Now is the best time for Americans to list a house for sale

According to data from the National Association of Realtors, US housing prices are higher now than they have been in six years and more of them are selling at the asking price or above. Furthermore, early summer is the best time to sell your house because more houses get sold at their asking price and the median prices are higher.  I’ve heard that before, but both of these data series confirm the anecdotes.

In fact, the median price in the summer is over 20% higher than the median price in the winter, so the magnitude of the seasonal swing is enormous.  Much bigger than I would have guessed. Assuming it takes about two months to get a house listed and sold, then about now is the sweet spot to start listing a house for sale.

Posted in Macro

House prices are a bit high in the US and crazy overvalued in New Zealand

I talked with friends in New Zealand (Tim and Jo) over the weekend who told tales that sounded like there is a housing bubble in New Zealand, so I looked up some data at The Economist magazine and sure enough, massive bubble. There are two main references for measuring a housing bubble. The first is the ratio of prices to buy versus the cost to rent. If housing prices are driven by economic fundamentals, rents and prices should both rise or fall in parallel because the same things that make a location desirable to own should make it desirable to rent, but housing prices fluctuate much more than rents. By this measure, New Zealand is in extreme bubble territory and the US is only moderately overvalued on average:

The second measurement to diagnose a real estate bubble is the ratio of housing prices to mean disposable income. You might think that I would prefer median income, but this is one of those places where mean income probably does a better job because rich people spend A LOT more money buying houses than people below the median, so mean income is a more useful measure.

The main determinant of housing prices is the income of the people who live in the area. Whenever local incomes rise, local housing prices rise and vice versa.  Again, by this measure New Zealand is in super-bubble territory with the highest percent of household income going to housing of any nation in the OECD database.

Remember the fabled US housing bubble that crashed in 2007 and brought down the global economy?  That bubble was tiny compared to what is happening now in New Zealand.

In the very long run, the real (inflation adjusted) rise in house prices is very, very low because although land values have risen, construction technologies have reduced the real cost of building, just like with almost all other manufactured goods.  Some people think that rising population would cause housing prices to rise, but if dense population caused prices to rise, then Japan would have some of the least affordable housing in the world, but the Japanese spend a smaller fraction of their money on housing than Americans and British people do:

Chart 1

Robert Schiller estimated the real change in housing prices over two centuries and concluded that they stay pretty constant in the very long run so a final way to examine whether there is a bubble is to compare current housing prices with the real, long-term average price history as in the graph below.  This measure also confirms the earlier data: US housing is a bit overvalued whereas New Zealand’s prices are stratospheric.

Note that Australia and Canada have real estate price histories that are extremely similar with that of New Zealand. It is almost like they have the same economic forces acting upon them (high immigration being one factor in common) and those forces are completely different from what is happening in the US real estate markets. The British market is somewhere between the New Zealand pattern and the US pattern.

Where is the money coming from to blow up those bubbles?  I doubt it is a repeat of the securitization scam that caused the US housing bubble.  My best guess is that it is coming from immigration policies that award citizenship to rich foreigners who bring a large lump of money into their new nations.  Those foreigners have the money and incentive to buy real estate.  But that is just a guess.

The bottom line is you should avoid buying real estate in Australia, Canada, and New Zealand because it is currently cheaper to rent and sock away savings in other places. According to the Economist magazine data, these are some of the very biggest housing bubbles in history.  People in those nations don’t have a memory of a major real estate crash (at least since 1970), and if they are like people in most nations in a similar situation, they are probably spreading urban legends about how real estate is the safest investment because it rarely ever goes down in value.  That is the kind of story most Americans were telling themselves in 2007, just before the housing crash caused the Great Recession and that is what many Japanese were saying in 1990 just before their housing crash led into their lost decade. The Japanese housing market still has not recovered and that bubble was tiny compared to what is going on in New Zealand, Canada, and Australia.  Housing crashes are extremely common as shown in the international data at the Economist link above. Nobody knows when the crash will come, but it will come.

