Monday, August 21, 2017

Or maybe you can't depend on it


"Arthurian" economics is the economics that makes sense to me; nothing more, nothing less. Supporting it is the understanding I have of everybody else's economics. And it's all, or almost all, just things I've picked up because I'm interested.

It's not always easy figuring out what other people are thinking. It wasn't long ago, for example, I finally learned that when you see a graph of a supply curve or a demand curve, output is on the horizontal axis and price is on the vertical.

Anyway, price is always on the vertical axis. Knowing that is almost always useful, when you read somebody's offhand remark. Not knowing it, sometimes the remark cannot be understood. Knowing it, you know what the guy is saying.

So here we are, and I'm looking at flat phill in Google Search, and I find Broken Phillips Curve a Symptom of Lower U.S. Inflation Expectations from PIMCO. They show this graph:

Graph #1, from PIMCO

They have it backwards. They have price on the horizontal.

Ahh, PIMCO.

Sunday, August 20, 2017

It's a small thing, but you can depend on it


One more thing from Christopher Snyder's VOX article What economists study: A guide for the curious:
How is value determined? Scholars puzzled over this for a long time. Why are diamonds, mere decorations, so prized, while water, essential for human life, flows freely from public fountains? In the Middle Ages, philosophers advanced the just-price theory...

Today, economists generally believe that value is neither inherent, nor determined by a single factor, but is the result of the interaction of several impersonal market forces. We can explain the water-diamond paradox simply by drawing curves of supply and demand, as depicted in Figure 2. Seller behaviour is represented by the red supply curve. Its upward slope indicates that at higher prices, more is supplied as existing suppliers expand their operations and new suppliers are drawn into the market. Buyer behaviour is represented by the blue demand curve. Its downward slope indicates buyers are willing to purchase more at lower prices.

Figure 2 Market supply and demand

An equilibrium is reached where supply and demand intersect. At other points, either supply exceeds demand, leading price to fall as sellers accepted lower prices to offload their excess inventory, or demand exceeds supply, leading price to rise as buyers would still line up to buy at higher prices rather than do without the good. Equilibrium price P* determines the object’s value.

Note that the vertical axis shows "price". On a graph like this, the vertical axis always shows price. Price, or inflation, or wages. Always some measure of money, on the vertical scale.

Maybe they taught that the first day in Econ One, I dunno. If they did, I missed it. But if you don't know price is on the vertical axis, things they say about the graph won't make sense. Especially when they just talk about the graph and never actually show it.

So now we know.

Saturday, August 19, 2017

Two points from "What economists study"


At voxeu, What economists study: A guide for the curious by Christopher Snyder.

Took me a while to get around to reading this, because it didn't strike me as "economics". I mean, if economists can give us things like the Global Financial Crisis, then surely economists are not studying the right things. But when I sat down to read it, I liked it. I liked it even though Snyder writes:

One of the great advances of modern empirical economic research is causal identification—uncovering true causal relationships rather than overinterpreting apparent correlations as causation.

Maybe that's what I do, overinterpret apparent correlations as causation. I look at graphs and try to find things that are similar and things that are dissimilar. But hey, I have my theories, and my theories are based on historical data, and that's good enough for me. I'm no economist, and I can't do the kind of math economists do, "causal identification" and all that, but economists are welcome to use that stuff on my theories any time they want. Meanwhile, there are a couple points in Snyder's article that I want to mention.


1. The Just-Price Theory

In the Middle Ages, philosophers advanced the just-price theory. This argues that value is an inherent property of an object. On this view, diamonds are expensive because of their inherent quality, and water is not.

What a cute idea! Gold isn't valuable because it's rare. Gold is inherently valuable.

Nobody thinks like a Middle Ages philosopher these days, except those who think money should be backed by something that has intrinsic value.


2. Feedback from the Economy

Economists have to devise clever ways to establish causation in nonexperimental data. Pick one ... A macroeconomist might pick Romer’s (1992) study of whether fiscal or monetary policy deserved more credit for the US recovery from the Great Depression. The problem: a bad economy can feed back to make beneficial policies look damaging.

