Matt Yglesias

Oil and Instability

The surging price of oil driven by turmoil in Libya and other Arab countries is a reminder that America’s national security posture in the Middle East is what it is for a reason. And I wish we could have more above-board discussion of that fact, because I think subjecting it to scrutiny would swiftly reveal that it’s not a very good reason.

Oil price shocks are very costly to the American economy, so it makes sense for us to expend a lot of resources on trying to prevent oil-related problems. But when we do so by trying to directly prevent the shocks, the benefits of our success are spread around to everyone while the costs are concentrated. What’s more, the costs not only include a heavy fiscal burden but also soldiers killed and substantial anti-American sentiment in the area. An alternative strategy would be to expend resources trying to make the country more resilient in the face of oil price shocks via a more diversified physical infrastructure. If we had congestion pricing and abundant bus lanes in our major metropolitan areas, the vast majority of people would still drive to work in the morning. But a system would be in place such that when price conditions changed people could switch at the margin. A subway line, more generally, is cheap compared to a war.

The Price of Life

A reminder that a certain level of arbitrariness invariably creeps into any cost-benefit calculus comes from Binyamin Applebaum’s article on how Obama-era regulatory agencies tend to value life more than did its Bush-era predecessors (also a reminder that partisan control of the White House matters in a lot of below-the-radar ways). The interesting thing is that the US government as a whole doesn’t have a consistent line on this:

The Environmental Protection Agency set the value of a life at $9.1 million last year in proposing tighter restrictions on air pollution. The agency used numbers as low as $6.8 million during the George W. Bush administration. The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims. The Transportation Department has used values of around $6 million to justify several recent decisions to impose regulations that the Bush administration had rejected as too expensive, like requiring stronger roofs on cars.

The gap between the EPA and the DOT is downright gigantic. It amounts to running a buy two get one free sale on human life in transportation-related mishaps. Meanwhile, I would say the case that we’re overemphasizing terrorism as a problem is basically sealed by the fact that “A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.” We should not let 1,000 people die in car accidents or of pollution-related illness in order to prevent a terrorism from killing ten people somewhere. Violent murder is awful, and we should try to stop it, but having your husband die in a construction mishap or your wife be killed a drunk driver is also awful.

Meanwhile note that while there certainly are misguided regulations in this country, it’s not like what the business community wants is to rescind a couple dumb rules and streamline things. They’re very upset about the higher valuation of human life, because their goal is to maximize profit by any means necessary up to and including getting people killed.

Egypt Fact of the Day

From David Leonhardt whose caught density equals growth fever:

Almost 50 percent of East Asians now live in cities. And Egypt? It is the only large country to have become less urban in the last 30 years, according to the World Bank.

Egypt’s economic problem is quite profound. It’s not rich enough for households to shrug off increases in the price of wheat and other commodity foodstuffs and it doesn’t have the power to halt negative shocks to world food supply from climate change and poor management of water resources. Consequently as long as Egypt grows slower than the world average, it’s going to be at risk for fall-behind immiseration every time the world has a bad harvest season. And it’s not the only country in this boat.

Talking Great Stagnation

I talk about Tyler Cowen’s The Great Stagnation on a new BHTV episode.

I think, however, that I may not have expressed my actual view of the situation very clearly. I think Cowen’s argument that the stagnation in question is caused by a semi-mysterious technological slowdown is ultimately less persuasive than the circumstantial Krugman and Hacker/Pierson case that it’s ultimately political in origin. But I think Winner Take All Politics often comes across as implying that the political problems here are very narrowly partisan in nature and could be easily remedied with more progressive taxation. The real issues, I think, are closer to Dean Baker’s less conventional analysis in The Conservative Nanny State—substantial dysfunctions in the health care, finance, education, and housing sectors of the economy plus loopy intellectual property policy that are conspiring to make growth slower and more concentrated.

I’m all for more tax and transfer and better science, but I think we should be more ambitious in our goals and more searching in our quest for improvements.

