Tag Archives: economics

March 2017 in Review

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Most frightening stories:

  • La Paz, Bolivia, is in a serious crisis caused by loss of its glacier-fed water supply. At the same time we are losing glaciers and snowpack in important food-growing regions, the global groundwater situation is also looking bleak. And for those of us trying to do our little part for water conservation, investing in a residential graywater system can take around 15 years to break even at current costs and water rates.
  • Trump admires Andrew Jackson, who I consider a genocidal lunatic and the worst President in U.S. history.
  • Fluoridated drinking water could eventually be looked back on as a really stupid idea that damaged several generations of developing brains, like leaded gasoline. Or not…I’m not sure who to believe on the issue but caution is clearly warranted.

Most hopeful stories:

  • A new political survey says there is a chance that a majority of Americans are not bat-shit crazy. Which suggests they might not be too serious about Steve Bannon, who believes in some bat-shit crazy stuff. There are a number of apps and guides out there to help sane people pester our elected representatives when they fail to represent our interests.
  • South Korean women are projected to be the first to break the barrier of an average life expectancy of 90, with a 50% probability of this happening by 2030.
  • Advanced power strips can reduce the so-called “vampire loads” of our modern electronic devices that are never really off.

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

  • This long NASA article first gets you excited about the possibility of life on eight new planets it has just discovered, and then throws cold water (actually, make that lethal X-rays) all over your excitement.
  • Bill Gates has proposed a “robot tax”. The basic idea is that if and when automation starts to increase productivity, you could tax the increase in profits and use the money to help any workers displaced by the automation. In related somewhat boring economic news, there are a variety of theories as to why a raise in the minimum wage does not appear to cause unemployment as classical economic theory would predict.
  • CRISPR could be used to create new crops out of the wild ancestors of our current crops.

choosing a college major

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For some reason, I was thinking today on what advice I would give a high school senior on picking a college major. Now, I believe in education for its own sake, and I believe there is a difference between education and training, but I would still have to advise someone who asked to consider a major with significant economic value. I think I would recommend a fairly traditional science or engineering degree to most people, because this leaves open many options for specialization in graduate school.

I think computer science will continue to be a hot field for the foreseeable future, and genetics is probably the emerging hot field right now. You really couldn’t go wrong picking one of these two majors.

If you want to go the computer science route, the obvious major is, well computer science. There are also computer engineering programs out there, and either electrical or mechanical engineering would be a good undergraduate foundation while leaving options open for a number of different careers. Good old mathematics is also an option.

If you want to go the genetics route, biology is the obvious major. Chemistry or chemical engineering would also lead to your knowing your way around a laboratory, while leaving all sorts of possible career options open in the chemical, energy, and pharmaceutical industries. Some schools have programs in biological, biomedical, and agricultural engineering that might have relevant training.

If these majors just aren’t your thing, other remaining traditional professions like law, medicine/nursing, architecture, and accounting should still be reasonable career paths. Teaching and child care are honorable professions but don’t get paid what they are worth to society, at least in the United States. You have to be a little careful with accounting, because you hear so much about basic bookkeeping functions being automated. But people who really understand the tax code and helping companies comply with financial laws should always be in demand. I might put my own profession of civil and environmental engineering in this category – it is not a path to fantastic wealth, but it is not likely to go away. Chemical engineering probably gives a person more flexibility to work in either the public or private sector, but it was just not my thing. I have no regrets about the path I have chosen and would recommend it to anyone if the field really interests you.

Now, if you really have your heart set on a liberal arts or fine arts degree, I think that is great. I might advise someone to do some training in a skill on the side or over the summers. You can still make a living as a plumber, electrician, or mechanic, for example. You can also learn to work with specialized software such as geographic information systems.

minimum wage and unemployment

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In this Atlantic article, James Kwak summarizes several theories on why a higher minimum wage doesn’t seem to increase unemployment in the real world as the simple supply-and-demand theory would predict.

