Growthology

My Son's First Lesson in Economics

Back in my day -- the Discolithic 1970s (when us kids in elementary school were singing "another brick in the wall" without quite grokking the whole Pink Floyd message) -- nobody was teaching us about "economics."  Not a class.  Not a chapter in the history textbook.  Sure, we learned about the Great Depression, but it was not in any sense an "economics" event, rather a historical event.

It was not until I was well into college that I took my first course in economics. Hoping to distinguish myself completely from my father, I decided to major in Econ, only to learn (with some real horror) a year later that economics was his major as well in college. Sometimes, destiny just won't let you go.

So how is elementary economics taught today?  It was with some interest that my 13-year old came home and told me that he was studing for his first economics test - a mini-course in social science.  I asked if I could skim his notes and see how the subject was taught. Wow. What an eye-opener:

Lesson 1: The Great Depression. The evil Republican Herbert Hoover and his conservative policies caused the Great Depression. Only when FDR was elected President was the evil rooted out, government spending boosted the economy, and civilization saved. (I'm paraphrasing ... slightly)

I worry that this personal anecdote is all-too-common. It was clearly the case of a teacher imposing their worldview as my son did not have a textbook or anything "official," just notes from the blackboard. But that made me even more disappointed - why is the school not using objective resource materials from the National Council on Economics Education? The more I looked over his notes and reviewed the homework questions, the more upset I got.  I started explaining the right answers, which he pointed out would be marked incorrect by his teacher, and I said to him, "Son, I don't care if you flunk this class.  It is more important to learn the truth than to regurgitate what will receive marks from this teacher." In the end, we compromised.  He learned the truth about markets to my satisfaction, and I taught him how to answer questions in way that would please his teacher just for the test.

So, how would you teach the very first class on economics to a young mind?  That question has been haunting me for a while now.  After some careful deliberation, I am pretty sure I would start with a lesson on the "Economics of the Cave Man." I already have the pictograms in mind. The lesson would have stasis versus growth as the moral of the story. You can stay in your own little cave and eke out a subsistence life ... or you can walk over to the next valley and trade. Once you trade, you specialize, and once you specialize, you grow productivity. No zero sum, kids.

A Closer Look at the NCEE

A first glance at the NCEE shows a smart, simple approach to introducing virgin students to the building blocks of economic reasoning, mental models, and consensus worldview.  That said, I am appalled by the treatment of growth. By following the conventional micro / macro ladder, economic growth is buried in the 10th of 11 section, Macro Unit 5: Lesson 4. Could it be more obscure? Here's the summary from NCEE's Table of Contents:

Macroeconomics Unit 5: Lesson 4 - Economic Growth
In this lesson, the students learn the main sources of long-term economic or real GDP growth and the policies that governments might use to increase economic growth. The students should be aware that there is a difference between the short-term fluctuations in real GDP that result from the business cycle and the long-run growth in real GDP discussed here. Activity 47 emphasizes the alternative measures of output growth and incorporates long-run economic growth into the aggregate demand and aggregate supply models. The activity also brings in the production possibilities curve discussed at the beginning of the course.

I am trying to think of analogy of why this summary is problematic. Here it is.  You could create a whole semester's worth of material on biology without explaining that in the real world, plants and animals grow. The static approach misses the essence. I know, I know ... that's a major improvement on politically oriented indoctrination, and I like the NCEE materials a lot. But we can do better than this. 

Farms of the Future

It's easy when thinking about jobs of the future to neglect the sector that has been with us since the beginning of and is basically the foundation of human civilization.  But farming is changing dramatically, despite employing just 1 in 50 Americans today, in contrast with 48 in 50 when the U.S. broke free from Britain.

