Declining Education Spending

Via Paul Krugman, Manny Fernandez writes about the effects of budget cuts for schools in Texas.

Table 3.15.6 of the National Income and Product Accounts ala BEA provides information on Real Government Consumption Expenditures and Gross Investment by Function showing education spending (in 2005$) from 2003 to 2010. Our chart shows real education spending, which unfortunately has been declining since 2008. The vast majority of this spending comes from state and local government and the declines have been across the board: elementary/secondary spending, spending on higher education, and spending on libraries. No – we can’t blame the unions for the Herbert Hoover style fiscal policies of many of our state and local governments.

Herb Gintis on Evolution and Morality

On Tuesday, April 3, Herbert J. Gintis, External Professor at the Santa Fe Institute, Professor of Economics at Central European University, and Professor Emeritus at the University of Massachusetts-Amherst, delivered a lecture on "Evolution and Morality" at James Madison University. One can view the video of it at the link, https://jmutube.cit.jmu.edu:8443/content/maypl/playlist/14826/play/ . I am the person introducing him in the video.

Which Way for the World Bank?

I’ve seen two general themes in discussions about the three-way race for World Bank president.  One is about the pledge to open up the process, fairly and transparently, to all candidates from all countries by jettisoning the custom that the US picks the top post at the Bank, while Europe gets the IMF.  This is long overdue; does anyone openly defend the US prerogative?  The second is about experience and bureaucratic savoir-faire; Jim Kim, the US pick, is obviously untested in the sort of organizational leadership challenges that await him at the Bank if he gets the job.  The other two, Colombia’s Ocampo and Nigeria’s Okonjo-Iweala, have more relevant profiles.

But there is a third, overarching issue, perhaps the biggest of all: what is the position of the World Bank, and its sister Bretton Woods spawn, the IMF, in the framework of global governance?  In particular, what is its relationship to the UN system and the global partnerships that have spun off from it?  In a way, this is the same as issue #1, but it is much more encompassing and involves substance as well as process.

The UN system—by which I mean the many specialized UN agencies, and not primarily the security apparatus housed in New York—is relatively democratic in the world of states: the richest countries do not rule by themselves but must find agreement with the others.  From time to time, for instance, a dispute flairs up in which UNESCO or some other agency annoys the US.  Americans withhold money, perhaps even withdraw, but the agency goes on, modified perhaps but not subservient.  If you read the agenda documents of these agencies, they are generally far to the left of the permissible space given to US politics, and on the leftward side of political space in Europe.

The Bank and the Fund, on the other hand, are largely controlled by the richest countries, and even within that sphere, by the US and the EU.  Their stated goals have historically been further to the right, sometimes directly conservative, as in their espousal of labor market “flexibility” and financial liberalization.

The split between the two international systems reached its peak during the Washington Consensus years of the 1990s, when the Bretton Woods twins (and their younger sibling, the WTO) were steeped in orthodoxy.  Since then there has been a partial rapprochement.  After the East Asian financial crisis the Fund retreated from its taboo against any form of capital controls, for instance, and the Bank’s embrace of the Millennium Development Goals symbolized its new openness to UN-ish progressivism.  In recent years this shift has become even clearer.  The IMF is now, astonishingly, a voice for relative fiscal heterodoxy, particularly in the European context, while the Bank has broken from its erstwhile endorsement of fees for education and health, and has participated in the Leading Group on Innovative Financing and, more recently, the Social Protection Floor Initiative.  One should not exaggerate, however, since there remains a significant gap between Bretton Woods and San Francisco (the UN).  Joint work often requires compromise: one example is the restriction of the MDG education targets to primary education only.  This reflects the Bank’s view at the time, and, in my opinion, it is symptomatic of a narrow, even paternalistic approach to development.

So what now?  At least as far as perceptions are concerned, both Kim and Ocampo favor even further movement toward a UN-centered conception of the Bank’s objectives; in fact, both have UN backgrounds.  To be honest, I was surprised at Kim’s selection by Obama, since the Obama administration has been hostile to much of the UN agenda, such as the program of the Leading Group.  It almost looks like a mistake.  In any case, if either of these two is ultimately chosen, there will be more impetus for tying the bank more closely to the UN.  On the other hand, and again from the vantage point of perceptions, Okonjo-Iweala is the insider candidate, more oriented to maintaining the Bank’s existing priorities and less open to the UN.

I will be honest and say that I have no basis for predicting how these three individuals would actually perform in office.  Maybe the perceptions are right, and maybe they aren’t.  Nevertheless, I think it’s useful to see the politics of these two branches of global governance clearly; how they evolve is what matters and not the optics of who is from where or what their last job was.