The idea that a higher minimum wage might not increase unemployment runs directly counter to the lessons of Economics 101. According to the textbook, if labor becomes more expensive, companies buy less of it. But there are several reasons why the real world does not behave so predictably. Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost. Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers. (Imagine a local copy shop: No matter how fast the copy machine is, there still needs to be one person to deal with customers.) Therefore, some companies can’t lay off employees if the minimum wage is increased. At the other extreme, very large employers may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production (think of an oil cartel, for example). A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.In the above examples, a higher minimum wage will raise labor costs. But many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families. In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs. Justin Wolfers and Jan Zilinsky identified several reasons why higher wages boost productivity: They motivate people to work harder, they attract higher-skilled workers, and they reduce employee turnover, lowering hiring and training costs, among other things. If fewer people quit their jobs, that also reduces the number of people who are out of work at any one time because they’re looking for something better. A higher minimum wage motivates more people to enter the labor force, raising both employment and output. Finally, higher pay increases workers’ buying power. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs. All of these factors vastly complicate the two-dimensional diagram taught in Economics 101 and help explain why a higher minimum wage does not necessarily throw people out of work. The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world.

Even if a higher minimum wage does cause some people to lose their jobs, that cost has to be balanced against the benefit of greater earnings for other low-income workers. A study by the Congressional Budget Office (CBO) estimated that a $10.10 minimum would reduce employment by 500,000 jobs but would increase incomes for most poor families, moving 900,000 people above the poverty line. Similarly, a recent paper by the economist Arindrajit Dube finds that a 10 percent raise in the minimum wage should reduce the number of families living in poverty by around 2 percent to 3 percent. The economists polled in the 2013 Chicago Booth study thought that increasing the minimum wage would be a good idea because its potential impact on employment would be outweighed by the benefits to people who were still able to find jobs. Raising the minimum wage would also reduce inequality by narrowing the pay gap between low-income and higher-income workers.

do we want a strong or weak dollar

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This Economist article tries to explain whether a stronger or weaker dollar is better. The answer is both or possibly neither. A strong dollar makes imported stuff at the store cheaper for consumers, but it lowers the demand for exports and makes it hard for those same consumers to get well-paying jobs making stuff to export. It encourages trade deficits (more imports than exports) for this reason. Because it holds down wages for the working and middle classes, it makes income inequality worse. All other things being equal, the value of the currency should fall relative to foreign currencies in this situation until things are in balance again. This doesn’t happen to the U.S. dollar because it is the world’s reserve currency, meaning other countries are always willing to buy it – people consider it a safe investment even if it is paying very little interest. So this is one thing that is holding our interest rates artificially low. The author concludes that being the only reserve currency is actually not in the country’s long-term interests.

An overvalued currency and persistent trade deficits are fine for America’s consumers, but painful for its producers. The reserve accumulation of the past two decades has gone hand-in-hand with a soaring current-account deficit in America. Imports have grown faster than exports; new jobs in exporting industries have not appeared in numbers great enough to absorb workers displaced by increased foreign competition. Tariffs cannot fix this problem. The current-account gap is a product of underlying financial flows, and taxing imports will simply cause the dollar to rise in an offsetting fashion.

America’s privilege also increases inequality, since lost jobs in factories hurt workers while outsize investment performance benefits richer Americans with big portfolios. Because the rich are less inclined to spend an extra dollar than the typical worker, this shift in resources creates weakness in American demand—and sluggish economic growth—except when consumer debt rises as the rich lend their purchasing power to the rest.

Chalk the headaches generated by low interest rates up to the dollar standard, too. Some economists reckon they reflect global appetite outstripping the supply of the safe assets America is uniquely equipped to provide—dollar-denominated government bonds. As the price of safe bonds rises, rates on those bonds fall close to zero, leaving central banks with ever less room to stimulate their economies when they run into trouble.

One thing I know from painful experience is that when you live abroad, a falling dollar can hurt, because I was getting paid in U.S. dollars and had to pay my rent in Singapore dollars. So my rent was going up every month in U.S. dollar terms, and also going up every year in Singapore dollar terms. Ouch. Well, the life experience gained had a certain value I suppose. That was one of the only times lately that the U.S. dollar has been falling relative to Asian currencies, so I am just unlucky.

peak bacon?

