My Portfolio...

Not that anyone really cares, but this morning I shifted my 401k portfolio more towards international equities and away from domestic equities.

Unfortunately the reallocation doesn't take effect until the close of market today...

One more thought about the minimum wage

Just one more follow-up to my discussion with Robin Hanson about whether there is a consensus among economists about the minimum wage.

Yesterday Greg Mankiw wrote a note about a new survey of economists by Robert Whaples. According to Mankiw, Whaples finds that

One issue that fails to generate consensus is the minimum wage: 37.7 percent want it increased, while 46.8 percent want it eliminated.

Hmmm..

Robin Hanson Advocates Journalistic Malpractice

Robin Hanson (who I generally like) writes:

Consider how differently the public treats physics and economics. Physicists can say that this week they think the universe has eleven dimensions, three of which are purple, and two of which are twisted clockwise, and reporters will quote them unskeptically, saying "Isn't that cool!" But if economists say, as they have for centuries, that a minimum wage raises unemployment, reporters treat them skeptically and feel they need to find a contrary quote to "balance" their story.

Robin, any reporter who didn't find those contrary quotes would be committing journalistic malpractice. And I find it horrifying that you should be suggesting that.

There are quite a few legitimate economists who have written papers arguing against the proposition that a higher minimum wage raises unemployment. The latest survey of the minimum wage literature, by David Neumark and William Wascher, admits

Clearly, no consensus now exists about the overall effects on low-skilled employment of an increase in the minimum wage.

True,Neumark and Wascher do believe that the evidence tends to support the proposition that a higher minimum wage increases unemployment, at least a little bit. Nevertheless, other "real" economists disagree, and journalists should be talking to them as well.

Labor Share Drops Again

The labor share of corporate output continues to plunge. Based on today's GDP numbers, labor compensation now accounts for only 61.9% of corporate value-added, marking the seventh straight drop. It's worth noting that this is the lowest labor share since 1951.

Deficit dementia

My regular readers know that I'm not terribly worried about the budget deficit, at least at current levels (see for example this piece here). Nor am I particularly worried about entitlement spending, which has been overhyped as a problem because of a weird forecasting methodology (see here)

So I was very happy to see a new post from Max Sawicky on "deficit dementia." Max writes:

Let us recap ten fallacies of deficit dementia:

1. Lumping debt service, Social Security and other "entitlements" with the only genuine fiscal problem -- Medicare and Medicaid.

2. Obsessing over retiree to worker ratios, instead of total population to worker ratios.

3. Exaggerating the tax adjustments required to finance Social Security.

4. Presuming that deficit reduction will spur capital formation and economic growth.

5. Assuming the Federal budget ought to be balanced, as a matter of course.

6. Treating tax increases to finance entitlement growth as "unprecedented" and politically impossible, but considering draconian benefits cuts as politically feasible and inevitable.

7. Assuming taxes could not be higher, for economic reasons.

8. Pretending we have a clue as to the nature of the economy forty (thirty? twenty?) years or more in the future.

9. Comparing the rate of return of equities over extended periods too long to be susceptible to prolonged slumps that would plague an actual investor to a program that a) paid the legacy costs of elderly who never contributed to Social Security, b) has lower risk than equities, c) provides an inflation-proof annuity with zero conversion cost at retirement, d) has minuscule administrative overhead, e) provides disability and survivors insurance, and f) provides insurance against low earnings over one's lifetime.

10. Comparing accumulations of program deficits over 75, 100, or eternal time horizons to this year's GDP.

To this I would add...counting government spending on as R&D, education--and yes, part of health care--as consumption rather than essential long-term investment that can be and should financed by borrowing.

Surprise! Enough scientists and engineers?

According to a new report from the National Science Foundation, science and engineering doctorates hit an all-time high in 2005. Fields reaching new highs include biological sciences, engineering, mathematics, and computer sciences.

What's more:

Post-9/11, there is little evidence of a decline in the number of or growth in noncitizens earning S&E doctorates from U.S. institutions...For the entire period from 2001 to 2005, S&E doctorates awarded to noncitizens increased by 25% and accounted for virtually all of the overall growth in S&E doctorate awards during the period

Hmmm....are these still the people who were in the pipeline before 9/11?