If Nobody Has Money, Houses Have To Be Cheap

David Streitfeld writes that “The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.”

First see David Leonhardt on whether the boom really was all that restrained in Seattle. But the other examples are better and I think this is a reminder that the relationship between the housing market and the economy is push and pull. There was, in fact, an unsustainable bubble in house valuations across much of the country that led to localized unsustainable booms in home building and related activities. That process came to an end in 2006-2007 and we were in recession all throughout 2008 as the unemployment rose and the construction boom unwound. But then came the really giant collapse of aggregate demand in fall of 2008 continuing through the subsequent winter. Now we’re way below the long-term trend level of overall nominal spending:

Overall nominal spending equals overall nominal incomes. And we live in an economy where lots of us have contractual obligations that are nominally denominated. That’s my cable bill, it’s my cell phone bill, and it’s my mortgage, and it’s probably your mortgage too. Fortunately for me, my nominal income isn’t below its pre-crisis trend growth path. But America’s collective income is. So if our nominal income is below where we expected it would be when we signed the contracts, people are going to be unable to pay bills. That means, among other things, serious housing problems even in jurisdictions that never suffered from noteworthy construction booms.

Indeed, though there’s definitely excess housing in Florida and parts of the southwest there’s reason to believe we have an overall housing shortage right now. But people need money to purchase housing with.

What Carmax Can Tell Us About Winning The Future

One of the less-discussed Super Bowl ads was this one from CarMax, dramatizing the declining customer service standards at gas stations:

As is often the case, this is a kind of covert nostalgia for a past time when people were poorer. This work can function as a stand-in for lavish customer service precisely because it’s so unproductive and wasteful of human time and effort. But as better machines and better education have raised economy-wide productivity and wage levels, it’s become pointless to employ people doing this kind of thing. This is, however, a reminder that in a world where manufacturing output rises even as manufacturing employment falls that the jobs of the future are mostly going to be in the service sector, the sector that employs the vast majority of people even in Germany.

The issue is what kind of service sector jobs will people be able to do? A wiping your car’s windowshield needs very few skills but also is producing very little value and won’t earn much money. A yoga instructor, a chef, a plumber, a dental hygienist, or an interior designer is someone with more skills and more earning potential. What’s more, in the more productive future we’ll be able to afford more restaurant meals, and yoga lessons. We’ll be able to afford cleaner teeth and better-designed homes.

The Continuing Conservative Recovery

With the latest data and revisions in, here’s the employment from January 2010 to January 2011:

It would be really nice to see conservatives acknowledge this reality. Conservatives say that we should shift away from public sector employment and toward private sector employment. Which is certainly a view to which they’re entitled. But this is what was already happening all last year. Presumably GOP gains in Congress paired with huge GOP gains in state legislatures will accelerate this trend. Which, again, can be deemed a good trend or a bad trend as you like. But this image of a tea party army standing strong against a socialist tide is just made up. In the face of plummeting tax revenues, the public sector has been steadily cutting back and creating a drag on recovery.

Winning the Future By Reducing Idleness

The reason the USA is more economically important than Canada is that we have many more people doing work, producing goods and services, and earning incomes. The reason China is more economically important than Serbia is that China has many more people doing work, producing goods and services, and earning incomes. This is often glossed by observing that China has a “large population” but of course a large population of people sitting on the couch watching TV doesn’t help, they need to be doing something.

So it strikes me as fairly scandalous—and not just in narrow humanitarian terms—that so many Americans are sitting on the couch and scanning help wanted ads:

As the recovery continues, the economy will add roughly 2.5 million jobs per year over the 2011–2016 period, CBO estimates. However, even with significant increases in the number of jobs, a substantial reduction in the unemployment rate will take some time. CBO projects that the unemployment rate will gradually fall in the near term, to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012, and 7.4 percent at the end of 2013. Only by 2016, in CBO’s forecast, does it reach 5.3 percent, close to the agency’s estimate of the natural rate of unemployment (the rate of unemployment arising from all sources except fluctuations in aggregate demand, which CBO now estimates to be 5.2 percent).