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This headline in USA Today says Nation’s bacon reserves hit 50-year low as prices rise. That pretty much covers it. The reason is not lack of supply but increased foreign demand.

In December 2016, frozen pork belly inventory totaled 17.8 million pounds, the lowest level since 1957, according to the U.S. Department of Agriculture.

As a result, prices are on the rise. The council reports pork belly prices have increased 20 percent in January. Officials said increased foreign demand might account for the decline in inventory. Hog farmers export approximately 26 percent of total productions, the council said.

The Great Equalizer

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The Great Equalizer by David Smick book is #8 on the New York Times nonfiction best seller list. Here’s the Amazon description:

The experts say that America’s best days are behind us, that mediocre long-term economic growth is baked in the cake, and that politically, socially, and racially, the United States will continue to tear itself apart. But David Smick—hedge fund strategist and author of the 2008 bestseller The World Is Curved—argues that the experts are wrong.

In recent decades, a Corporate Capitalism of top down mismanagement and backroom deal-making has smothered America’s innovative spirit. Policy now favors the big, the corporate, and the status quo at the expense of the small, the inventive, and the entrepreneurial. The result is that working and middle class Americans have seen their incomes flat-lining and their American Dreams slipping away. In response, Smick calls for the great equalizer, a Main Street Capitalism of mass small-business startups and bottom-up innovation, all unfolding on a level playing field. Introducing a fourteen-point plan of bipartisan reforms for unleashing America’s creativity and confidence, his forward-thinking book describes a new climate of dynamism where every man and woman is a potential entrepreneur—especially those at the bottom rungs of the economic ladder.

Ultimately, Smick argues, economies are more than statistical measurements of supply and demand, economic output, and rates of return. Economies are people—their hopes, fears, dreams, and expectations. The Great Equalizer is a call for a set of new paradigms that inspire and empower average American people to reimagine and reboot their economy. It is a manifesto asserting that, with a new kind of economic policy, America’s best days lie ahead.

 

Bradford Delong on…I’m not sure what

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I have a sense that this long blog post by Bradford Delong contains some key insights or kernels of wisdom, but I just don’t quite have the language skills to translate from econospeak to English. I’ll give it a shot:

  • The human economy consists of two layers – the supply-and-demand market system governed by prices as envisioned in economics 101 textbooks, built on top of something more biological, our “propensity to be gift-exchange animals”.
  • Gift-exchange animals want to form relationships. We want wealth, but we want to feel like we have earned that wealth. We want to give, but we don’t want to feel like we are being taken advantage of.
  • What we are paid actually has a lot to do with what country, city and family we were born into, and all the knowledge and groundwork that was laid by the people who came before us in that location, and in the world/economy more generally.
  • Based on the above, he claims to be for some system of fair income or wealth allocation – “we need to do this via clever redistribution rather than via explicit wage supplements or basic incomes or social insurance that robs people of the illusion that what they receive is what they have earned and what they are worth through their work.”
  • He never quite explains what this would look like. He quotes another blogger, who suggests infrastructure, education, entrepreneurship, and something about removal of urban land use regulation that doesn’t quite make sense.

So I don’t quite know what my personal take-away from all this is but I feel like there is something there and if I ruminate on it for awhile it might come to me.

