Growthology

Cochrane's Euro question cleaves the blogosphere

John Cochrane, a newbie blogger but well-known UofChicago economist asked a question about the optimal form of the Eurozone in the latest Economics Bloggers Survey...

I'm a little bit surprised -- a majority think the Euro should be abandoned?  Although this chart doesn't stack qwll (my fault), opinions are strongest in favor of the two extreme positions -- complete union or complete disunion, and I expected the middle "weak union" to be most favored.  This is the U.S. model, a currency union among states which allows state and municipal default.  

Thanks John!

Newmark's Door's insights on inflation and education

Craig Newmark from Newmark's Door provided us with two questions in the latest Economics Bloggers Survey. One is fairly simple, asking about inflation.  The other is a really rich question about education reform.  Both are fascinating:

Note, these values do not add up to 100% because we did not chart neutral responses.  Think about it this way: there were more responses in favor of "Flexibility for principals" (81%) than ALL responses for most other questions!  Supreme Court, are you listening?  

Economics Haiku (Euro edition)

HAIKU from the latest Economics Bloggers Survey...

By now we know to
Expect the unexpected
To ruin your day.
~ Ryan Avent

Can’t bail forever
This year we might discover
The can does kick back.
~ Arnold Kling

Common currency
Is not the source of problems
Debt is the culprit.
~ Pedro Albuquerque

Euro troubles prove
Federalism is key
To secure freedom.
~ Will Franklin

Euro, Kroner, Franc,
Makes no difference to me
Long as gold glistens.
~ Robert Cringely

Europe’s Recessing
The ECB has no clue
Austerity Bites.
~ Daniel Gross

Euro-zone crumbling now
Silently, in the background
Surface is a veil.
~ David Tufte

Greece will soon default
The Eurozone will crumble
Let’s all go shopping!
~ Felix Salmon

Haughty Albion
Because she made the right choice
She must be punished.
~ Scott Sumner

NGDP it
Nominal incomes restored
Safe assets return.
~ David Beckworth

On this Continent
All European Unions
Always end in blood.
~ Andrew Samwick

Poor little Euro
a useful means of exchange
with no fiscal role.
~ David Zetland

Run the Euro press
Beg America for help
Beg China for help.
~ Michael Rizzo

Saint Germanicus
Gave no gifts to young Euro
Christmas without snow.
~ Tim Kane

Surprise everyone
Reintroduce the Deutschmark
Inflate the Euro.
~ Eli Dourado

The most painful part
Of the Euro’s coming end?
Krugman being right.
~ Joshua Barro

Twelve years later
Returned to the beginning
Germany loses again.
~ Kenneth Houghton

Euro resembles badly made movie
Its producers keep claiming movie a hit
Time they accept it flopped.
~ Amol Agrawal

Welfare states’ debt due
Ratings downgrades, states default
Euro muddles through.
~ Arthur Diamond

When the task is great,
take but one step at a time
Compromise builds strength.
~ Jeff Miller

You may disappear
or appear in great numbers
debt must come undone.
~ Steve Waldman

FT/alphaville in from the cold with fringe-ish ideas

Thanks to Cardiff Garcia for recruiting his co-bloggers at FT Alphaville to submit three (!) questions to the latest Economics Bloggers Survey.  We tried snubbing them for nearly two years, but you can deny greatness for only so long ...

Bloggers offered tepid support for any of the solutions laid out by FTAlphaville. In fact, one-third of bloggers dispute the premise that there is aglobal shortage of safe assets. The full text of solutions is:

More country assets: The treasuriesof every remaining AAA sovereignshould start pumping out safeassets immediately (in the form ofgovernment debt).

Wider guarantees: Governments orcentral banks should guarantee a widerrange of debt (feel free to assume accompanying stricter regulation).

Broaden collateral: Central banksshould continue to diversify the rangeof acceptable collateral for temporary liquidity ops until they’re approving everything but Silvio Berlusconi’s black book.

Earth bonds!: Earth bonds!