In fact, because housing crashes are so often accompanied with overall economic malaise, it would probably be a good idea for residents of the bubble markets to diversify their investments into foreign stocks.  Their domestic stocks should emphasize companies that do a lot of exporting rather than companies that rely upon domestic consumption.  Be particularly careful about buying stock in domestic banks that specialize in housing lending.

Posted in Globalization, Macro

How to eliminate most of the inefficiency of doing taxes

Americans waste way too much time and money preparing their taxes. There is a much more efficient information-age technology that other nations use which eliminate the entire burden for most citizens.

If I’m not itemizing deductions (like 70 percent of taxpayers), the IRS has all the information it needs to calculate my taxes, send me a filled-out return, and let me either send it in or do my taxes by hand if I prefer.

This isn’t a purely hypothetical proposal. Countries like Denmark, Sweden, Estonia, Chile, and Spain already offer “pre-populated returns” to their citizens.

In a number of countries, like Japan and the UK, the vast majority of people don’t have to file tax returns at all, pre-populated or otherwise.… Closer to home, California has a voluntary return-free filing program called ReadyReturn for its income taxes.

Austan Goolsbee, former chief economist for the Obama administration, designed a proposal called “The Simple Return” in 2006 that would provide pre-populated returns for everyone not itemizing their deductions. …

Ronald Reagan touted the idea in a 1985 speech… So why hasn’t return-free filing happened yet? The short answer is lobbying, and in particular lobbying by companies like Intuit.

…Intuit and other tax prep companies had a powerful ally: Grover Norquist. The anti-tax crusader vehemently opposes automatic filing on the grounds that it makes tax season insufficiently nightmarish, which might reduce people’s aversion to taxes and make it easier for politicians to pass tax increases. So even though Ronald Reagan himself supported automatic filing, Norquist has helped make the idea dirt in the eyes of conservative legislators.

Boycott tax preparers and save yourself some money too. Dylan Matthews again:

TurboTax is an evil, parasitic product that exists entirely because taxes are confusing and hard to file. Worse than that, Intuit is one of the loudest voices on Capitol Hill arguing against measures that make it easier to pay taxes. Years ago, the Obama administration proposed a system of automatic tax filing, in which the IRS uses income information it already has to fill out your tax return for you. That would save millions of Americans considerable time and energy every year, but the idea has gone nowhere. The main reason? Lobbying from Intuit and H&R Block.

Don’t give Intuit money. Don’t give H&R Block money. To do so is to perpetuate the status quo in which you have to file your own taxes in the first place. 

Posted in Public Finance

Why I was (probably) wrong about the coming collapse of Obamacare

I’ve been teaching the conventional wisdom which says that a Bismarck-style universal health insurance program like Romneycare and Obamacare is like a three-legged stool. The three legs that hold up universal healthcare Bismarck systems like Obamacare are supposed to be:

  1. A mandate to buy insurance with penalties.
  2. Regulations that prevent insurers from charging extra for people with pre-existing conditions (nor any other exclusion).
  3. Subsidies for poor people who cannot pay.

The conventional wisdom has held that if one of those legs were cut off, the whole system would collapse. Now Trump has announced that he will cut off the first leg next year: the mandate that everyone must buy health insurance. I had been thinking that that would destroy the health insurance market, but Dylan Scott had an insightful analysis that convinced me I’m probably wrong. That won’t kill Obamacare next year because the mandate hasn’t actually been working anyway.  It is just too small and too easy to avoid to have been a significant leg of Obamacare.  Dylan says that,”In 2016, 6.5 million Americans paid an average fine of $70 for not being covered the year before” and Obama created numerous exemptions to help people avoid the mandate because it was so unpopular.  It was just too small to do much lifting in the system.  That also explains why Obamacare never achieved anything close to universal health insurance. Obamacare was going to get closer by ratcheting up the penalty over time and that would have made the mandate a more important part of our healthcare system, but now the mandate is already going away before it really had much effect.  Eliminating it at this point will not have as much effect as I had thought because it was just so trivial to begin with. I had thought that the mandate must have been a big deal because it generated a large amount of controversy and negative press and it was the only part of Obamacare that was unpopular with a majority of Americans.  