Trump and the military-industrial complex

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This article published in Forbes the day after the election pretty much says it all: For The Defense Industry, Trump’s Win Means Happy Days Are Here Again. So much for “draining the swamp” and sending the special interests packing. (By the way, this isn’t fair to swamps. Before Washington D.C. was drained and became a cesspool of legalized corruption, it was a highly productive wetland ecosystem. And what I just said isn’t really fair to cesspools which are a low-tech but highly cost-effective means of treating wastewater. How about we just go with shit-pile? But that’s not really fair to shit-piles, which contain valuable nutrients…)

First, Trump has repeatedly stated that he will modernize the nation’s aging nuclear arsenal, which consists of missile-carrying submarines, land-based missiles in Midwestern silos, and long-range bombers.  The Obama Administration has nuclear modernization plans, but it hasn’t explained where the money will come from.  Now, it is sure to come.  Big winners: General Dynamics and Huntington Ingalls Industries which make subs, Lockheed Martin which makes sub-launched missiles, Northrop Grumman which is building a new bomber, and Boeing which builds tankers and airborne command posts to support the nuclear force.  One of these companies will also be tapped to replace land-based Minuteman missiles.

Second, Trump has proposed significantly increasing the size of the Army and Marine Corps, which will require major equipping initiatives.  Vehicle makers BAE Systems and General Dynamics will benefit not only from new production, but also upgrades to the existing fleet making it more lethal and resilient.  Helicopter makers Boeing and Lockheed Martin will almost certainly get more money, as will companies like BAE Systems and Raytheon that provide radios, electronic warfare gear, and ground-based air defense systems.

Third, Trump has stated an intention to expand the Navy’s fleet to 350 warships from less than 300 today.  That probably means buying aircraft carriers and surface combatants faster, which would be good news for General Dynamics and Huntington Ingalls Industries — the nation’s two leading producers of warships.  The Obama Administration already has programmed fairly robust spending on Virginia-class attack subs (not to be confused with ballistic missile subs) which are built in partnership by GD and Huntington; Trump’s win will do nothing to undermine that plan, and may expand it.  If the Marine Corps grows, Huntington Ingalls will also be building more amphibious warships.

Apparently, a lot of this assessment comes from a report card on the military by the Heritage Foundation, which rates our nation’s military as “marginal” and the army in particular as “weak”, despite the fact that we outspend our “enemies” by orders of magnitude.

A think tank from the opposite end of the spectrum called Center for International Policy had this to say in 2011:

Current reductions must also be measured against the unprecedented growth in Pentagon spending over the past 13 years. Since 1998, the Pentagon’s base budget has grown by 54% (adjusted for inflation).4 Moreover, with the country turning the page on a long decade of war in Iraq and Afghanistan, the planned reductions represent a historically small drawdown when compared with those following the end of Korea, Vietnam, and the Cold War…

We spend more on the Pentagon and related military activities than all of our potential adversaries combined – over four times what China spends – and roughly double what we spent in 2001. 6 Defense spending includes not just the Pentagon’s budget, but also intelligence, veteran’s affairs, defense-related atomic energy programs, defense-related interest on the national debt and other defense-related agencies such as the Department of Homeland Security. Altogether, this constitutes 23% of the entire federal budget, more than half of discretionary spending, or $832 billion…

Our conventional and nuclear forces are more capable, better equipped, and better trained than any other military force in the world.14 For example, as former Secretary of Defense Robert Gates explains, with 11 large, nuclear-powered carriers, the U.S. Navy can carry twice as many aircraft at sea as the rest of the world combined, and the Marine Corps is the largest force of its type, exceeding in size most nations’ armies.

Let’s look at a few more numbers. I’m piecing together numbers from multiple sources and years here so I don’t expect them to be highly accurate, just to give a general idea.

  • U.S. federal government spending is about $3.85 trillion for 2016. (Source: http://www.usgovernmentspending.com, which sounds like an official government website at first glance but is obviously not.) $916 billion of this is for Social Security. $595 billion on Medicare. If I can do math, this leaves $2.3 trillion for everything else.
  • So let’s take that $832 billion estimate from above for all security related spending. 22% of all federal spending, and 36% of spending outside of Social Security and Medicare, which are funded mostly by their own dedicated taxes rather than income tax. In other words, more than a third of our federal income taxes go to support the military and national security.
  • The federal budget deficit in 2016 was $587 billion. This sounds bad at 15% of federal spending, but sounds less bad at about 3% of GDP. Our creditors (which include ourselves) don’t worry too much because we could probably cut spending and/or increase taxes by this amount if we absolutely had to. Just like my mortgage, my creditors don’t actually want me to pay it off, they just want to know that I could if I had to.
  • The nuclear weapons “modernization” program (this is a code word for new nuclear weapons) has been estimated to cost a total of $1 trillion over 30 years. Ignoring inflation, interest, and all principles of finance and accounting, this is $33 billion per year, which doesn’t sound so big next to the other numbers above. It is a diabolical fact that nuclear weapons are relatively cheap compared to conventional weapons. This is one thing that makes them so hard to get rid of – we could never afford to replace them with an equal amount of conventional power, so to get rid of them we would have to give up some power relative to the other countries of the world.