This is an absurd situation to be in. Does anyone seriously deny that there’s something these people could be doing that would be more useful than being unemployed? Now ask yourself this. Suppose you had more money. Would you buy more goods and services? I would. And if more people were buying more goods and services, then wouldn’t firms need to hire more people to provide those goods and services? I don’t see any way around it. So why not put some money into people’s hands so they can go out and buy more goods and services? Maybe you think we can’t do that because “the money has to come from somewhere.” But it doesn’t. It’s fiat currency, we can just make more. It’s true that if we print more and more money that at some point we’ll soak up all the idle people and it’ll start to spark inflation. And that would be an excellent time to stop trying doing it. But what’s stopping us today?

Ezra Klein says the administration’s moved past unemployment as an issue because there’s nothing more they can get out of congress. Do they know there are other macroeconomic stabilization tools at the government’s disposal? Do they think it’s a problem that those tools aren’t being used?

America’s Housing Shortfall

“Everyone knows” that massive overbuilding of housing during the boom years is a crucial contributing “structural” factor to current unemployment, but Scott Sumner looks at the actual data and finds little evidence of housing oversupply:

Source: U.S. Census Bureau

Here’s my assumption. Housing construction normally seems to fluctuate between one and two million units. Let’s take 1.5 million as roughly the trend rate which keeps up with population. Yes, it’s true that we exceeded that number every single year from 2002 to 2006, and the total excess production was about 1.87 million units. That’s a lot. But over the next four years there was a shortfall of about 2.6 million units. So why do we seem to have a hugely excessive number of homes, if we are actually 730,000 short?

Now of course some of these units are mislocated relative to demand. And severe regulatory restrictions on density mean that lots of this investment is non-optimal. But there are plenty of people in this country who, given decent aggregate demand conditions, would be forming new households and occupying this housing stock.

The Corporate Recovery

David Leonhardt reflects on America’s corporate recovery:

The gross domestic product here — the total value of all goods and services — has recovered from the recession better than in Britain, Germany, Japan or Russia. [...]

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

On some level, though, this still looks to me like aggregate demand. Normally highly profitable firms would attract lots of capital and expand rapidly. People don’t just sit around saying “what a highly profitable store I have here, let me count my money”—they try to franchise and get richer and richer. The exception is that if you expect generally depressed economic conditions then the mere fact that you’re running one highly profitable store may still leave you doubting that a second store would make money. And, after all, with American households debt-constrained and many households suffering reduced income due to unemployment it seems quite reasonable to think that even profitable firms may not have expansion opportunities. You need to raise demand expectations by putting money into people’s hands.

That said, what I think is clear is that a country with an institutionally stronger union movement wouldn’t have let the current situation come to pass. What happened in Germany is basically that faced with a political culture that’s absolutely terrified of stimulus, they worked out a labor-capital bargain that avoided mass unemployment even in the face of very poor GDP performance. It’s possible that a hypothetically stronger labor movement in America would have worked out such a deal, but also possible (and more, I think, in keeping with the American character) that it simply would have demanded more stimulative policy and we’d have both lower unemployment and higher real output. As it stands, though, America’s weak labor movement is concentrated in health care and the public sector so the bulk of its reduced store of ammunition has been focused on those elements of the economy.

Construction Workers and the Recession

It’s both true that the quantity housing construction has declined sharply and also that the unemployment rate has risen sharply, but as Scott Sumner points out for all that people want to keep talking about construction workers you just can’t make the numbers add up on this:

January 2006 — housing starts = 2.303 million, unemployment = 4.7%

April 2008 — housing starts = 1.008 million, unemployment = 4.9%

October 2009 — housing starts = 527,000, unemployment = 10.1%

In a well-managed sectoral shock, what happens is a lot of construction workers lose their jobs and then . . . most of them get new jobs. But when you let aggregate demand collapse, that’s not what happens and instead you end up with 10 percent unemployment. Instead of the construction workers getting new jobs, folks who sell things to construction workers lose their jobs and the cascade tumbles forward.