I’m surprised that it is so unpopular given how trivially small it is.  In comparison, the penalty is large in European universal systems and it is accepted there.  They achieve universal health insurance in those systems (unlike with Obamacare) because they have huge penalties and few exemptions and that works to get people to buy insurance. Uwe Reinhardt in Vox explains:

When you do this as the Swiss or Germans do, you brutally enforce the mandate. You make young people sign up and pay. But we are too chicken to do that, so we allow people to stay out by doing two things: We give them a mandate penalty that is lower than the premium. And we tell them, If you’re really sick, we’ll take care of you anyhow.

When they run these exchanges, they accompany them with a very harsh mandate. If you don’t obey the mandate, the Swiss find out, and they go after you and garnish your wages. If you’re not insured, they’ll look at your wages and recoup the premiums you owe. They’re very tough. And we’ve never been tough.

So the main work of Obamacare to increase health insurance coverage has been the subsidies that have encouraged a lot more people to get insurance and the regulation that enables sick people with pre-existing conditions to buy affordable healthcare.  Both of those two ‘legs of the stool’ are tremendously popular and a lot harder to cut (as the Republican Party discovered after many attempts last year) than the mandate which was the only part of Obamacare that was ever unpopular with the masses.

Now that the mandate is gone, Obamacare will become more popular because the other parts were always popular and now it is much harder to campaign against.  Plus we will achieve slightly lower rates of health insurance coverage which will make healthcare a slightly more prominent issue on the public’s list of domestic political priorities.

On the other hand, even though Obamacare only had a trivial penalty averaging only $70/year, perhaps it created a much greater perceived impetus for people to buy health insurance and Obamacare really will collapse.  Many people (including Trump) have the misconception that Obamacare has been repealed and so perhaps signups will collapse next year.  Trump is certainly also making other changes to help Obamacare collapse so even though the end of the individual mandate shouldn’t have much effect by itself, is there still the possibility that Obamacare will enter a crisis next year?  The smart money says no.  The healthcare industry should have the best analysis because their money depends upon getting the answer right and their lobbyists are not freaking out.  If they really thought that the Obamacare markets were going to collapse, they would be working overtime and they are not.  Now I finally think I understand why they are so nonchalant about the end of the individual mandate to buy health insurance.

Posted in Health

Robin Hood and broken window facts and fallacies

Note: This is an update of two previous posts.

The broken window ‘fallacy’ is an enduring parable invented by Frédéric Bastiat in 1850, and popularized in English by Henry Hazlitt (chapter 2) in his attempt to combat the dominance of Keynesian macroeconomics after the Great Depression. The parable is primarily misused by austerians* in an effort to discredit Keynesian economics by associating it with a story about stupid policy: breaking windows. Austerians who misuse Bastiat’s parable of the broken window to refute Keynesianism are committing a Petitio Princpii fallacy. They assume what they purport to prove. They assume that breaking windows cannot help mitigate because there is already full employment which means they are assuming there is no recession to begin with.

In Bastiat’s parable, breaking a window would simply redirect workers from doing other work they had been planning to do. In Bastiat’s original example, the person whose window had been broken was planning to spend the time creating new shoes and ended up repairing the broken window instead so there is no change in employment because he is already working as much as he wants to work. Because the parable assumes no resources are unemployed, obviously a broken window cannot reduce unemployment and reduce the problems of a recession. But this is a straw-man argument because nobody argues for Keynesian stimulus when unemployment is low. Bastiat parable essentially assumes that unemployment is zero and then says breaking a window cannot reduce it which is true because unemployment cannot go below zero. This reasoning agrees with Keynesian theory because Keynesians support austerity when unemployment is zero, but when a recession creates high unemployment, a fiscal stimulus can do some good.

This Keynesian theory can be illustrated using a parable about Robin Hood breaking windows. Suppose the Sheriff of Nottingham decides to hoard as much money and other resources as possible. Rather than spending, he doesn’t buy services from the villagers. And the Sheriff wants to hoard the game animals in Sherwood Forest, so he does not let villagers hunt. This creates unemployment. In the Robin Hood legend, Robin creates work for his band of merry unemployed men by illegally hunting the Sheriff’s game animals in Sherwood Forest to feed the villagers.