A book review in the Wall Street Journal on Monday added something to my short list: A Revolution Down on the Farm, by Paul K. Conkin, reviewed by Blake Hurst:

In recent decades, the most startling change in food production has had to do with productivity: Its rise has been so dramatic that U.S. agriculture turns out to be, in Mr. Conkin's words, "the most important industrial revolution in American history." He notes that, since 1950, agricultural productivity per hour of work has grown sevenfold (compared with 2.5-fold in the economy's nonfarm sector). Between 1950 and 1970, the farm work force declined by half, but the value of its total product "increased by approximately 40 percent." In 1900, the yield for corn was 2.5 bushels per acre; it was 40 bushels in 1950, 80 in 1970 and more than 120 in 2000. The output for other field crops has grown in a similarly exponential fashion, not to mention livestock productivity. Post-1950, Mr. Conkin writes, change was so rapid "that almost no one was able to measure, or comprehend, what was happening."

The reasons for such growth are many. Mr. Conkin gives a full account of the "great new machines" (including combines and cotton pickers) that have made harvesting faster and easier, as well as describing the ever more potent fertilizers, insecticides, herbicides and animal- breeding techniques that scientists have made available to farmers. The "revolutionary surge" in output and efficiency has been a great blessing to America and the world, of course.

A setting Sun in New York

The New York Sun published its last edition yesterday. The fourth quarter is cold indeed.  We remember that in this time of financial trouble, our future prosperity rests with entrepreneurs like those who published the greatest newspaper in New York:

This was always a risk, and all the greater is the heroism of our financial backers. Even at the end they were offering millions of dollars if we could find the partners we needed. I don't mind saying to you, as I have to them, that I very much regret — I will always regret — that we were not able to return to them the capital that they invested in us. Yet we have not heard a single regret from any of them on this head, which underscores the fact that it was not only for the possibility of profit that they invested in this newspaper. They invested also for other ideals, as well.

That's Seth Lipsky in remarks to the Sun's staff.

Fast Company

Fast Company invited me to do some blogging for them, which I just started today. I'm not very creative, so I just called it Growthology Max.

The bulk of my blogging will still be here, and I'll make sure to repost relevant material here as well.  But I did want to share the link with you to my initial post, which carries over the "Growth Deconstructed" line. Unfortunately, their blog editor chewed up the image, so I'm going to go ahead and repost the gif file here.  For analysis, I'll have to honor my agreement and direct you to the original content at the Fast Company site here.

Main Street Rescue - Designing HOLC 2.0

Odds are the revised Paulson plan will pass the Senate today and House tomorrow. If the plan fails, America will need an alternative. And even if it passes, America may still need additional support. In either case, we should start thinking seriously about a Main Street rescue, something akin to the Home Owners' Loan Corp. of 1933. The next President will probably have to.

John Kennedy once said that success has many fathers, but failure is an orphan. But in this case, America's financial mess now has many foster fathers. You personally may have played by the rules, but the whole world owns this baby now.

If we are to look for the biological parents of this crisis, we know for certain the identity of the mother: her name is Ms. Housing Bubble. Many would agree that Mr. Leverage was involved, but frankly, his DNA has been part of every financial crisis for the last few centuries.

Housing on Main Street is overbuilt, and every home-owner who was told that housing values never decline now knows better.  Supply and demand applies to all markets. By over-stimulating demand to a ridiculous degree, Congress forced Fannie and Freddie to put excess Housing on Main Street.

Wall Street is in trouble because it got in the business of selling mortgage-backed securities based on infinitely chopped up mortgages from around the U.S. So long as those mortgages were paid on time (and housing values rose), all was well. But once the housing price bubble burst, the related securities became of questionable value.  As more and more homes face foreclosure because the "home-owners" can't or won't make payments, everyone has a problem. "For sale" signs litter Main Street, and values drop further, creating an extended domino effect.

The ultimate remedy is probably for the government to rescue Main Street directly through mortgage interventions, which I wrote about a few days ago. An op-ed in today's Washington Post proposes something similar in "The Trickle-Up bailout" by Jonathan G.S. Koppell and William N. Goetzmann:

The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see -- and need to treat -- the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.

If the government did this, all the complex derivatives based on these mortgages would be as good as U.S. Treasuries. Their fair value would jump to 100 cents on the dollar, rescuing teetering financial institutions. The credit markets would be resuscitated overnight. Foreclosures would stop.