The Corporate Bureaucracy

Microsoft is a highly profitable firm. And it shows all signs of being able to continue to obtain large profits selling Windows and Office. By contrast, as Karl Smith observes, its “Online Services” effort to compete with Google sucks up large and growing quantities of cash:

Now it is possible that Microsoft will thrive, raise the dividend and deliver real gains to its shareholders. Yet, it is equally possible that Microsoft will lose in the new environment, go out of business or be forced to limit its dividend increases to less than the rate of inflation. In that case shareholders will lose money by having invested in Microsoft.

There is a simple way out of this. Shutdown the Online Services Division. Double or even triple the dividend and payout the profits to shareholders.

What’s your guess on the probability that Microsoft will do this?

But, obviously, Microsoft won’t do this. Successful companies basically never do this. And in particular companies like Microsoft with hugely successful businesses that will predictably decline in the future are especially loathe to just take profits while they can and accept eventual decline. The firms want to live! They want to grow and prosper. They want to reinvest profits in new lines of business. They want to conquer the world. The firm, in other words, is “captured by its corporate bureaucracy” and I agree with Smith that this is an underrated source of loss to the American economy.

I note that mitigating this problem is supposed to be one of the main advantages of fancy financial shenanigans. And there was a brief moment in which shenanigans were being deployed to reorganize conglomerates and unlock shareholder value. But that process seems to have essentially ground to a halt even as the quantity of shenanigans has exploded.

It’s Always a Good Time to Regulate Well!

Ezra Klein and Kevin Drum have an interesting back and forth about Michael Mandel’s idea that regulations should be somehow “counter-cyclical” which, in his formulation, basically amounts to saying they should be laxer during recessions.

The more I think about this, though, the more I think the insights here basically just amount to “it’s always a good idea to have sound public policy.” If you imagine some rule that’s really important to preventing cans of beans from giving people botulism, that rule doesn’t suddenly become less important in a recession. What’s more it’s hard to imagine a 12-month holiday on food safety rules for canned goods leading to a spike of job creation. It would mostly freak people out. Conversely, an unwise regulation like the rule in some parts of DC giving preference to franchised chain restaurants over non-franchised chain restaurants (or consider this) doesn’t actually become worse during a recession.

I think that when there are downturns, public policy questions just become more salient. Good micro policies are, however, always really excellent things to have. Nonetheless, I don’t think anyone really thinks the Italian labor market is holding up better than the American because of superior microeconomic policies.

The Only-in-America Output/Employment Breakdown

Neil Irwin on the Fed’s new “beige book” on the state of the economy:

The economy “continued to expand moderately” at the end of last year, according to a new report from the Federal Reserve that shows a recovery that, although not rapid, is on track. [...] Add it all up, and the picture is an economy very slowly gaining momentum, with some continued pockets of distress but also definite signs of progress as 2011 gets underway. In the all-important labor market, for example, conditions “appear to be firming somewhat,” though not enough to push wages upward.

To put this in some context, I would suggest you read this post from Nick Rowe. But to steal the punchline, though by definition a recession is bad for GDP, in output terms the United States has weathered this recession better than most of our peers:

Only Canada does better. And of course the Canada-like portions of the United States—those with little overbuilding in the housing sector and/or valuable natural resources—are doing better than average. But how about employment:

Total, unmitigated disaster. And as Rowe points out this isn’t because there’s been some cosmic breakdown of the output/employment relationship, the breakdown is exclusive to the United States of America. To make monetary policy under the circumstances, you’d really want to know why this is. In the absence of a good explanation, if I were an FOMC member I’d say “damn the torpedoes, full speed ahead” and interpret this as meaning that the USA currently has the capacity to dramatically (albeit temporarily) increase its rate of real GDP growth. But actually FOMC members may well look at the fact that real output is doing okay, all things considered, and declare mission accomplished.