The Economics of Envy

Lou Uchitelle, in today's NYT, has a front page article entitled "Very Rich Are Leaving the Merely Rich Behind." In it he writes

The opportunity to become abundantly rich is a recent phenomenon not only in medicine, but in a growing number of other professions and occupations. In each case, the great majority still earn fairly uniform six-figure incomes, usually less than $400,000 a year, government data show. But starting in the 1990s, a significant number began to earn much more, creating a two-tier income stratum within such occupations.

I'm honestly not sure why I should care. I actually live in the town that he writes about (Short Hills is officially part of Millburn, where my family and I moved in 1991), and I know full well that a lot of the people I see at the local Starbucks earn a lot more money than me. So what?

Envy is not a pretty emotion. No much how much you earn, there is always going to be someone doing financially better than you. Far better to focus on doing your job well, caring about your family, and helping people in need.

Rant over.

New York City: The Lowest Unemployment Rate in 30 years

This is a followup to my "musical chairs economy" piece. According to a new report from the New York State Labor Department, the unemployment rate in New York City dropped to 4.1% in October, "reaching its lowest level on record." (The data starts in the mid-1970s).

4.1%. 4.1%. 4.1%
New York City. Manhattan. Brooklyn. Queens. Staten Island. The Bronx.

The Bronx! With an unemployment rate of 5.5%, down from 7.5% a year earlier.

What the heck is going on here? Is this really the best NYC economy in thirty years?

The Musical-Chairs Economy

Here's the question for today: If the unemployment rate is only 4.4%, why do we all feel so dang nervous about our jobs?

More here

Will the Dems Raise Taxes?

Probably not, if this chart is any guide.

The thin blue line tracks federal revenues as a share of GDP (through the second quarter of 2006). The purple horizontal line is the average revenue share since 1960.

Generally speaking, we are more likely to get tax cuts when the revenue share is well above the long-term average, and tax increases when the revenue share is below the long term average of 18.4%. So the tax revenue share had peaks in 1981 (19.8%) and 2000 (20.9%), right around the time of the 1981 Reagan cut and the 2001 Bush cut. And the tax revenue share bottomed in 1992 (18.1%), right before the Clinton tax increase. (all these numbers are based on BEA data).

I think of this in political terms. When Americans are paying a lot of money in taxes, they are more receptive to a tax cut. And if they are paying relatively less money, they are less opposed to a tax increase.

Of course, this link does not explain the second Bush tax cut, in 2003, when the revenue share of 17.2% was already well below the long-term average.

But still, with the federal revenue share at 19.4% according to the BEA, that's well above the long-term average. And that suggests that Democrats will find a fair bit of "push-back" if they try to raise taxes.

Virtue is not rewarded

Take a look at this chart. The blue bars are U.S. manufacturing productivity growth, and the crimson bars are U.S. manufacturing output growth.

The good news: Manufacturing productivity is growing faster than ever before (or at least the last forty years)

The bad news: Unlike the past, virtue is not rewarded. Despite higher productivity, output has lagged way behind.

These numbers come out of the government's new report on international manufacturing productivity.

According to the report, U.S. productivity growth in manufacturing between 2000 and 2005 averaged 5.8% per year. Only Korea (7.1%) and Sweden (5.9%) had faster manufacturing productivity growth among the countries studied (which did not include China). Interestingly, these two countries had much higher output growth than the U.S.

Does the Election Really Matter for Economic Policy?

Take a look at my new cover story, "What the Election Won't Change"

Comments?

Did the Government Really Hire that Many People?

Is the unemployment rate really 4.4%? I've got some doubts.

A big reason why the unemployment rate has been dropping is an apparent hiring spree by government bureaucrats. The number of people reporting that they had public sector jobs rose by 147,000 in October and 169,000 in September.

Since last March, public sector employment has risen by a very solid 430,000. Without this increase, the unemployment rate would still be stuck at 4.7%, just what it was in March.

However, these numbers come from the household survey, which is based on responses from individuals. The payroll survey, which is based on data from unemployment insurance records, shows a much slower growth of government jobs...only 183,000 since March.

430K vs 183K--that's a big difference. It says something when we can't even figure out how many people are being hired by our public servants.

Which number should we believe? If the lower number is true, then the unemployment rate is closer to 4.6% than 4.4%. I tend to lean that way.

However, to be fair, there are some reasons why the higher number might be more accurate. One possibility is that there's massive hiring by the Federal government in intelligence agencies like the CIA, the National Security Agency and the like, which aren't included in the payroll survey. Another possibility is that small school districts have been hiring like mad. They would have been missed on the initial survey, but that will be picked up as the statisticians revise their data.