All bad ideas: The world needs moresafe assets, but none of these ideas is any good.

 

Wow.  NGDP targeting not so near the fringe.  

 

So if the majority is right, who else loses their top rating?  America?  Oh, wait ...

Economics Bloggers Survey - Q1 2012

You may have already seen that Kauffman published the latest quarterly bloggers survey earlier this week. Here are some of the individual charts ...

As Donald Marron noted on his blog, the word cloud is showing some positive signs.  One of the quirks of a word cloud is that it can miss the "nots."  For example, we noticed early on that some responses to this question included things like "not growing" and "not stable" which are read by the idiot algorithm as two distinct concepts NOT and GROWING.  We try to clean that stuff up, so Donald is right, the positive words are a nice change.  As such, it seemed appropriate to shift from the monochrome to a multi-colored map.  Hopefully it will be monochrome -- but all positive chrome -- a year from now. 

What I love about this question is its nuance!  Our sample of economists is mostly non-partisan, and the few partisans are evently split between D and R.  But the clearest constant has been the strong majority that thinks the federal government is too involved in the economy.  

Jim Hamilton has written some tremendous blog posts at Econbrowser.com on Keystone.  I was happy to see such strong support for his position here.  The biggest surprise was the response to a pet issue of my own: allowing states to set their own minimum wage.  I wonder if you could combine that with this idea of inflation adjusting the federal minimum -- would that pass Congress?

Unfortunately, scanning the old reports, this chart shows the same pessimism as 2010 ... 2 years ago. Bloggers generally think the real economy is worse off than the measured economy.  We have our work cut out for us.

Thanks to the 58 bloggers who participated in the survey!

 

 

 

 

Job Growth at the "Best Companies"

This is a terrific and interesting visualization by Nicolas Rapp, done for Fortune's article on the 100 Best Companies to Work For:

For those of us who try to figure out what new and young companies contribute to the economy in terms of job creation, this is another useful reminder that large companies matter, too. These 100 companies, representing one-ten-thousandth of all companies in the US, employ 1.1 percent of the American workforce. I cannot tell if this really only counts US employees, because we know Microsoft, among others, has many employees overseas. 

In any case, it is an interesting chart for seeing existing employment and where people have applied for jobs: 7.6 million job applications at Starbucks last year!

Today's Readings Relevant to Entrepreneurship

The intersection between tight labor markets, housing costs, and the opportunity cost of entrepreneurship: Free Exchange. The work by Fairlie and Chatterji that Ryan cites here is terrifically important and has not gotten nearly enough attention.

Why is carried interest taxed as it is? Observational Epidemiology. 

What the studies say about private equity. Dealbook (via Marginal Revolution). Tyler sums it up: "'Some positives, lots of uncertainty' would be a good description of the available evidence."

Brad Feld on the intra-metropolitan geography of entrepreneurship. We probably need some new mapping tools. Feld Thoughts.

As an aside, I completely agree with Brad that "entrepreneurial density" is a good measure of a region's culture of entrepreneurship, but I don't know if we can yet measure it precisely. For one thing, we need to agree on a common definition of entrepreneurship. Then we need to figure out how to count it--government data are not entirely helpful here. Then we need to figure out what it means. One of our research assistants has been looking over Business Dynamics Statistics data on employment in young firms as a share of total employment in each state over the past three decades. We will post some charts and findings soon, but as the data relate, so far, to existing literature, I am reminded of The Princess Bride:

Vizzini: "He didn't fall? INCONCEIVABLE!"

Inigo Montoya: "You keep using that word. I do not think it means what you think it means."

(h/t to PK for the reminder of this pricelessly fungible line the other day)

President Obama Promotes Entrepreneurship

In case you missed it, here is President Obama in the State of the Union speech last night, underscoring the important role of entrepreneurs:

It means we should support everyone who’s willing to work, and every risk-taker and entrepreneur who aspires to become the next Steve Jobs. After all, innovation is what America has always been about. Most new jobs are created in start-ups and small businesses. So let’s pass an agenda that helps them succeed. Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow.