A bad economy can feed back to make beneficial policies look damaging. Yeah, exactly, and that's very important. There is another version of the same idea: A good economy can make any policy (good or bad) look good.

There are techniques that rely on such ideas. A common one is to separate the good economy from the bad and study only the bad years. Any study that starts in 1980 or after, ignoring the "golden age" that followed WWII, is one of these. There must be millions of 'em.

Friday, August 18, 2017

Wise words


Tim Duy:

This is the language used by the far right to discredit and undermine faith in our government institutions. For the left to adopt the same language adds to the fire already burning.

Thursday, August 17, 2017

Stop doing psychology and start doing econ


Brad DeLong:

[M]ore than a generation of inequitable and slower-than-expected economic growth in the global North has created a strong political and psychological need for scapegoats.

Well fuck you Brad DeLong. For inventing stories about my psychological need for scapegoats, fuck you.

DeLong continues, regardless:

People want a simple narrative to explain why they are missing out on the prosperity they were once promised, and why there is such a large and growing gap between an increasingly wealthy overclass and everyone else.

I can give you the simple narrative: Excessive private debt is the reason we are missing out on the prosperity we expect, and excessive private debt is the reason there is such a large and growing gap between an increasingly wealthy overclass and everyone else. End of narrative.

If Brad DeLong would stop doing psychology and start doing econ, he could see it for himself.

Wednesday, August 16, 2017

Too much fertilizer


The Symptoms of Over-Fertilizing:

Fertilizing plants encourages healthy growth and flowering, but too much leads to problems.

Some signs of over-fertilizing are easy to spot... And though fertilizer should encourage healthy growth, too much can stunt growth or stop it entirely.

Is it possible that the emphasis on free trade and globalization is just too much fertilizer?

Tuesday, August 15, 2017

Voluntary vs Involuntary Unemployment


Pettinger ("helping to simplify economics") offers this definition:

Voluntary unemployment is defined as a situation where the unemployed choose not to accept a job at the going wage rate.

That's it exactly. And by choosing to define voluntary rather than involuntary unemployment, Pettinger simplifies economics. Here is Keynes:

If, indeed, it were true that the existing real wage is a minimum below which more labour than is now employed will not be forthcoming in any circumstances, involuntary unemployment, apart from frictional unemployment, would be non-existent. But to suppose that this is invariably the case would be absurd.

And

Moreover, the contention that the unemployment which characterises a depression is due to a refusal by labour to accept a reduction of money-wages is not clearly supported by the facts.

And

For, admittedly, more labour would, as a rule, be forthcoming at the existing money-wage if it were demanded.

In other words, involuntary unemployment is a situation where the unemployed are willing to accept a job at the going wage, but do not find work. This meshes perfectly with Pettinger's definition.

And then there is Scott Sumner:

We all agree that there were lots of people without jobs. We all agree that lots of them wanted to be working. We all agree that lots of them were miserable. I call that “involuntary unemployment.”

Number one, Sumner gets the definition of "involuntary" unemployment wrong. It's not about being out of work. (That's just "unemployment".)

Number two: I omitted it, but Sumner prefaces these thoughts by saying, "But what is so obvious about involuntary unemployment, as defined by Keynes?" That's Sumner's emphasis on the words "as defined by Keynes", not mine.

The first three sentences after those four words all start with the phrase "We all agree". Sumner apparently agrees with Keynes three times. But he is putting words in Keynes' mouth, as we find out in the next sentence after, where Sumner admits he has been giving us his own definition of involuntary unemployment.

But Sumner's is not a definition of involuntary unemployment. It is only a definition of unemployment: without a job, wanting work, and miserable. And it's not even a technical definition of unemployment. It's just some social chatter.

"Involuntary unemployment" is a technical term, defined by Keynes. Pettinger simplifies the concept by choosing to define voluntary employment instead: a refusal to accept work at the going wage.

Funny thing: Sumner gets that wrong, too. He says:

I think they were unemployed because of sticky wages, and that if workers collectively accepted lower wages then we would have had full employment in 1936.

The Depression drove wages down, so that the "going" wage was lower during the Depression than before. Sumner is saying workers refused to accept the going wage (in 1936) because it was lower. This refusal, by definition, makes the unemployment in Sumner's story voluntary. Sumner calls it involuntary. Sumner is wrong.

