Friday, November 29, 2013

What is a recession, and why do we care?

Imagine a large group of people (perhaps it would be better to consider groups of peoples) on a quest to conquer a very large, uninhabited continent. By "conquer" I mean they seek to live on this land and improve their lives and the lives of their progeny. We can call that the goal, but it is important to understand that there is no singular goal. There are many, many goals, and within each goal are numerous sub-goals. To measure success toward this generic goal there are two important qualities:

  • How much people advance toward their goals
  • How efficiently people advance as they attempt to advance

The first quality is about increasing resources while the second is about maximizing the use of existing resources. Doing better at one can come at the expense of the other (a zero-sum game), but it can also come to the improvement of the other (a positive-sum game). The political-economic system that governs will determine which game conditions will exist.

To hone in on the concepts I am exploring, let us consider the early days of exploration of this new, raw continent. Let us further consider the macroeconomist to be the omnipotent (but certainly not omniscient) expedition leader. The process of moving across the continent is a constant process of trial and error. At times this becomes a seemingly coordinated activity whereby many errors or successes occur at the same time. At these times it is more of a surge/retreat process. This is akin to the so-called business cycle of modern macroeconomic parlance.  But why do we seem to get surges and retreats—that is massive, similar results at the same time where the magnitude makes it "clear" this is something happening not just to me or my small group but to "all" of us at the same time?

In all macroeconomic models feedback is an essential contributor. All leave room (in varying degrees) for animal spirits. The different schools of thought are taking up daunting challenges. They are attempting to not just answer the questions of why is this happening and how can we stop it but also the question is it really happening.
Problem posed by the group: We’re lost and don't seem to be making good progress…
Solution offered by the macroeconomist: Are you sure you're lost, and if so, how do you know if you are or are not making good progress?
The particular school of thought from which the macroeconomist originates will determine the next steps in the solution. Here is an oversimplified summary:

  • The Keynesian seems to believe that if the group just keeps moving in any direction, they will eventually start making meaningful progress. Activity for activity’s sake with no fear (old Keynesian) or qualified fear (new Keynesian) that the induced activities will be more costly than curative.
  • The Market Monetarist seems to want to change the scale on the map. If the group is deceived about the pace being made, the group will more effectively make progress.
  • The Real-Business Cycle (RBC) adherent seems to believe that the actions of the Keynesians and Market Monetarists rather than solving the problem have in fact caused it.
  • The Patterns of Sustainable Specialization and Trade (PSST) devotee seems to say we just sometimes have to stop and recalibrate and maybe send scouts out to see if there are better paths or impassable obstacles in our way.

Leaving our allegory but still over-simplifying, recessions are when progress is not what we think it should be and to a degree of magnitude such that we give it the label (in fact I'm somewhat surprised we don't name recessions as we name hurricanes). To be certain we are constantly falling short of potential, but it is all relative. What matters is when that falling short is some combination of quite short, for quite a while, for quite a few of us, and (this is key) without quite the natural recovery we would otherwise expect (i.e., persistence, which is in the eyes of the beholder as witnessed by the extent of the macroeconomic debate). Some parting random thoughts:

  • Keynesianism seems least concerned with how we got here—it is a recession and here is how you get out of recessions. Arguments about if it is duck season or rabbit season are of no concern. If the fire is hot and your hand is burning, take your hand out of the fire. How or why the fire started is of little concern. As such it leaves the most room for magic both in problem definition as well as solution.
  • Market Monetarism seems to offer the most straight-forward solution (get monetary policy right), but it is the specific solution too few can agree on the definition of.
  • PSST seems to explain recessions as a combination of coincidence and regulatory policy error. Recessions free up resources after major disruption(s). There resources usually include labor, but can be many types of capital too. The disruption(s) can be greater-good productive (e.g., computers and medical advances) or counter productive (e.g., regulation and tsunamis). As such, PSST has the most defeatist fatalism built in to it.
  • At many times RBC seems to be a particular form of PSST in the midst of market monetarism with the fear of one particular manipulation (money-interest rates-price of credit) causing the problems.

Sunday, November 24, 2013

Highly linkable

Gun rights are dead. Long live gun rights! Caplan offers some great insight into the Briggs-Tabarrok Effect, a study which shows that gun access doesn't lead to more violence but does lead to more suicide. The points Caplan makes are right in line with the concept that magnitude matters.

As you sit down for Thanksgiving dinner this week and Uncle Fred begins ranting about how, "The dollar has lost 97% of its value! When I was your age, I was older!You're gonna carve the turkey with that? That's not a knife; this is a knife..." You can confidently dispute at least part of his claims.

The government picking winners and losers wouldn't be quite as infuriating if it came at a decent cost.

Landsburg makes a great case for the magnitude of tragedies that happened ~50 years ago today. And Boudreaux supports the argument thoroughly.