So, let me come up with some of my naive policy prescriptions just for fun:

  • The Army and Marine Corps obviously do the same thing. Get rid of one of them. I would tend to get rid of the Army since the Marines have more experience riding on boats and getting from the boats to the shore.
  • Keep the Navy the way it is or even strengthen it a bit, as it is probably the branch of the military most likely to be needed.
  • Two out of three branches of the nuclear “triad” are completely useless – land based missiles and bombers. Get rid of them. If you can’t just throw them away, cancel the modernization program and retire them as they become obsolete. Store them safely or use them to generate carbon-free electricity in developing countries under UN supervision.
  • Keep the submarine-based missiles for the time being. Use them as bargaining chips and retire them little by little as we convince other countries to give up their own nuclear weapons.
  • The Air Force will have less to do now that it doesn’t have any nuclear weapons. Get rid of that part of it. Also get rid of most of its airplanes because the Navy has plenty of those. It will still have some satellites and what-not to take care of.
  • Change the Constitution so military-industrial companies can’t buy politicians and write the nation’s laws in their favor.
  • Change the Constitution so income tax revenues can be spent on the military only up to 2% of GDP. If the political system agrees to more funding, fund it through a national sales tax on everything the citizens buy, with a message printed on every receipt telling them exactly how much of every purchase goes to the “war tax”. Let them puzzle over why there is a war tax if there is no war.
  • Reform the Security Council by giving up the veto in exchange for everyone else giving up the veto and replacing it with some kind of rational consensus process.
  • Grow the economy, reduce the deficit, create jobs, build great infrastructure, provide great education, protect the environment, help the poor, etc.

inflation

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The Economist says inflation could be on the verge of a comeback.

Some economists reckon a sustained rise in inflation is overdue. Most of the rich world is out of recession, emerging markets seem to have put the worst of their commodity bust behind them, and in a few places, like America, low unemployment has at last given way to accelerating wage growth. It is possible, some suppose, that the weak growth and sustained disinflation of the past half-decade has blinded markets and policy-makers to the potential for a sharp swing in the other direction, toward uncomfortably high inflation.

The rest of the article goes on to poo-poo the idea that inflation may be on the verge of a comeback. But we’ll see.

October 2016 in Review

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3 most frightening stories

  • The U.S. electric grid is being systematically probed by hackers working for foreign governments.
  • According to James Hansen, the world needs “negative” greenhouse gas emissions right away, meaning an end to fossil fuel burning and improvements to agriculture, forestry, and soil conservation practices to absorb carbon. Part of the current problem is unexpected and unexplained increases in methane concentrations in the atmosphere.
  • The epidemics that devastated native Americans after European arrival were truly some of the most horrific events in history, and a cautionary tale for the future.

3 most hopeful stories

  • New technology can read your heartbeat by bouncing a wireless signal off you. Mark Zuckerberg has decided to end disease.
  • While he still has people’s attention, Obama has been talking about Mars and zoning. Elon Musk wants to be the one to take you and your stuff to Mars.
  • Maine is taking a look at ranked choice voting. Ironically, the referendum will require approval by a simple majority of voters. Which makes you wonder if there are multiple voting options that could be considered and, I don’t know, perhaps ranked somehow? What is the fairest system of voting on what is the fairest system of voting?

3 most interesting stories