Keynes establishes the definition:

The classical school [argue] that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so ...

Pettinger simplifies it:

Voluntary unemployment is defined as a situation where the unemployed choose not to accept a job at the going wage rate.

It's not complicated. Sumner is wrong.

Monday, August 14, 2017

I hate politics


Replying to Mark Thoma, I wrote:

Half a dozen years back there was so much right-wing chatter about the threat of inflation (from quantitative easing) that it seemed the chatters wanted hyperinflation, just to show they were right about the economy.

... It's not quite so bad these days, not yet at least, and I'm not sure it's only a left-wing phenomenon, but these days the chatter seems to be about impending recession.

Why would "impending recession" be a left-wing phenomenon?

Why, indeed. On the day after the Presidential Inauguration last January, Adam Ozimek was at Forbes with The Best Case For The Trump Economy. Ozimek is not a fan of Trump, as his concluding remarks indicate:

So if everything goes smoothly and Trump doesn't do anything crazy, or anything really, he could potentially keep the current pace of job growth running for a few more years and maybe even for the whole term...

If I was Trump, I'd do the absolute minimum policy-wise and make job #1 avoiding a recession.... I'd also probably change the hairdo.

Not a fan, but not so full of hate for the man that he can't do econ. Many people are.

Anyway, in the same article Ozimek says

If you look over the long-term, the employment to population rate falls during recessions then slowly recovers. So if we can avoid a recession, it's not crazy to think we could get back to 2000 levels.

I quoted that yesterday, talking about Trump's 4% growth target. Ozimek's point is that for Trump to succeed in making America's economy great again, he's going to have to avoid recession.

And there, right there, is the reason the chatter about impending recession is a left-wing phenomenon.

Sunday, August 13, 2017

Trump's 4% growth target


Trump apparently wussed out, abandoning his 4% target for economic growth and embracing 3%. I read a couple things ridiculing him at 3%, as if even that is too high a target. Absurd.

Myself, I'd hold Trump to his original target: 4%. We can get there. Even if we don't make it, shooting for 4% is a much more honorable goal than shooting for 3%. And far more impressive, if we make it.


Back in January 2017, Menzie Chinn of EconBrowser looked at Trump's growth target. Quoting from the economy page of the Trump-Pence website, Chinn echoes

Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate.

The Trump-Pence link today reports a "page not found" error. Wuss.

Anyway, Menzie points out that reaching Trump's growth target will require a large increase in the size of the labor force or in labor productivity, or both. Unrealistically large, Chinn implies. He says

it seems unlikely to have acceleration of growth to the indicated rates, especially if policies are undertaken to deport some portion of the population

and

If we are deporting undocumented workers en masse, how is [the labor force] going to be expanded?

It's a fair question.


At Forbes (21 Jan 2017) Adam Ozimek said

If you look over the long-term, the employment to population rate falls during recessions then slowly recovers. So if we can avoid a recession, it's not crazy to think we could get back to 2000 levels.

Ozimek continues:

That means going from 78.2% today to 81.9%, an increase of 3.7 percentage points. If you apply this to the 125 million population, that's about 4.6 million jobs. If these jobs take the whole four years of the Trump administration to recover, that's 95,000 jobs a month above and beyond the natural growth in the labor force. When you add in that natural labor force growth, that should be enough to keep job growth in the range from the last three months, which has averaged 165,000.

That was January. Job growth in June 2017 surged "as employers surpassed the expectations of most economists by adding 222,000 jobs."

As that kind of job growth continues, Trump's 4% becomes more likely.


At FiveThirtyEight (4 August 2017) Ben Casselman writes:

Meanwhile, the U.S. doesn’t seem to be running out of available workers, at least not yet. Rather, the improving job market seems to be drawing people off the economy’s sidelines. The labor force grew by 349,000 people in July; the so-called participation rate — the share of adults who are either working or actively looking for work — has been essentially flat for the past year and a half. That’s an impressive trend given the ongoing retirement of the baby boom generation, which puts downward pressure on the participation rate.

Things are happening in the labor force.


// Related: You don't just show a graph and assume that the trend it shows will continue forever