"Failure is always an option." -- A great point among many made in this post. (HT: Russ Roberts)

Instead of a carbon tax, how about a carbon subsidy? That is not the point of this post; rather the point is don't be so presumably sure about the sign attached to the externality.

Wednesday, November 20, 2013

How would a tax on employment help workers?

I was asked to comment on this tweet from Michael Pollan and the study he references:

Michael Pollan (@michaelpollan)
Taxpayers pay $1.2 billion in public assistance to make up for MacDonald's lousy pay and benefits. Fascinaing [sic] study.

The "study" from the National Employment Law Project (NELP) basically makes this argument:

  • Many employees in the fast-food industry are also on some kind of public assistance.
  • The fast-food firms are profitable.
  • Therefore, the firms are costing the taxpayers for the amount of public assistance their employees consume. 

My review: In a word, that "study" is stupid. Totally nonsensical. It is so absurd it is closer to a parody than an actual public policy argument. Would we rather the employees not have jobs? That is the alternative. Not above market wages. Does NELP or Pollan have an argument that these employees are paid below market wages? If so, it is not in this report. CEO and top-executive pay should be disconnected from other employees' pay. An economy that would base employee pay on CEO pay would be a poor economy with lots of unemployment or very low wages. Likewise, an economy without profit flowing to owners is an economy without profit.

Thinking more about it I realize that what Pollan and NELP are essentially advocating is a tax on employment to be paid by the employers. Rather than have society in general pay for benefits we presumably want to provide for those in need, the businesses who employ them and lighten the load should shoulder the entire burden. Not only does this proposal fail an economics test; it fails a fairness test as well. 

I guess Hammer was right. It takes wages to make wage slaves.

Monday, November 18, 2013

Highly linkable

We start with a cool invention: the invisible bicycle helmet.

James Altucher bundles some great life advice in this collection of lessons learned while day trading.

Grantland has two right down the middle: one on maximum overdrive coming to baseball and another on the coach who never punts (a theory after my own heart). While never is probably not the optimal strategy, as the authors mention, the current state is sub optimal from a winning perspective.

As long as we're bucking conventional wisdom, here is something to put in your pipe: popular hysteria about crack and meth is just that--hysteria. Mark Perry shows the way pointing towards an article in the NYT by friend of free thinking John Tierney.

But I thought we should just say no; that drugs = total life destruction was a fact. Well, facts aren't always so factual. Here is a completely different example from Russ Roberts where he shows Simpson's Paradox. One would think that if every sub group of a larger group saw a decline in a measured factor that the larger group itself must exhibit a decline as well. Doh! Not necessarily and importantly not in this case of supposed income inequality.

They're about to start paying you to live in Switzerland--and paying well: ~$2,000 per month just for calling the land of cheese and chocolate home. I like the idea of a negative income tax. I like the idea of largely replacing the social safety net with fixed cash transfers. I think it is a third or perhaps even second-best solution. But $2,000 per month? We've gone from supplement to substitution really fast. Sure it might spur entrepreneurship, but do we really want someone leading the life of Riley starting a business, using capital? Oh, we don't.

One thing all those Swiss might start doing is going to college. But what is the value of that anyway? Here is one version of the debate from the Bleeding Heart Libertarians. Here is the same but Muppetized.

Finally, in most situations where a dispute from within a fraternal order (and one that is not like the typical world) is made public, there is more there than what at first meets the eye. Such is the case with the Miami Dolphin's locker room hubbub suggests Russ Roberts.

Tuesday, November 12, 2013

WWCF: Computerless companies or Flipped companies?

Which will come first?

 Most major U.S. corporations do not have company-owned personal computers 
Most major U.S. corporations have "flipped" the work week

Here is some explanation. My prediction is that at some point in the future many firms will find it unnecessary and undesirable to have the firm own and maintain computer hardware for individual employees. Instead the firm will just have some company servers hosting software/apps/websites that employees can tap into to do their job using a computer device(s) they own themselves. With technology ownership comes the burdens of keeping the technology running and safe. And increasingly employees use the technology for personal purposes blurring the lines between who that machine really serves. In fact many if not most are already practicing BYOD(evice) through smart phones and tablets. It seems it is just a matter of time before a company's technological connection with employees is more like the current connection between companies and customers. 

For this half of the WWCF to come first, we need to see a majority of major U.S. corporations adopt this policy on near company-wide scales. And this might be close at hand. IBM is offering advice on the idea. And reading between the lines of a few studies suggests we all but may already have a winner. These seem premature. I think for this to be fully achieved we would need a bit of a cultural change--employees will need to see not having their own computer/device(s) used as the way to connect to the firm and do their jobs as an antiquated concept. We are not quite there yet.