This may have been a reference to the Startup Act, versions of which have been introduced in both the House and Senate. Even so, any mention by the president of the vital role that new companies play in economic growth is noteworthy, especially because, as many claim, public celebration of entrepreneurs is an important cultural attribute.

'Twas the Night Before (Eurocrash) Christmas!

I'll be sharing this on my PBS commentary on Nightly Business Report, scheduled for December 19th.  It's more than a little cheeky, but I just can't get the image of Anglea Merkel dressed in a Santa suit out of my head.  How big is Santa's bag anyway?

- Tim 

 

‘Twas the night before Christmas, and all through the zone
Not a banker was liquid, not even your own.
Promises were made by the Piigs with all sincerity
In hopes Saint Germanicus would delay the austerity.

State unions weren’t protesting, but snug in their beds.
Infinite pensions flowed full in their heads.
Bernanke in hi brown socks, Obama all blue
Had settled their brains that the recovery was true.

When across the Atlantic there arose such a clatter
They launched Air Force One to see what was the matter.
Europe was United, or so it would seem
But no, fiscal union was only a dream.

France hugged Spain and Greece, to little avail
Cross-holding sovereign debt was too big to bail.
Father Christmas, where are you? was their deafening sound.
In London, the Scrooge nation guarded its Pound.

Would be Santas should know the real origin story.
Gift-giving can cause weakness and can even be gory.
In 3rd century Turkey was born the first Saint Nikolaos.
His secret gift-giving inspired Christmas for all of us.

Pilgrimages were made to see the relics of Saint Nick.
Where in the year 1087, some Italians played a trick.
They stole his bones away to the city of Bari,
Which drive tourism today on the Adriatic Sea.

Today’s sovereign debtors are angry and haughty,
But that’s because they’re on the list that is naughty.
Productive workers in nations with smart regulations:
Enjoy your growing economies and Christmas Vacations!

The antithesis of entrepreneurship

Consider government run health care in Canada.  And thanks to my friend, Medcan CEO (and USNA graduate) Shaun Francis for the pointer: 

In Quebec for instance, nearly 1.7 million people, or 25% of the population, still have no family doctor. Patients wait an average of 17.6 hours in the emergency room, nearly two hours more than a decade ago. Throughout Canada, the median wait time between seeing a general practitioner and treatment by a specialist has almost doubled from 1993 to 2010, going from 9.3 to 18.2 weeks.

In most sectors of the economy, the many problems facing the health-care system would be seen as opportunities by entrepreneurs. However, since hospital and medical services deemed to be “essential” are monopolized by government, entrepreneurs are by definition excluded from a large portion of the health-care sector. Even in areas in which the private delivery of services is allowed, numerous regulations and obstacles handcuff entrepreneurs and undermine their drive to initiate new ventures.

This is from Yanick Labrie's excellent opinion piece in the Financial Post.

 

Lucky or Good or Both?

Sam Arbesman shines some light on the relative impressiveness of the market-beating streak of Bill Miller, who recently stepped down:

Unlike the real world, we found nothing that approached Bill Miller’s streak. In fact, streaks of fifteen years only occurred 30 times out of 10,000 runs, far below a reasonable expectation based on luck. In fact, the next longest streaks in the real world were only eleven years long (these occurred twice). Now this doesn’t sound like much of a difference. But remember, these are streaks. To beat the market year after year isn’t a little bit harder, it’s geometrically harder. This can be seen by looking at how often an eleven-year streak occurred in the null model. While still somewhat unlikely, these occurred in nearly a third of our simulations.

The impressiveness of Bill Miller’s streak is magnified by looking at its timing. Our analysis shows that the streak, begun in the early Nineties, occurred during an unlikely period when compared to the Seventies or early Two Thousands. Surprisingly, despite the market’s good overall performance in the Nineties, it was one of the worst decades for active managers. For example, only about one in ten funds beat the market in 1995 and 1997, demonstrating that a long streak during this time is far from inevitable.