This is tantamount to breaking windows, but they are destroying wild animals instead of destroying glass. Robin Hood is famous for stealing from the rich and giving to the poor. In this case he is not only redistributing resources, he is also increasing GDP by putting unemployed people back to work (hunting) and using underutilized capital (Sherwood Forest). It would be even more productive to farm the forest land, but the Sheriff’s men can easily control farmland and Robin Hood doesn’t have the military might to secure land for farming. The best Robin Hood can do is steal illegal game in the lightly-guarded forest. Robin Hood would prefer to steal the Sheriff’s gold, but that is impossible to steal because it is locked inside the heavily-guarded castle and Robin Hood cannot create jobs by employing the villagers to steal anything else.

If Robin Hood cannot steal the Sheriff’s unproductive gold hoard inside the castle, another way for Robin to create jobs for the villagers is to get the sheriff to spend some of his hoard by destroying something the Sheriff will want to rebuild. A simple way is for Robin Hood to use his arrows to break some castle windows. That gets the greedy Sheriff to spend some of his hoard to hire unemployed villagers to rebuild the windows (and perhaps hire more villagers to guard against Robin Hood). This grows GDP by making unemployed resources become more productive. Unemployed workers can produce windows and earn a living to feed their families. And some of the unemployed gold that the greedy Sheriff had hoarded becomes productive once again by circulating in the economy rather than just sitting idle in his treasury. Money is only productive when it is circulating and facilitating economic exchanges, so getting the money out of the Sheriff’s vault also acts as a monetary stimulus too.

Monetary and fiscal stimuluses work the same way. Both get money from hoarders and use it to increase spending. A fiscal stimulus is an increase in government borrowing that takes money from hoarders and tends to increase the interest rate that they earn. A monetary stimulus reduces the interest rate (and/or increases the inflation rate) which encourages hoarders to lend more money because it makes it harder to earn interest in safe investments. A monetary stimulus redistributes resources and ends recessions by punishing hoarders and encouraging spenders. Monetary stimulus is painful for savers. Although a fiscal stimulus would seem like it would be less politically painful because nobody pays any price in the short run ironically, the opposite is true. Fiscal stimuluses are almost never deliberately used whereas monetary stimuluses are routine. The Fed announces changes in monetary stimulus eight times per year, every single year. For example, as you can see in the graph below, the Fed sometimes changes the Federal Funds Rate eight times per year, and this is only one of several monetary policy tools at the Fed’s disposal.

So breaking windows can be a useful stimulus if there is a recession caused by a shortfall in demand (hoarding) which has been the main problem in almost all recessions in the past century (with the possible exception of the oil-shock recessions of the 1970s which also had notable supply problems). A recession caused by hoarding is a kind of market failure that wastes resources (unemployed labor and capital) sort of like breaking windows is usually a waste of resources. Ironically, when there is a market failure (hoarding), adding another market failure (breaking windows) can potentially make things better instead of worse! This is known as the theory of the second best and it is true in the Robin Hood example where Robin’s vandalism redistributes under-productive resources from hoarders to consumers which stimulates the economy and makes everyone better off except the Sheriff, and even he doesn’t suffer because he wasn’t using his hoarded resources anyway.

But breaking windows would be a ridiculously wasteful kind of stimulus that nobody would advocate except if all other options are impossible. Robin Hood would much rather simply steal resources from the Sheriff and redistribute them to the poor because that would be a much more efficient stimulus. Robin Hood doesn’t want to break window just to be spiteful. His purpose is not make the Sheriff suffer. His goal is to help the poor and although breaking windows is a stupid way to do it, it may be the best choice in this unfortunate scenario where the Sheriff’s stupid hoarding is keeping everyone else desperate and unemployed.