Disclosure: I have done a lot of work with the International Labor Organization, a branch of the UN system, over the years.  I like and respect the individual Bank people I have worked with, but sometimes the political gap between their outfit and mine has been a problem.

In the Blogosphere, Econ Looks Macro

I’m mainly a microeconomist.  There are lots of folks like me.  I don’t know the percentages, but surely microeconomists make up a large proportion of the global econ profession.  Lots of important ideas and empirical discoveries are flowing through the micro pipeline all the time.

Yet if you didn’t know anything else about economics other than what you read in the blogosphere, you’d think that most economists were on the macro side, that the main schools of thought in macro determine how we are sorted intellectually, that the real-world importance of economics is mainly about economic growth, employment, inflation, etc., and that macro is where the new ideas are.

How come?  Is it because the financial crisis and its global consequences, like the bitter politics of fiscal budgets, are currently at center stage?  Or because the news cycle in macro is so much faster, with new data points popping up every day?  Or is it because the ideological implications of macroeconomic disputes are more apparent than most micro dustups?  Or because key players, like Mark Thoma (who should wear a headband saying “I am a public good”) and Paul Krugman, are mainly macro?

Actually, there are huge things happening on the micro side of the aisle.  Climate change remains one of the world’s fundamental challenges, the battle against mass poverty has taken a micro-ish turn, and a slow-mo intellectual drama of vast significance is taking place in welfare economics—it’s crumbling under the weight of behavioral econ and related threats.  Applied micro is largely on autopilot, so theoretical developments are mostly out of view, but the whole idea of the blogosphere is that everything is potentially in view.

How do we get to where millions of online readers feel the day is not complete without a dose of microeconomic controversy, or that their vocabulary is missing something if it doesn’t include network externalities and subgame perfection?

Feldstein v. Lazear on the Size of the Output Gap

Martin Feldstein is worried that the Federal Reserve will not reverse its increase in the monetary base even as we approach full employment:

Here is what worries me: the structure of US unemployment is very different in the current downturn than it was in the past. Nearly half of the unemployed have been out of work for six months or longer. In the past, the corresponding unemployment duration was only 10 weeks. So there is a danger that the long-term unemployed will be re-employed much more slowly than in previous recoveries. If the unemployment rate is still very high when product markets begin to tighten, the US Congress will want the Fed to allow more rapid growth in order to bring it down, despite the resulting risk to inflation. The Fed is technically accountable to Congress, which could apply pressure on the Fed by threatening to reduce its independence. So inflation is a risk, even if it is not inevitable. The large volume of reserves, together with the liquidity created by quantitative easing and Operation Twist, makes that risk greater. It will take skill – as well as political courage – for the Fed to avoid the rise in inflation that the existing liquidity has created.

Dr. Feldstein is implicitly saying that the GDP gap is not as large as what Ed Lazear wants us to believe:

During the postwar period up to the current recession (1947-2007), the average annual growth rate for the U.S. was 3.4%. The last three decades have experienced somewhat slower growth than the earlier periods, but even in the period 1977-2007, the average growth rate was 3%. According to the National Bureau of Economic Research, the recovery began in the second half of 2009. Since that time, the economy has grown at 2.4%, below our long-term trend by either measure. At this point, the economy is 12% smaller than it would have been had we stayed on trend growth since 2007. Worse, the gap is growing over time. Today, the economy is four percentage points further from the trend line than it was the first quarter of 2009 when this administration's nearly $900 billion fiscal stimulus efforts began. If forecasts of around 2% growth turn out to be accurate, we will add to that gap this year.

Lazear wants us to believe that the economy could have continued to grow by 3.4% per year since 2007QIV even though average growth was less than 2.5% for the 2001 to 2007 period. If that claim had any credence then potential real GDP would have been almost $15.3 trillion as of 2011QIV as opposed to actual real GDP being only $13.4 trillion. In other words, Lazear wants us to believe that the current GDP gap is 12%. Not that anyone should believe such nonsense but isn’t it interesting that Dr. Feldstein is worried that we may be overestimating the GDP gap.

Republicans are simultaneously pushing two themes. One theme is that current Federal Reserve policy is endangering an inflationary spiral, which seems to be the concern of Dr. Feldstein. The other theme is that the Obama Administration is somehow making the recession worse, which Dr. Lazear was so happy to echo. Funny thing – these two themes appear to be contradictory.