All sorts of interesting work has been done on the expected probability of streaks (in investing, in baseball) and whether or not "hot hands" do in fact exist in activities such as basketball (in general, they don't, as a matter of reflecting performance). But Sam shows that, once in a while, an impressive streak can be pulled off with luck and skill.

Q4 Economics Bloggers Survey (a word cloud time series)

We published the results of the survey at kauffman.org this morning in PDF, and I just emailed the GIF files out to the blogging community.  Here, I'll post the now famous word cloud (which is redder than ever):

 

Compare this to previous word clouds ...

 

 

 

Was Steve Jobs in the 1 percent?

I find myself reading two things today: the excellent biography of Steve Jobs recently published by Walter Isaacson and also the celebrated report on income inequality published by the CBO.  The CBO report under the signature of its director, Doug Elmendorf, offers a lengthy comparison of the distribution of U.S. incomes by comparing different income classes in 1979 until 2007. There is a heavy emphasis the report on the "Top 1 Percent" in its charts and talking points, but I am bothered by a simple question. Is Steve Jobs in the "Top 1 Percent"?  

Estimates are that Jobs had a net wealth of 6.7 billion dollars, even though his income was just a single dollar in 2010.  So, did CBO count him among the poorest quintile?  For my household, those numbers are pretty much reveresed, with a smaller net savings (let's charitably say $1, but unfortunately these numbers are allowed to go negative) and a nice thousandaire's salary.  Surely, all of Jobs wealth meant that he made some serious capital gains, right?  In 2007, probably, but who knows?  I wish CBO would address this, but let's just assume that common sense is screaming "Yes, Steve Jobs was in the CBO's 'Top 1 Percent'" in 2007 and leave it at that.  

But was Steve Jobs in the "TOP" in 1979?  He sure as heck wasn't in 1974, when he was wandering India in search of meaning, or in 1975 back home in America where Woz was fist inventing the personal computer. Apple Computer was officially formed on January 3, 1977.  Isaacson's biography indicates that in 1979 they had not yet launched the Macintosh, nor had Apple gone public. Steve Jobs was 24 years old, founder of a hot company, but how much income did he make?  TOP income?  Doubtful. 

So I find the language the CBO report uses to be confusing.  It leaves the distinct impression that the Top One Percent in 1979 were the same group of people across all four decades:

• "For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007 (see SummaryFigure 1)," says the first bullet point in the full report.  This matches the first sentence in the CBO summary, "After-tax income for the highest-income households grew more than it did for any other group."
• The second point strays even farther from what the data say by introducing more personal pronouns. "For others in the 20 percent of the population with the highest income (those in the 81st through 99th percentiles), average real after-tax household income grew by 65 percent over that period, much faster thanit did for the remaining 80 percent of the population,but not nearly as fast as for the top 1 percent."  

I'm pretty sure the data say nothing like this.  The data say that the income distribution between contemporary income cohorts in 1979 were not as unequal as the contemporary income cohorts in 2007. But even that language should include a caveat: "Numerous kinds of mobility tell us that the actual people in these cohorts changed."  Given aging, immigration, and shifting fortunes, I would be surprised if even a tenth of the TOP 1979 were still in the TOP 2007.  To say that the income of households grew, or income of people in those households grew, you need longitudinal data on those things, households and people, not just cohorts from different slices of time.  You might get a representative sample of 100 households in 1979 and survey their incomes in 2007, then calculate an average change. But that's not what this report does.

It would be interesting to see if Doug Elmendorf would stand by these claims during his next Congressional testimony.  I'm sure his team was aware how inflammatory this issue is given the Occupy Wall Street protests.  I would have to assume that would make all the scholars and editors want to be cautious in the tone used in the report, and to make sure its claims were not subject to misinterpretation.  So why the sloppy language?  And why does it lead the report without caveat?

