and Kreuger, in the context of increasing gap between “making minimum wage” and “making subsistence wage,” appear to have discovered not so much that minimum wage increases are not negatives to well-run businesses so much as that any negative impact of an increase, under the condition that the minimum wage does not provide for subsistence income, will be more than ameliorated by the increase in Aggregate Demand at the lower end.

My non-economist students had very little trouble understanding that.

*The general retort of “well, then, why not $100/hour” would create a severe discontinuity, making standard models ineffective in the short term and require recalibration to estimate the longer term. Claiming that such a statement is “economic reality,” then, empirically would be a statement of ignorance.

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by Jeff Soplop

What Happened to the Political Price for Lying? (Part 2)

Recently I wrote about the political price of lying and how there is a serious disconnect between voters (including republican voters) saying they want honesty in a politician and how they act. My initial conclusion was that many voters are lying to themselves and so, consequently, end up lying to pollsters.

With this in mind, the next question is this: just how dishonest are voters about their priorities? Behavioral science may help fill in part of the picture.

Some of the most salient behavioral research considers how we perceive honesty and integrity in others. In one notable study, researchers focused on how individual beliefs about the nature of intelligence altered these perceptions

The researchers divided study participants into two groups that are defined by their view of intelligence, entity theorists and incremental theorists. These definitions are supported by a broad base of research on human personality and intelligence, and were initially proposed by Carol Dweck of Stanford University.

Entity theorists tend to believe that intelligence is fixed and based on underlying traits, and so they often draw conclusions even from having only limited information about others. Incremental theorists, by contrast, view intelligence as malleable and able to be developed through hard work.

Once divided, study participants – in this case a group of MBA students – were randomly split into buyers and sellers and guided through a multi-stage exercise called the Bullard Houses negotiation case. The exercise involved negotiating over a fictional property sale and was structured such that buyers had an incentive to deceive the sellers but were not allowed to reveal their deception. Research assistants, who were blind to the hypotheses, coded the negotiations. In almost all cases (94%), buyers did in fact engage in a deception of the seller.

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