Unemployment Doubling Everywhere

Here’s a basically unreadable chart that you should click on in order to be able to see a larger version of:

That’s from Mike Konczal and it shows the ratio of U3 unemployment in November of 2010 to U3 unemployment in November of 2007. And the point is that for the vast majority of states unemployment rose by between 50% and 150% during that period, indicative of a widespread collapse of aggregate demand that’s made it suddenly much less appealing to employ people:

The average is 1.93, and the median is 1.87. So roughly a doubling. So to me Nevada having a higher unemployment isn’t nearly as interesting as why Nebraska has a 4.6% unemployment rate when it used to have a 3% unemployment rate – a 50% increase. Why has North Carolina’s unemployment rate doubled from 4.8% to 9.7%? Yes Nevada is an important story, but it’s clearly an outliner in what is a national trend. They didn’t all have housing bubbles.

There’s a particularly severe problem relating to Nevada and especially to Florida which has a much higher population. Even in a higher AD world, there’d be an important question of what kind of targeted assistance could be provided to people in those areas severely afflicted by overbuilding and the construction downturn. But the widespread and fairly consistent nature of the rise in unemployment shows that thus far we’ve made relatively little progress even on the “easy” issue of below-trend economy-wide spending.

Killing Jobs, Killing People

(cc photo by LateNightTaskForce)

Steven Pearlstein has a great column on the right’s obsessive use of the phrase “job killing”:

What’s particularly noteworthy about this fixation with “job killing” is that it stands in such contrast to the complete lack of concern about policies that kill people rather than jobs. Repealing health-care reform, for instance, would inevitably lead to thousands of unnecessary deaths each year because of an inability to get medical care.

Although lack of effective regulation led directly to the deaths of 78 coal miners last year in West Virginia, Republicans continue to insist that any reform of mine safety laws is bad for miners’ employment.

Republicans also continue to oppose food safety legislation that could save the lives of hundreds of Americans killed each year by contaminated food, just as they oppose any regulation that would effectively keep assault weapons out of the hands of convicted criminals and narco-terrorists who kill thousands of innocent victims on both sides of the Rio Grande.

One reason I’m increasingly convinced that liberals need to learn to talk about monetary policy is that this jobs talk is both very powerful and also quite misguided. For any given state of US public policy, there’s going to be some level of “full employment.” That doesn’t mean no unemployment. It means that efforts to stoke further reductions in unemployment through monetary expansion will lead to accelerating inflation. Once you’re at full employment, to achieve further increases in national output you need to make more growth-friendly public policies. And in general, growth-friendly policies are a good thing to adopt, though I personally prefer to think of growth-friendly policies that don’t lead to dead miners.

But suppose the economy is operating below potential. Suppose 9.4 percent of your workforce doesn’t have a job. Suppose a rising number of able-bodied adults aren’t even in the labor force. Suppose many of your part time workers would like full-time work. Well in that case you don’t need to run around being paranoid about how many people would have jobs in the hypothetical scenario where the economy’s running at full-tilt. You just need to step on the gas!

Inequality and the Labor Market

I cooked up this model in my head whereby asymmetric time spans of slack and overheating labor market conditions would exacerbate inequality, but then I thought I might be wrong because normally I try to avoid espousing economic theories I haven’t previously read from someone with a PhD. Fortunately, Tyler Cowen does have a PhD and says this was cut from a draft of something he was working on:

A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. And if all those new orders require keeping the warehouse open late, the company may need to bring in a new night watchman. To paraphrase a common metaphor, a rising tide eventually lifts most boats. When the economy’s expanding, a worker who previously was worthless will at some point become valuable again. But this means that workers at the bottom of the economic ladder will have to wait until the entire economy has mended itself before they have the chance to improve their lot: That can be a painstakingly slow and uncertain process.