Similarly, Keynesians don’t promote spending money on wasteful projects like breaking windows because there are so many actual needs that new projects could try to serve. Keynesians are often quoted out of context in an attempt to discredit their ideas. For example Keynes is often ridiculed for writing that we could stimulate the economy by burying money in the ground and then letting others dig it up. He actually wrote that simple parable to ridicule the defenders of the gold standard who implicitly argue that we should pay miners to dig holes in order to create a monetary stimulus. He pointed out the absurdity of this idea because it would be cheaper and more efficient to print money and then use the money to pay some people to bury money and let people to dig it up again. He was not suggesting this as his preferred stimulus plan. He was merely pointing out that it is no more absurd than the gold standard. If you read the context of the quote Keynes was ridiculing the wastefulness of digging holes looking for money (gold). Later in chapter 16, Keynes repeats his criticism of the wastefulness of digging holes looking for money and wasteful government projects like building Egyptian pyramids. He reiterates that although it would work as a stimulus, it is ridiculous to think that such wasteful spending could be the optimal choice when there are many more useful things to do.

The Robin Hood parable illustrates why Keynesian economics is so politically polarizing. Keynesian economics only works by redistributing money from savers to consumers and that means redistributing from people who are richer than the median to people who are less-rich than the average. That is one reason why many rich elites are so passionate about opposing Keynesianism. Economists rarely acknowledge this fundamental reason for political tension because economists shy away from talking about redistribution, but it is baked into the Keynesian cake. The Robin Hood parable makes it memorable. The burden of government spending disproportionately falls on wealthy people in democracies. Wealthy people prefer to promote tax-cut Keynesianism as an alternative to Keynesian spending, but both forms of Keynesianism work in the same way.

In the Disney version of Robin Hood, the Sheriff taxes the villagers too much and Robin Hood steals from the Sheriff and gives money back to the poor like a tax rebate. This is another form of Keynesian stimulus. Tax cuts only work to stimulate the economy if they increase the incomes of consumers who will spend the money. Tax cuts do not work if they increase the incomes of hoarders who simply lock more money away. Giving a tax cut to the Sheriff would do nothing except encourage even more hoarding. Because the poor and middle class are better consumers than rich elites, a tax cut for the poor works much better to stimulate the economy than a tax cut for the wealthy people that pay the highest tax rates. Unfortunately, some of the tax-cut Keynesians are elites who just want an excuse to reduce their own taxes. Tax cuts for elites who hoard the money are ineffective stimulus compared with tax cuts for the median and below who have more needs to spend money on.

The tax-cut ‘Keynesians’ who want to cut taxes for corporations and the wealthy have it backwards. Tax cuts for the middle and bottom of the income distribution are much more stimulative than tax cuts for the rich because non-rich people tend to spend money whereas the rich just tend to add it to their hoard. That is exactly what happened to much of the tax rebate checks that George W. Bush sent out in 2008. High-income households pay the most income taxes and so a disproportionate amount of the tax rebate went to them and they tended to hoard it rather than spend it. Only the part of the tax cuts that went to the median household (and below) was spent and stimulated the economy. Research found little stimulative effect because of this and because even many of the low-income people used the rebate to pay back debt and thereby returned their money to the hoarders rather than directly spending it.

A reverse example is the payroll tax hike of 2013 which reduced take-home pay by 2 percentage points, but only on wages under $113,000. That means that almost all American workers had a tax increase this in 2013, but billionaires were scarcely affected. Whereas there was a tremendous fight in Congress at the same time about whether to raise taxes on the top 2% richest Americans, all workers saw our taxes rise without any complaint in Washington because Congress only cared about preventing tax hikes for elites rather than tax the tax hike that hit all ordinary workers.