Ed Lazear Takes One For Team Republican

Ed Lazear writes a couple of whoppers – one of which was countered by Brad DeLong. Item #1:

During the postwar period up to the current recession (1947-2007), the average annual growth rate for the U.S. was 3.4%. The last three decades have experienced somewhat slower growth than the earlier periods, but even in the period 1977-2007, the average growth rate was 3%. According to the National Bureau of Economic Research, the recovery began in the second half of 2009. Since that time, the economy has grown at 2.4%, below our long-term trend by either measure. At this point, the economy is 12% smaller than it would have been had we stayed on trend growth since 2007. Worse, the gap is growing over time. Today, the economy is four percentage points further from the trend line than it was the first quarter of 2009 when this administration's nearly $900 billion fiscal stimulus efforts began. If forecasts of around 2% growth turn out to be accurate, we will add to that gap this year.

Brad does not buy this 3.4% per year increase in potential real GDP, which is not consistent with what CBO is telling us. Using the FRED database, one can calculate the percentage difference between CBO’s measure of potential GDP versus actual GDP. By mid-2009, this gap had grown to 7.4%. Since then it has slowly declined to around 5.5%.

But hey – we are indeed far from full employment in my opinion. Item #2:

Are there other factors that may have contributed to the slow recovery that we are experiencing? It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment. Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments. Policies have focused on short-run changes and gimmicks—recall cash for clunkers and first-time home buyer credits—rather than on creating conditions that are favorable to investment that raise productivity and wages.

Aha – the standard GOP talking points! What enormous increase in government spending? Excuse this Keynesian for suggesting that we’ve had too little fiscal stimulus.

The New York Times and Romney: Lost and Without a Clue

The New York Times tried to play gotcha today with Mitt Romney and displayed truly awful journalism.  How clever we are, they thought: we will show that Romney’s position on energy in 2012 is different from the one he laid out in his book in 2010.  Isn’t this what tough, gritty reporting is all about?

No, it isn’t.  The whole attack is misguided, since reasonable people change their minds about things all the time, even if they can’t admit it while they are running for president.  Unreasonable people also change their minds, or never had a mind in the first place, but inconsistency doesn’t help you figure out who they are.  Readers of this supposedly serious analysis will learn exactly nothing of value.

Meanwhile, here is what the article didn’t say: it is an unquestionable fact that neither Obama nor Romney have it within their power to alter the market price of oil.  The fact that oil prices have risen by more than a third in the last two years has zilch to do with government policy.  The whole “issue” is stupid.

Lost Hours

Those were the hours I spent reading Lost Decades, by Menzie Chinn and Jeff Frieden.  I had high hopes for this book because of the obvious skills of its authors, and I was scouting it out as a possible text for my class on the financial crisis next fall.

Not a chance.

Unpacking the Decoupling Tautology

A couple of weeks ago, Lane Kenworthy asked, "Is Decoupling Real?" I've got another question: "is decoupling a tautology?" Laneworthy was referring to the gap between median family income and per capita GDP in the U.S. Along much the same lines is the chart below produced by the Economic Policy Institute's State of Working America, which compares median family income and productivity growth.

The Sandwichman is concerned with another kind of decoupling -- the much touted decoupling of energy consumption from GDP growth that technological optimists like Amory Lovins promote as the solution to environmental impact and resource exhaustion problems. Relative decoupling of energy consumption per dollar of GDP is a well established fact. What is in dispute is whether that can be translated into absolute decoupling through imminent technological breakthroughs.

The short answer is: it can't. The slightly longer answer is it can't because even the relative decoupling that has occurred over the last 39 years is questionable. Oh, there's no doubt that energy consumption per dollar of GDP has fallen; what's questionable is the composition and distribution of that growing GDP.

Even at the aggregate level, there is the question of the increasing proportion of economic activity that needs to be devoted to repairing the damage done by previous economic activity -- cleaning up toxic spills, recovering from extreme weather events, etc. This is what Stefano Bartolini referred to as negative externalities growth and Roefie Hueting called asymmetric entering. This is a kind of decoupling of GDP increase from any meaningful notion of expanded or improved utility. It is just running faster on a treadmill.

But that's not all. There is also the question of distribution and even the possibility that the growing gap between GDP growth and median incomes is a structural imperative. Now, by "structural imperative" I don't mean something that can't be changed -- only something that isn't going to be budged by moralistic pronouncements about fairness. To show what I mean by structural imperative, I would like to share a composite chart that integrates the data from the EPI productivity and median income chart above and data comparing the energy intensity of GDP to the energy intensity per hour of work. I have added an inverted productivity series (black dotted line) for reasons that will become clear as the narrative unfolds.

