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

The rest of the trick is??

Mark Thoma says it well on the ‘what comes next’ dilemma facing voters and those making recommendations for policy:

there is supposed to be a “rest of the trick,” but it doesn’t come until later. The idea is that the labor that is freed up from the increased productivity will be used to produce new goods and services thereby increasing the quantity and variety of the nation’s output. In a dynamic, growing economy, even though there’s a delay before the new jobs appear (and hence a need to help workers through the transition), the new jobs are supposed to be even better than the old ones. But as workers look forward, the fear is that that won’t be the case. Workers who have lost jobs face an uncertain future where, if they can get new jobs at all, they are unlikely to pay as well or have the same level of benefits as the jobs they lost. New workers do not appear to have the same opportunities that their parents had, particularly workers without a college degree.

If workers could be assured that rising productivity would translate into better jobs and higher pay, the outlook would be different. But the last several decades of stagnant wages have undermined that promise. The growth that has occurred was not widely shared — it did not trickle down as promised — and the frustrations and uncertainties households have are understandable. It’s a mistake to think that just because the economy starts growing again, all will be well. If the growth that occurs post-recession simply picks up where pre-recession growth left off, i.e. with income gains flowing mainly to the upper classes, and with even more income inequality than we have now, the frustrations and tensions will continue to build and our troubles will not have ended.

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Preface to a Thought-Experiment on Labor, Capital, and Income Distribution

Mark Thoma goes to something called the Business Ethics Blog for an economics thought-experiment:

A Montreal accessories company has taken its policy of using no animal products beyond the rack and has forbidden its staff from eating meat and fish at work.

A former employee says the policy violated her rights as a non-vegetarian….

It’s an interesting experiment for many reasons, none of which deal directly with economics as it is currently taught.  For one thing, it is a dictated change in a contract with workers.  As a standard microeconomics problem, there is a negotiation, the worker’s preferences are examined, and the student is asked to find an economic balance that will satisfy the worker, with the implication that the employer desiring the change with provide compensation. (Note that the standard intermediate or graduate-level microeconomics problem merely teaches math, with dollars and preferences substituted for widgets and variables.)

For another, there is insufficient information to discuss externalities. (Aside to Brad DeLong: it’s not only, or even most importantly, Irving Fisher who is forgotten; Alfred Marshall appears to have been stripped from the curriculum as it transmogrified into a Libertarian Wet Dream.)  Absent evidence, we cannot know if the company had a legitimate reason for banning meat eating. Perhaps chemicals used in their processes combine with some proteins and produce a marginally higher level of cancer in those exposed for long periods. Perhaps the maintenance crew has discovered multiple rat nests because the workers have not been attentive to clean-up requirements, leaving enough pieces of pork, chicken, beef, and tripe around to make the building a desirable habitat. We do not have sufficient information.

We do, however, know that bars that permit smoking produce lung, throat, and other cancers in even the non-smoking bartenders and wait staff.  It may be unlikely that the aggressive hormone and radiation treatment given to meat these days produces a similar effect—radiation and drug treatment, after all, are both perfectly safe—but it is also possible that the company has seen recent research that indicates otherwise and fears for its future health-care costs.

We also do not know whether the company provides eating areas for its staff, or under what conditions it does.  Is there a company cafeteria (or eating spaces on various floors) that provides napkins and utensils to those who bring their own food? Is eating at one’s desk permitted? (I have worked places where it is not.) In such a case, we cannot even model the type of microeconomics problem referenced above, because we do not know the extent to which the workers are being told to give up something. (Smokers having to leave the building has positive externalities for them, such as work breaks others do not get and social networking opportunities that provide compensation.)  We cannot, in short, know the value of the widgets or the identities of the variables.

The question then becomes whether this is an economics problem at all.  And, if we assume it is, what does that mean for other. more standard, problems?  On the Next Rock: capital, labor, and taxation.

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And Next Mark Will Ask for A Pony

Slowly moving back into everything, and so catching up with Mark Thoma’s use of Paul Volcker as his latest line of Defense of Giving the Fed More Regulatory Power. (Amusing in itself, given Volcker’s description of the Fed before he was Owned by the Obama Administration.)

I like Thoma (a lot more than he likes me) and his professional work is clean and clear. (Judging by his videos, he’s also the second best college-level Econometrics teacher I’ve ever seen—and it’s no crime to be behind Peter Loeb in that regard.)

But he’s an Incurable Optimist, especially in his blogging. For instance:

If we ask tough questions and insist that the Fed take action in response to the problems that are uncovered, oversight can be improved without moving the authority outside of the Fed.

The English translation of that is: Better the Devil We Know Has Already Failed and that doesn’t have—or appear to want—the Governance Skills to Do the Job Required.

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I Be Officially Right of Center Now?

As I am arguing on the same side as Henry Kaufman, and against the kind-hearted Mark Thoma, does the phrase “left-of-center” at the top of this blog have as much Memory Meaning as the Suzanne Vega song from Pretty in Pink?

Kaufman:

During the Greenspan years (1987-2006), the Fed clearly failed to recognize the significance of the many structural changes in the financial markets—such as the rapid growth of securitization and derivatives—on economic and financial behavior and thus for its monetary policy. The Fed also failed to foresee how the 1999 repeal of the Glass-Steagall Act, which had separated commercial from investment banking since 1933, would sharply accelerate financial concentration through mergers and acquisitions and thus contribute to the “too-big-to-fail” phenomenon.