Unfortunately, the authors make the same mistake Hillary Clinton made in calling for a new HOLC. They envision a bailout of home-owners who cannot afford their home, paid for by everyone else who lived within their means (even the millions of Americans who are full-time renters). It's been 75 years since HOLC 1.0, so you would think we might have learned how to build a better version.

Koppell and Goetzmann say, "unfairness is a small price to pay to avoid a rapid transition to a socialist economy," but they are only looking at the sticker price of a new HOLC.  Let's say their plan would have the government buy up 1 million homes at an average cost of $200,000.  That's $200 billion right there, but the government wouldn't own the homes, which under their plan would be retained by the irresponsible parties. Instead, the government would pay some hefty percentage of that value just to convert the mortgages to something more affordable, so let's say it would cost $50 billion.

That's a pure $50 billion bailout to the worst offender, not an investment by taxpayers.  It would be a terrible subsidy for bad behavior and, worse, the moral hazard problem would be immediate. What would stop fiscally sound neighbors from suspending their own mortgage payments in such a plan? Without a cap, the price would balloon from $50 to $500 billion in the blink of an eye.

Look, the only smart way to design a HOLC 2.0 Main Street Rescue is to leave the bailout out. I do think it would be incredibly wise to fix the mortgage mess from the bottom up, which would relieve lenders while also stabilizing housing markets (at least from overcorrecting), but only if the at-risk property is fully transferred to the taxpayer. The existing resident should be converted from an evictee to a renter, because, let's all admit, they are not a home "owner" in the face of a foreclosure. The lender would not be made 100 percent whole in this plan, maybe just 90 percent.  But liquid!  And the lender would be better off than going through months or years of foreclosure and eviction proceedings.

A HOLC 2.0 can work wonders, but only if it gets the incentives right. If HOLC is recreated unchanged (in a country where many homes are refinanced and leveraged), it will make matters much worse.  And that, my friends, will be just like how the government handled Great Depression 1.0 - fixings things by killing market incentives.

Do we really want to go there again?

Signs of Recession

Fresh evidence that the recession hit in Q3 comes from this post & chart from Calculated Risk:

But in general, the two month estimate is pretty accurate. Maybe September was exceptionally strong (very unlikely from anecdotal evidence), or maybe July and August will be revised upwards, but the two month estimate suggests real PCE will decline in Q3 by about 2.4% (annual rate).

Pointer came from Econbrowser, which also has a good post.

PCE is not my favorite growth indicator, as loyal growthology readers know, but it is an important short-run reflection of GDP composition so attention must be paid.

Exports Kept Away the R-Word, Says Bergsten

C. Fred Bergsten, former assistant Treasury secretary of international affairs and now director of the  Peterson's Institute, writes in The Washington Post.

Fresh evidence of the trend came last month, when the second-quarter growth rate for the U.S. economy was revised upward, to 3.3 percent. A record surge in net exports accounted for almost all of that expansion. Since the housing and financial crises erupted in mid-2007, there has been a decline in final domestic demand. We would have been in recession throughout this period had we relied wholly on internal economic forces.

International trade has saved the day. Our external balance has improved by more than $200 billion as calculated for gross domestic product (GDP) purposes, cutting the previous deficit by more than one-third. This dramatic progress has kept the overall economy growing by modest amounts. The prophets of recession ignored the international engagement of the U.S. economy. . . .

This favorable swing of at least $300 billion in the "real" trade balance translates into more than 2 million new jobs in the U.S. economy. These export jobs pay 15 to 20 percent more than the national average.

All major sectors, from agriculture to consumer goods to services, as well as our bellwether capital equipment, have shared in the export boom. About half the gains have come in manufactured products; the trade swing is likely to boost employment in manufacturing substantially, offsetting at least part of the downdraft from sluggish domestic growth and ongoing productivity improvement. Foreign sales of our manufactured products, including cranes from Wisconsin and diesel engines made in Indiana, are soaring.