On the same topic of language, I find it odd that economists talk about income being "distributed." Not earned?  Why not mention income mobility in the report?  (I just searched for the word and it appears in one footnote).  And why not factor in immigration?  Unforutnatley, the CBO does mention immigration, but only by dismissing it as a downward pressure on native wages.  That's not the point.  It seems more than an oversight to neglect the presence of ten million illegals among the poorest cohort.  So it goes.

The story of Steve Jobs should be remembered for many reasons, but his income as an entrepreneur, and the immigrant roots of his parents (biological and adoptive) are just as important.  It should disturb anyone to realize that the CBO report will be used to justify policies that are hostile to wealth creation and hostile to the capacity for the children of immigrants to grow companies, get rich while making great products, and make a dent in the universe.

 

 

 

The Ongoing Debate Over Small Business and Job Creation

My Kauffman colleague E.J. Reedy wrote an insightful post at Data Maven on Carl Bialik's somewhat disappointing Numbers Guy column over the weekend about job creation by small business. These come on the heels of Charles Kenny's well-done essay in Bloomberg Businessweek about the various nuances involved in counting job creation by business size and the distortions that often arise.

We continue to do research and analysis on these issues--one of the exciting things about entrepreneurship research is that every time we learn something new, we realize how much there remains to understand. What's clear, and what E.J. underscores, is that we should not be satisfied with aggregate data. They help us penetrate to one level of understanding, but aggregate data also introduce another slew of distortions and obscurities. E.J. pointed out that firm age and local/non-local are two important distinctions. I would also add the sectoral lens--the more time I spend with the numbers the more I'm convinced that sectoral breakdowns explain a significant share of what we see in terms of new and young businesses, small businesses, job creation, and churn. There is still quite a bit of work to do, however, and I'm happy to disprove my own hypothesis.

Why Means Testing Threatens Growth

Andrew Biggs doesn't like means testing.  For example, Biggs analyzes a Heritage Foundation plan to reform entitlements and balance the budget, which includes a flat tax (hurrah) and means testing (hiss) in terms of implicit tax rates on elderly workers. Their flat tax rate would be 25 percent, but because of means testing, "total marginal tax rates in retirement could reach 72%."  

... there is reason to believe that people are more responsive to marginal tax rates during or near retirement — when the option not to work is clearly available — than during their prime working years, when the need to support a family and save for retirement means that most people will work as much as they can. In a 2008 study of workers over the age of 70, Lucie Schmidt of Williams College and Purvi Sevak of Hunter College found that "a reduction in the marginal tax rate that would increase the payoff to working by 10% would increase labor force participation by 7.5% among men and 11.4% among women." These are far greater responses to tax incentives than have been found among younger workers. For the population as a whole, the Congressional Budget Office assumes a response about one-third this size. The effect on marginal tax rates of the means test proposed in the Heritage budget would be almost four times larger than the increase studied by Schmidt and Sevak — and in the wrong direction — and so would be likely to yield a powerful undesirable response. Similarly, a study by Eric French of the Federal Reserve and John Jones of the State University of New York found that labor-force "participation decisions are most sensitive to financial incentives when workers are old." Means tests would thus impose powerful negative incentives precisely when people are most responsive to them.

He makes a compelling case, Professor Caplan.  

A Game Changer

Rarely do I read something that changes my mind on a topic about which I felt pretty strongly.  If you care about college sports, you have to read "The Shame of College Sports," a lengthy essay by Taylor Branch in the October issue of The Atlantic.

Do you favor the amateur ideal in college sports?  Like the phrase "student-athelete"? Recoil at paying big salaries to college running backs?  Feel indignant that Buckeyes sold memorobilia in exchange for tatoos or that the father of Auburn's QB pimped his son's services around the SEC? Yeah, me too.  Until I read this:

Using the “student-athlete” defense, colleges have compiled a string of victories in liability cases. On the afternoon of October 26, 1974, the Texas Christian University Horned Frogs were playing the Alabama Crimson Tide in Birmingham, Alabama. Kent Waldrep, a TCU running back, carried the ball on a “Red Right 28” sweep toward the Crimson Tide’s sideline, where he was met by a swarm of tacklers. 