Keynesian economics is favored by mainstream economists on mmutilitarian grounds–because it increases GDP–and Bastiat’s is smart to ridicule mmutilitarianism. Bastiat’s parable shows one way mmutilitarianism could go astray. Breaking windows (or a war, natural disaster, or pollution) never decreases GDP, so it is never bad according to naïve mmutilitarianism. Professional economists are rarely this naïve, but defenders of military spending sometimes come close. For example, Paul Ryan and Mitt Romney were criticized by libertarians for using this sort of mmutilitarian economic reasoning to support increased defense spending. Unfortunately Ryan and Romney had often used austerian logic against government spending that they opposed. So Ryan and Romney agreed with Keynesian logic for defense spending and tax cuts, but opposed Keynesian logic for many social programs. I supports Keynsianism because it tends to help the median of the income distribution (and below) AND it tends to increase GDP, and I have no problem with increasing the size of the economic pie (GDP) when the benefits are broadly shared.

Bastiat attacked the mmutilitarian logic that defense spending is always good for GDP. This is often derided by calling it military Keynesianism, but that is a misnomer because most of those people are just in favor of higher military expenditures regardless of the business cycle. Keynesians are often mischaracterized as always supporting increased government spending, but they support cutting government spending (to cut deficits) when unemployment is low. Military spending, like all government spending, is only good if it is more productive than its opportunity cost and the opportunity cost rises during economic expansions when businesses need more workers. In 2012, Ryan and Romney’s military spending priorities agreed with Keynesian logic because there happened to be high unemployment at the time and so there was a Keynesian justification for military spending. But Keynesians should support decreasing government spending when unemployment is low and Bush’s chief economic adviser, Michael Boskin always opposes defense cuts. For example, he opposed defense cuts in the mid 1990s when unemployment was extremely low and he made the nonsensical argument that it would increase unemployment at a time when unemployment was arguably too low. That is not Keynesianism, it is a true example of the broken window fallacy. Keynesianism recommend cutting government spending because unemployment was so low. When resources are fully employed, Keynesians agree with the broken window fallacy.

When hoarding (wasteful saving) causes a recession, the opportunity cost of government spending is extremely low when spending redistributes resources from unproductive hoarders who have too much money to the unemployed who have too little. During economic expansions when unemployment is low, savings (mostly of older, richer people) is productively channeled by financial institutions to borrowers who need the money more than the savers. Like an invisible hand, finance channels the impulse to save and hoard into productive activity by lending savings to people with a greater need of the resources. When a recession happens, the invisible hand of finance stops channeling savings to put people to work. Instead, the invisible hand of finance puts savings into unproductive hoards. The money leaves the economy which makes the economy poorer. Workers lose their jobs due to the lack of spending and factory owners go bankrupt because their factories sit idle. Keynes’ genius was in realizing how monetary and fiscal policy can be used to make the clenched hand of finance relax and release the hoards to get people (and our capital equipment) working productively again.

Robin Hood In Glassland

In the middle ages when Robin Hood lived (according to legend), glass windows were incredibly valuable and only the elites could afford them. The rareness of glass made stained-glass cathedral windows appear miraculously heavenly. Glass was still so rare in the early 1700s, that wealthy Americans could rarely afford much in the way of glass windows. At the time, stained glass exemplified the state of the art of glass technology although it evolved out of the technological limitations of the era. Glass panes were impossible to make smooth, clear and large anyhow, so glaziers might as well dope their off-color glass with extra color and fit the little pieces together into big stained-glass windows. Glass was still so valuable in the 1800s that it was still being used as money in some parts of the world.

Medieval Europe was bestowed with a relatively generous endowment of gold and silver, but it those metals had been as scarce as diamonds in Robin Hood’s England, ordinary people might have used glass as money like they did elsewhere in the world. If glass had been used as money, the parable of Robin Hood Breaking Windows would explain Keynesian economics even more clearly. Suppose the Sheriff was hoarding panes of glass rather than gold and silver, then even if Robin Hood could not directly steal the glass from the castle, he could indirectly ‘steal’ some of the Sheriff’s glass and give it to the poor by breaking the Sheriff’s windows. The Sheriff would have to pay peasants some glass to put them to work replacing his windows.