Thoma:

The hope is that an independent Fed can overcome the temptation to use monetary policy to influence elections, and also overcome the temptation to monetize the debt, and that it will do what’s best for the economy in the long-run rather than adopting the policy that maximizes the chances of politicians being reelected.

On of those people lives in reality. The other, apparently, is a good econometrician.

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Mashup Post: Two Marks

No original content here, just two posts that make even more sense together:

  1. Mark Thoma proves he’s an economist (not just an econometrician) by reminding everyone of the Opportunity Cost of the Oughts from a long-term perspective*:
    ((Rdan…Attribution of the quote is in error due to a format error at Mark’s…the original is from Joseph Stiglitz at Korean Herald)

    [T]he worst effects were on our human capital, our most precious resource. Absurdly generous compensation in the financial sector induced some of our best minds to go into banking. Who knows how many Borlaugs there might have been among those enticed by the riches of Wall Street and the City of London? If we lost even one, our world was made immeasurably poorer.

  2. Mark Cuban summarizes the effect of that skew in the short term**:

    The beautiful thing about this country is that we like to work hard, and we like to take chances. Unfortunately, over the last 15 years, the incentives have been to take chances as a financial engineer rather than as an entrepreneur. We give far more money to people who play games with financial instruments than we give to people who come up with ideas for the next big thing. That needs to change if we want to remain a leader in this world. [emphasis his]

I have quibbles, but the direction and magnitude of the two above is correct: a massive reallocation of incentives that diverted talent from potential paradigm-shifting development to incremental risk re-allocation and obfuscation. The rest of us were just, well, marks. *Maybe more on this one later, from another angle. **Though he has a rather generous, imnvho, definition of an “investor.” But even by that weak definition, his point stands.

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Coming Soon from Major Economists Near You

Ken Houghton is talkin’ about his generation.

Pete Davis, Mark Thoma (who at least has the decency to phrase it in the form of a question), N. Gregory Mankiw, and Brad DeLong explain why there should not be any penalties against providers of West Virginia water (h/t Bitch).

Because fungible is fungible, even if it isn’t.

At least Garth Brazelton at Reviving Economics gets it right, leaving hope that when we’re all dead, the next generation will know how to teach economics so that they’re not looked at as if they’re insane.

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Those Who Think the "Left of Center" is Too Tough on N. Gregory Mankiw

should read Sensible Centrist J. Bradford DeLong on the difference in forecasting between the current Administration and the CEA under N. Gregory Mankiw.

Romer/Bernstein/Kreuger et al., 2008-9 edition:

As I understand matters, last December the median private-sector forecast had the unemployment rate topping out at 9% in the second half of 2009. The incoming Obama administration simply adopted that forecast. At the time I thought that was a mistake: (I thought that was a mistake: I thought they should have made a bifurcated forecast with a “good case” 80th-percentile scenario and a “bad case” 20th-percentile scenario; they should then have stressed that in the bad case we would need a large stimulus indeed to prevent high unemployment, and that in the good case we could restrain inflation via monetary policy.)

Mankiw et al., 2003 edition:

it would make it extremely difficult for things to happen like what happened to the Mankiw CEA over the winter of 2003-2004, when high politics appears to have reached down into the forecast, changed the table for payroll employment (and only payroll employment: the rest of the forecast is not out of line with contemporary professional forecasts), and produced an estimate for December 2004 (a) inconsistent with the rest of the forecast, and (b) high by 2.3 million in its estimate of payroll employment–all because Karl Rove and company thought it important to avoid headlines like “Bush administration forecasts 2004 payroll employment to be less than when Bush took office.” (link from original)

The positive-spin version is that Mankiw plays politics better than the Obama Team.

UPDATE: Kauffman Foundation invitee Mark Thoma adds to the fun.

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Simple Answers to Simple Questions, CRA edition

Dear Barry:

The need for posts such as this one recurs because the large majority of economists are idiots. (Multiple exceptions noted—but not enough to change the truth of the initial statement.)

As the regulatory reform report notes (quoted by PK at the last link above):

In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.

But the truth should never be allowed to get in the way of Economic Theory.

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Brad DeLong (Desperately?) Tries to Rationalise the Giveaway

UPDATE: Dr. Black twists the knife.

The Geithner Plan FAQ is worth reading; it’s a classic example of treating an incomplete market as if it were the entire market. And note that “skin in the game” is limited to a part of the local pool.

Unfortunately, while Treasury plays in the wading pool, hedge funds have The Whole Wide World in which to romp. Yves (h/t Mark Thoma) has a commenter who explains:

Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm.

I would have thought by now that economists would know what happens when you create bubbles in a market. That doesn’t change just because you use the U.S. Treasury as a Fluffer.

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Two Things Someone Else Needs to Discuss

Since I’m trying to cut a 24-page paper down closer to 15 today, I’ll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:

  1. Brad DeLong appears (to me) to confuse perceiving a move from Democratic Republic to Empire—and therefore away from any Competitive Advantage for the past 100-ish years—with conspiracy theory. But I may just be reacting to his headline.
  2. Tim Duy (at Mark Thoma’s place) refuses to jump into the briar patch:

    Increasingly, society views the purchase of a home as primarily an investment, not for the service it provides (don’t even get me started on this topic).

    Someone needs to get him started. Or continue from Tom’s previous AB post.

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