... Waldrep was paralyzed: he had lost all movement and feeling below his neck. After nine months of paying his medical bills, Texas Christian refused to pay any more, so the Waldrep family coped for years on dwindling charity.

Through the 1990s, from his wheelchair, Waldrep pressed a lawsuit for workers’ compensation. (He also, through heroic rehabilitation efforts, recovered feeling in his arms, and eventually learned to drive a specially rigged van. “I can brush my teeth,” he told me last year, “but I still need help to bathe and dress.”) His attorneys haggled with TCU and the state worker-compensation fund over what constituted employment. Clearly, TCU had provided football players with equipment for the job, as a typical employer would—but did the university pay wages, withhold income taxes on his financial aid, or control work conditions and performance? The appeals court finally rejected Waldrep’s claim in June of 2000, ruling that he was not an employee because he had not paid taxes on financial aid that he could have kept even if he quit football. (Waldrep told me school officials “said they recruited me as a student, not an athlete,” which he says was absurd.)

It goes on and on.  The one-year scholarships that leave injured kids high and dry, unable to finish college if they are hurt and cut from the team. The NCAA raking in huge royalties for the likeness of players in video games, decades after they have left their teams, and of course the people whose likeness are used get zero.

 

Crippling Inflation and American Health Care

The news that health care premiums in the U.S. rose last year by 9 percent is another shock to the body politic that must by now realize something is deeply rotten.  A page 6 story in the Wall Street Journal today by Anna Matthews includes a powerful chart showing that the average annual premium rose from roughly $6000 per family in 2000 to just over $15,000 in 2011.  The Kaiser Family Foundation produced the report and its researchers estimated that the new PPACA health care reform was responsible for "only" one-sixth of the premium spike last year. 

Contrast this news with the steady stagnation in median family incomes, which the Census Dept. says dropped by 2.3 percent in 2010.  Median household income was $49,445 in 2010, compared to roughly $53,000 in 2000. Wow. It should be blindingly obvious that Americans' labor productivity is generating higher labor earnings, but that those earning are being sponged up entirely by health care costs which are predominantly paid by employers. Translation: workers are being robbed, and they don't even know how badly.

My numbers above are undoubtedly a crude approximation, but the simple fact is the benefits (like health care premiums paid by employers) are not counted as income.  They are not taxed as income by the IRS.  They are not accounted in the Census report on median incomes. And so forth.  To be fair, the Kaiser report indicates that approximately $3000 of the $15,000 typical premium is paid by the individual, not the employer, compared to half that amount ten years ago.  That means employer-paid benefits not-counted as income rose from $4500 to $12,000 over the decade.  Here's the point: if benefits were recognized as income - the single policy fix needed to solve this dilemma - families would have seen annual incomes of $57,500 in 2000 and $61,500 today, and they would see that in just one decade the proportion of U.S. pay taken by insurance premiums went from 10.4 percent to 24.4 percent. If Americans knew this in the way that only dollars being taken from their pockets can awaken the mind, they would react rationally with a wave of market pressures that would rationalize the mess that the federal bureaucracy has built.

Sure, mine is a back-of-the-envelope calculation mixing a few apples and oranges.  Not all households are paying family premiums, granted, the Kaise dollars aren't in real terms, and only 60 percent of employers offer coverage. Although, the latter point isn't so much a feature as a bug, since it implies that entrepreneurs don't get the kind of tax treatment that big firms do.  But these are quibbles.  The basic big numbers described above tell a fundamentally true and scary story about how Washington health care policies are in the process of crippling the U.S. economy, something that has been going on for half a century but is now spinning out of control.  

When I was a young policy wonk, I thought we would have a few decades to work this out.  But if health care inflation continues galloping like this, we only have a few years before Main Street is broken.  How can housing recover if median incomes are being gutted? What scares is not whether there will be a fix from Washington, but that the fix will be complicated.  It shouldn't be.  The fix is fundamental tax reform: recognize all employer benefits as income, and simultaneously lower incomes tax rates to be revenue neutral.