As for a "flipped" work week, I am referring to the idea that workers have fewer days in the office than days out of the office. This might mean workers would do the bulk of their work away from the office, or this might mean just a few highly concentrated days of uninterrupted work surrounded by multiple leisure days. In any event less time spent in the office leads economist David Levinson to believe we are nearing the end of auto traffic (and while we're off on this tangent, here is Reihan Salam's take on Levinson's vision). But back to the point. While I agree this indeed is a trend, I'm not sure Levinson's quick timeline is accurate. All the more so since a majority of major U.S. corporations is the benchmark. 

Getting there in either case means fighting against culture, bureaucracy, and conventional wisdom not the least of which includes that which has worked should not be hastily disregarded. In my estimate these inertial forces push back our winner until after 2033 (20 years from today). And I think BYOD will be the winner. Both the firm and the employee will tend to like this outcome. As for being at the office, it's an increasingly nice prison. And from the firm's perspective, the power of "being there" is real and difficult to replace. You can ask the gardener to bring his own shovel, but you can't ask him to weed from home.

Saturday, November 9, 2013

Highly linkable

The more I read about pirates the less I think the Jack Sparrow saga is based on true events. (HT: Tyler Cowen)

What do you mean the cost of health care is going up?!?

But surely there aren't simple, compromise solutions that while they may not be first best, are second best and far and away better than the Obamamess?

Finally, here is a great summary of what market "efficiency" is really all about. One of many money quotes:
Efficiency implies that professional managers should do no better than monkeys with darts. This prediction too bears out in the data. It too could have come out the other way. It should have come out the other way! In any other field of human endeavor, seasoned professionals systematically outperform amateurs.

Sunday, November 3, 2013

We need more teacher pay inequality

A recent conversation with a relative who I am quite sure is a very good teacher got me thinking about the conventional wisdom regarding teacher pay--specifically, that teachers are underpaid.

While I feel strongly about this particular teacher's abilities, I do not feel as strongly that she is "underpaid" despite being in a position of relative low pay when considering hours and effort that go into her job. Likewise, I don't think she herself necessarily believes she is "underpaid", though that would be a common and understandable instinctive feeling. If I have to guess, I would say she is indeed underpaid, but as you will see that is not a guess I can arrive at lightly nor can I have much confidence in it.

Here are my thoughts:

A status of being low paid is only meaningful in a relative sense. However, a status of underpaid is also a relative status, but the two are not congruent. Underpaid is a deeper sense of relative--kind of a second derivative in a manner of thinking. To be low paid simply means having a lower absolute level of income in some comparison. To make that comparison more meaningful one should seek a good apples-to-apples arrangement. Obviously comparing a $40,000 a year job to a 10,000 Euro per month job doesn't tell us much. We get more information in comparing a $20 per statutory hour job with a $30 per statutory hour job, but we don't get a whole lot more. Most professionals including many teachers put in time beyond the standard work day.

Suppose we could get a standardized denominator of effort hours (we can't just use hours because an hour spent scanning people in at the local gym is not the same as an hour spent fighting a fire). How meaningful would that comparison of pay then be? The answer is "a lot more meaningful but still significantly short of deep economic significance". Certainly that information would help guide a lot of career decisions, but it still doesn't tell us if someone is underpaid. To get that comparison, we need to know if a particular person should make more. The person should make more (technically speaking, command a greater share of society's resources) if the value of her teaching (resource she creates) is worth more than the total pay she receives (resources she uses). Our best bet to know this answer (and this is a loose use of the term know since we actually can only hope to have a really good guess) is through a market process--and you thought I was going to say government omniscience.

Notice that the market answer is usually the standard to judge the righteousness of outcomes not because we define optimal resource allocation as the outcome the market creates but because we believe (with really good reason) that under the right conditions the market will elicit optimal resource allocations. Those right conditions are when markets are deep, cheap, and esteemed (lots of knowledgeable buyers and sellers with low transactions costs where property rights are firm, clear, and respected). We need a substantial degree of all of these to describe a market as a free market. The free market is not God. The free market is our way of discovering how a benevolent, omniscient dictator (a god-like super creature) would allocate resources.

But the education market is not conducted under very favorable conditions to elicit good allocations. Transactions costs are high and knowledge is expensive. Government separates buyer and seller insulating sellers from the discipline the market would otherwise provide*. We can probably expect a few outcomes from this as it relates to teacher pay. Pay differentials will become compressed where bad teachers are overpaid and good teachers are underpaid. Resource allocation communication and decisions will be further polluted pushing good teachers out of the profession or encouraging them to shirk while inducing bad teachers to enter the profession.

Because of this, I am led to believe that my relative is indeed likely underpaid (I have a lot of inside information about how good a teacher she is). However, (and now isn't this ironic?) for the same reason I believe she is underpaid, I cannot have much confidence in this judgment. That is at the heart of the problem with heavily government-influenced markets--they obfuscate knowledge inhibiting the communication process the market wants to provide.

*Nature abhors a vacuum and the market abhors bad resource allocation. In this sense the market naturally works toward being a free market. It is because of this positive feedback loop, a virtuous cycle, that markets are so powerfully good.