Watch out for Wikipedia

So I was researching the 'misery index'--the unemployment rate plus the inflation rate--and of course looked at the wikipedia entry. The very first sentence says:

The Misery Index is an economic indicator created by Chicago economist Robert Barro in the 1970s

Okay. I didn't remember that. So I looked further. Under the Wikipedia entry for Barro, it said:

During the 1970s Barro also developed the concept of the Misery Index, which Jimmy Carter publicized during his 1976 presidential campaign, and Ronald Reagan in his 1980 presidential campaign

Boy, that's pretty specific. So I shot off an email to Barro asking him if that was true (it was 5AM in the morning, and I was pretty sleepy). In the meantime, I looked at the site www.miseryindex.us, which says

The misery index was initiated by Chicago Economist Robert Barro in the 1970's

and the Investopedia describes the misery index this way:

The index was initiated in the 1970s by a U.S. economist named Robert Barro

Safety in numbers? Hardly. By then my brain was functioning, despite the early hour, and I was pretty sure all these entries were wrong. Finally I tracked down the truth. In fact, the original misery index was invented by economist Arthur Okun. Barro was responsible for the much more recent "Barro misery index," which he described in a 1999 BusinessWeek column . The Barro misery index includes GDP and interest rates, as well as unemployment and inflation.

The moral of this story: Be very suspicious of Wikipedia information, even if it seems confirmed by other sites.

Is Productivity Growth Weaker than It Seems?

This is a much longer post than usual...I've been a cheerleader for strong productivity growth for, oh, a decade now. Through rain, through shine, through attacks from idiotic mainstream economists who shall not be named, I've argued that the U.S. was capable of growing faster, without inflation, than anyone expected. And lo and behold, it turned out to be true. According to the official statistics, nonfarm productivity growth has clocked in at a 3.2% rate over the past five years. That's faster than any five year stretch in the 1990s, 1980s, or 1970s.

Here's my problem: Just like productivity growth was underestimated in the mid-1990s, I'm beginning to worry that it is being overestimated today. What triggered off today's post is a new paper from Dean Baker of the Center for Economic and Policy Research in Washington. Dean argues that "usable" productivity growth is almost a full percentage point lower than the official numbers show, in part because so much of our national output goes into replacing fast-depreciating computers, software, and other information technology.

Dean's arguments dovetail into what I had already been worrying about. To my mind, there are four macro facts about the economy today.

1. The official numbers show that productivity growth has more than doubled since the mid-1990s.

2. The official numbers show that the gap between productivity growth and real compensation growth has widened sharply since mid-1990s.

3. The official numbers show that the trade deficit now stands at roughly 6% of GDP, compared to 1-1.5% in the middle of the 1990s.

4. The long bond rate is still below 5%, much lower than it was for most of the 1990s.

Boys and girls, these four facts taken together don't make sense.

A. It doesn't make sense that productivity growth has accelerated while the trade deficit has grown so fast. If the productivity numbers are right, the economy is roughly 10% larger today than anyone would have expected 10 years ago. That's $1.3 trillion larger. At the same time, the trade deficit--our excess of imports over exports--is about $600 billion larger than it should be. That means our domestic purchases are $2 trillion higher than expected! Not impossible, but hard to believe.

B. It doesn't make sense that productivity growth has accelerated while compensation growth, while faster, has lagged. Once again, it's not impossible, because these numbers often get revised a lot. Still, it's disturbing.

C. It doesn't make sense that the trade deficit have grown by so much, while long rates have fallen. One would expect the need to attract foreign capital would push up rates...but it hasn't happened.

So how do we explain these contradictions?

Positive explanation: The trade deficit is not as big as it seems, because the official data doesn't pick up many of the flows of knowledge that drive today's global economy ('dark matter'). Interest rates have stayed low because foreign capital is attracted by the dynamism of the U.S. economy. And the compensation data ignore the fact that many of the gains from higher productivity growth have flowed through the housing market.

Negative explanation: Productivity gains have been overestimated.

I'm beginning to think that both the positive and negative explanations are correct. We are overestimating the trade deficit. The U.S. economy is dynamic enough to attract capital from around the world. The gains that Americans have reaped from higher housing prices are real, since a share in housing can be sold off to foreign investors through mortgage-backed securities. And...productivity gains are perhaps being overestimated.

Thoughts?