But Cowen is a libertarian, so his way of phrasing this is kind of in the mode of “unemployed folks are going to have to gut it out.” But Google revealed a similar point in the 2003 edition of The State of Working America from Lawrence Mishel, Jared Bernstein (now of the vice president’s office), and Heather Boushey (now my colleague at CAP) from the Economic Policy Institute:

Monetary policymakers aim at maximum employment consistent with long-term price stability. In other words, an economy that avoids either an output gap or an overheating scenario. Both kinds of failure are bad, but the failures have different consequences for different types of people. Low-skill individuals and the working class suffer disproportionately form output gaps and benefit disproportionately from full employment. Elites—meaning not just 23 rich bankers and Fred Hiatt, but a much larger minority of the country—faces a different set of incentives.

Understanding the State/Local Budget Crunch

(cc photo by Justin Brockie)

From the California section of N+1′s year in review:

Without any pressure telling them otherwise, Democrats, faced with an ineluctable revenue crisis, are going to go with what has been their signature political move for decades: conceding. The point is, it hardly matters whether you cut the budget with fat Republican enthusiasm, like Chris Christie in New Jersey, or gaunt Democratic humility, as Jerry Brown has promised. What effect this coming evisceration of social services and mass layoff of public servants will have on the makeup of the country is incalculable. That it will only contribute to the deep recession, which supposedly ended several months ago, is axiomatic.

I think the spirit here is right, but the details are wrong. The thing about state governments is that they need to balance their budgets. Consequently, it actually matters a great deal whether you implement cuts with Christie-like enthusiasm or not. Christie has actually been lowering taxes on the richest New Jerseyites, thus increasing the need for cuts. Conversely, while it’s quite true that state budget cuts amidst a recession impair recovery, it’s also true that state tax hikes amidst a recession impair recovery. The only solution to the macroeconomic problem of state/local budget cuts is for congress to appropriate funds.

This is a really big problem! Congress should appropriate funds. What’s more, congress should—but gives no indication of giving any consideration whatsoever to doing so—be looking at some way to reduce the systematic tendency of state and local government to engage in pro-cyclical budgeting. So it’s really two big related problems, and their scope is much wider than the ideological back-and-forth about the optimal size of the state/local public sector.

Pending Commercial Real Estate Doom

There’s an organization with a floor in the same building as CAP/AF called the “Institute for International Finance” and I sometimes wonder what it is they do. According to Gillian Tett they release alarming reports about commercial real estate. She starts with the observation that there’s been a lot of “extend and pretend” in the CRE world and continues:

[L]ook at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).

Thus far, the banks have “dealt with potential delinquency problems in part by extending loans until 2011-13”, the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, “nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property”, it adds.

What’s more, while homeowners have been subjected to major moral suasion campaigns to get them to avoid strategic defaults, commercial property is owned by rich businessmen who’ll be expected to act like rich businessmen and try to maximize profits. The big losers here are likely to be European banks, as well as America’s gigantic “small banks” sector. Of course if we get adequate action to try to push growth back up we may be able to mitigate some of this.

How Rich Is Mark Zuckerberg?

The answer keeps shifting:

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction. [...] In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

Once again we’re watching regulatory arbitrage in action as Facebook seeks loopholes around the rule that prevents it from having more than 499 investors without opening its books. But this is also, I think, a reason to believe it would be better to levy a consumption tax with a highly progressive rate structure instead of our current income tax with a modestly progressive rate structure. One can count how much money Mark Zuckerberg is spending in any given year and more or less what he’s spending it on. The ups-and-downs of his notional fortune, by contrast, are pretty unstable and depend in part on things like whether or not Goldman Sachs wants to buy Facebook shares at an inflated value in order to capture a potentially valuable middleman role for itself. This means it would be technically and economically feasible to levy very very high marginal rates on extremely extravagant consumption in a way that’s just unworkable with investment income.

In bonus rich people news, apparently upper class have less empathy than normal people.