Sources: U.S. Bureau of Labor Statistics, Energy Information Agency, U.S. Census Bureau

The first thing that becomes clear from this chart is that productivity, median income and the energy intensity per hour worked tracked each other closely from 1949 to 1973. The latter year was chosen as the index year because energy intensity per hour of work peaked in that year. After 1973, energy intensity per hour of work declined for about ten years and then remained virtually flat up to the present. Productivity and Median Income diverge after 1973.

The inverted productivity series now presents a clue as to what exactly is being "decoupled" in all this decoupling. With productivity defined as GDP per hour worked, inverted productivity is hours worked per unit of GDP. Before 1973, inverted productivity appears as simply the mirror image of productivity, median income and energy intensity per hour worked. After 1973, though, it tracks energy intensity of GDP, while the stable energy intensity of hours worked can be understood as the axis around which productivity and energy intensity of GDP rotate and reflect one another. For all intents and purposes, then, one could say that "energy intensity of GDP" is a statistical tautology, which itself, prior to 1973, performed as the axis around which productivity growth translated into steady gains in median income.

Correlation does not imply causation. Sometimes, however, it reveals a hidden tautology. Hours, energy consumption, income and GDP are inputs and outputs of an economic system that transforms some of those into some of these. The inputs don't cause the outputs any more that cattle "cause" beef, they're just different names for the same thing in a different state.

The indexes I have plotted in the graph are ratios between inputs and outputs (productivity and energy intensity of GDP) or inputs and other inputs (hours of work and energy consumption). Median family income can be thought of as a circular ratio of inputs and outputs in which both income and the family can be viewed alternatively as either outputs or inputs -- income provides sustenance for the family; the family supplies labor to industry in return for income and so on.

Ratios between inputs do not wholly determine ratios between outputs or between inputs and outputs. Policies do that. But the quantities of outputs are constrained by the quantities of inputs. It is thus necessary when examining the energy intensity of GDP, for example, to ask what is happening with the other inputs and the other outputs.

In closing, I would like to present a third chart that compares the growth of population, labor force, employment and hours worked in the U.S. from 1950 to 2009.

When I initially chose employment as the numerator of an alternative index, I was aware that there was a rough coincidence with total population and thus would be similar to a per capita energy consumption index but would smooth out some of the cyclical variations. Aggregate hours of work presumably performs this smoothing function even more precisely. For the last fifty years, though, the growth in employment, labor force and aggregate hours has been steeper than population growth, with hours reaching a peak in 2000 of nearly 30% more per capita than in 1961. Employment as a percentage of total population peaked in 2008, even though labor force participation peaked in 2000 because the later ratio considers only the population 16 years and older.

Follow the Honey

There is lots of buzz (sorry) about a pair of just-published articles that provide further evidence that the colony collapse disorder, which is decimating bee populations around the world, can be at least partially attributed to neonicotinoids, one of the most widely used of pesticides. There has been a lot of controversy around this class of agents, and they are banned or restricted in much of Europe—but not in the US. In the writeup in this morning’s New York Times, after a brief summary of the new research, we get this paragraph:

Outside experts were divided about the importance of the two new studies. Some favored the honeybee study over the bumblebee study, while others felt the opposite was true. Environmentalists say that both studies support their view that the insecticides should be banned. And a scientist for Bayer CropScience, the leading maker of neonicotinoids, cast doubt on both studies, for what other scientists said were legitimate reasons.

There followed comments from four of these outside experts. One is from the main producer of neonicotinoids; he thinks the studies are flawed. Another is from the US Department of Agriculture, who thinks the studies shift the weight of research against the pesticide. The other two, both from academia, were evenly balanced, one finding the studies persuasive, the other not.

In other words, the article is a he-said, she-said about pesticides and colony collapse, which relieves the author from having to express his own judgment. Worse, there is no indication whether either or both of the academics have received funding from pesticide manufacturers. Research in entomology and ecotoxicity is expensive, and much of it is funded by industry. Being on the receiving end of pesticide dollars does not invalidate a scholar’s argument, but it is certainly relevant information for nonspecialists who want to know who to believe.

This is an interesting topic for me, because economics has the same problem: a lot of academic, not to mention think tank, economic researchers are funded by business interests with a stake in what their research shows. They present their views to the general public, but rarely with a disclosure of their own interests: the Inside Job problem.

I have two recommendations. First, there should be a public registry, for bee researchers and economists alike, that records any substantial funding they may have received from private individuals or organizations. Journalists should be able to look up this information online and include it in their reports. Professional organizations, like the AEA, should iron out the details and monitor compliance.

Second, journalists have to graduate from the duelling quote game. The only alternative is to write stories that explain, in terms that the public can understand, what the substantive issues are in scholarly disputes, and why some experts go one way and others go another. If a journalist does not have the expertise to do this herself, she should outsource the work to a panel of experts. Their job is not to take sides but to explain, as clearly as possible, what the root basis of the disagreement is, so that readers can understand the points on which the argument turns. In this scenario the job of the journalist is to put together the panel and use her writing skills to make their analysis clear to nonspecialists.

Year by year, more of the issues that democracy has to deal with are technical in nature. Journalism is the indispensable intermediary between arcane knowledge and popular debate. The job isn’t being done very well right now.

EU, How About a Public Option for Mobile Phone Users?

The EU has chosen to continue its system of price controls on mobile phone roaming and internet services.  Isn’t there a simpler way?  Why not create an EU-wide public enterprise to provide connectivity under the condition that it cover its cost of capital, and then let private firms compete with it?  If they can overwhelm the public entity with a great burst of innovation, fine.  If not, too bad.  Doesn’t this make more economic sense than trying to micromanage the price structure?

A Puzzler on Statistical Risk and Fundamental Uncertainty

Let’s compare two situations. In situation A there will be a coin toss. The coin is known with complete certainty to be fair. The odds are obviously .5 that it will come up heads and .5 that it will be tails.


In situation B there will also be a coin toss, but in this case we have no information whatever regarding the fairness of the coin. It could be rigged to always come up heads or tails, or it could be biased toward one or the other, or only in windy weather, or who knows. We don’t. What are the odds? With only two possible outcomes and no reason to expect either to be more likely than the other, it is still .5 and .5.

And that’s the puzzler. Does it really make no difference at all whether we know the true odds? From a decision point of view, are situations A and B effectively the same?

Although this is a greatly stripped-down puzzle, it contains the core of the risk vs uncertainty problem. Consider the typical problem faced by a firm of whether to make an investment. There are many possible outcomes of this investment, and its profitability will be affected by events we may not even conceive of in the present—the so-called unknown unknowns. Nevertheless, if the firm has a hurdle rate of return, its decision will boil down to whether it thinks the expected return is above or below the bar. In situation A it is able to calculate an expected rate of return with full confidence, in situation B with partial, and perhaps very little, confidence. Again, from a decision perspective, is there any reason for the confidence of the expectation to matter? Note that, in the absence of relevant information in situation B, there is no reason to expect the variance of the ROI to be greater or less than in situation A.

Did I mention that this is a tremendously important topic not only in macroeconomics, but also in areas of micro like the justification for the precautionary principle?

Is there a literature that frames the problem this way? I haven’t seen it, and I would be very happy if someone could lead me to it and allow me to achieve enlightenment, since this puzzle has kept me awake off an on for years.  (But I have chipped away at it and even published a paper on it a while back...)

If The Supremes Say No To Obamneycare, Then Go To Single Payer

So, the US Supreme Court seems likely to reject the individual mandate in Obamneycare, which would bring down the entire Affordable Care Act, even though the individual mandate was cooked up by the Heritage Foundation and was long the favored Republican plan, emphasizing using private insurance companies and individual responsibility not to be freeloaders on the system.

So, if the Supremes say no, just do what Teddy Kennedy proposed: expand Medicare to the entire population. This takes care of it, and we can get rid of Medicaid as well, which is increasingly an insufferable burden on the hard pressed state budgets (reminder that last year it was state and local governments that were laying people off to balance their budgets, the main source of rising unemployment in the US economy). So, go to single payer, which was better all along anyway.

Time To Lock The Gun Nuts Up In The Looney Bin

US society has been caving and kowtowing to the NRA for some time now, with Dems terrified to stand up to them over anything. Guns in bars, churches, schools, you name it, and then the obnoxious and insane "Stand Your Ground" laws that have been widely passed. We have now seen the fruits of this in Florida where it is not just the awful Martin-Zimmerman case, but a tripling of these sorts of homicides. The old manipulations of data by sock puppet John Lott are no longer able to cover up the truth: encouraging wider availability of guns leads to more people getting killed by them. Time to lock the lying gun nuts into the looney bin.

Debt, Income and Aggregate Demand: Scoring Krugman vs Keen

Not having learned from my earlier foray into MMT-land, I’m at it again, sucked into a debate between Paul Krugman and Steve Keen over how to think about debt, money and macroeconomics. It is remarkable that these questions could still be unresolved after eons of economic theorizing; this stuff is not very complicated, after all. Someone has to be right, but who?