In a commodity money economy like this, Keynesian hoarding theory is even more obvious than in a paper-money economy like today. For example, imagine a society using iron as money. A recession happens when people start hoarding money (and rich elites have the most to hoard). Because they are hoarding a commodity money, it is clear that money hoarders are hurting the economy because they are hoarding iron which is useful. Hoarded iron is unproductive and people cannot work if they don’t have enough iron to make things. Hoarding is wasteful just like breaking things is wasteful. In an economic expansion, the invisible hand of finance would direct the iron hoarders to loan some of their unemployed iron to unemployed workers so that they can make more plows and pots and make everyone richer. In capitalism, flows of money are required to facilitate productive exchanges and induce people to be productive making plows and pots and other goods. It does not matter if the money is iron, paper or electronic. In a recession, the invisible hand of finance has a spasm and clamps too much of money in unproductive hoards.

Keynesian fiscal and monetary policies are all about loosening the cramped hand of finance to get the hoarded money–and the productive resources that the money commands–back out in the economy to can get people working again. Economics needs to expand its vocabulary to be able to explain recessions better. We need to be able to distinguish between savings and hoardings. When economists talk about ‘savings’ they usually mean lendings. A dollar saved is usually really a dollar lent to someone else because when you put it into the bank (or another financial institution), you have lent the dollar to the bank which promises to pay it back, often with interest. Saving is great for the economy when it increases capital investment and productivity and that is normally what happens. One person has more money than they currently have productive use for can help other people with a money shortage become more productive.

Hoarding is when money is taken out of the economy and hoarded for oneself without being lent out to someone who can use it. Hoarding is taking money, and the production that it represents, out of the economy for a time. During the Great Depression, many Americans hoarded their money by hiding it in mattresses or in buried jars because they understandably did not trust the banks to pay back their savings. In the modern economy, hoarding sequesters money in different kinds of places, but the effect is the same. For example, the Great Recession of 2008 was partly caused by banks hoarding money as excess reserves that sat unproductively at the Fed, but it had the same effect as if people were hoarding their money in their mattresses. It was also partly caused by banks hoarding money in complex securities like CDOs that got stuck because of defaulting homeowners and banks until the time-consuming legal process could sort out the complex contracts and decide how to divide the assets and liabilities that remained.

Another place Americans hoarded their money during the Great Recession was in government bonds. A government bond is normally a form of savings because it is a way to lend money to the government. But it is impossible to call it ‘lending’ to the government when government bonds pay a negative real interest rate. Real lending involves taking a risk and thereby earning a positive real interest rate. If a business in a competitive market could borrow money for a negative real interest rate, it would do anything it could to expand. That is because loans are free and if you don’t use free money to expand, your competitor will expand at your expense. The government doesn’t work that way. It does not spend and invest more money simply because private individuals are willing to pay the government to store hoards of money. The government was borrowing money at zero percent nominal interest and negative nominal interest rates became more widespread than ever before in history. That is just hoarding.

Any money that is kept as a store of value rather than as a medium of exchange is being hoarded rather than saved. Principles of economics teaches that money is useful for three purposes: 1) a medium of exchange, 2) a store of value, and 3) a unit of account. There is an inherent tension between the first two purposes because whenever money gets used as a store of value, it stops being used as a medium of exchange and that is what causes a recession. Money used as a store of value is hoarding. When money stops being used as a medium of exchange, goods and services stop being exchanged. Savings are different than money because savings pay positive interest and money does not. Savings should be used as a store of value, not money. Durable consumption goods like housing and clothes are another common store of value that earn a return because of use even if we never exchange (sell) them. Money is different from all other stores of value because money would be worthless if it could not be exchanged for something that is directly useful to have. Money is only valuable because it is easier to exchange than anything else. A positive real return on holding money is called deflation and deflation is particularly harmful because it encourages people to hoard more money. Good monetary policy should strive to prevent deflation and reduce the tendency to use money as a store of value. One of the reasons that recessions were so frequent under the gold standard was the fact that deflation was a regular recurrence whenever the price of gold (and therefore the value of money) increased.

If money gets used more as a store of value than as a medium of exchange, that is hoarding and that is what causes a recession, but for some reason, economists have ignored the central problem of hoarding and rarely use the word, so there is no agreed-up definition of what counts as hoarding, but I’ll give it a try. Interest rates should help distinguish between savings and hoardings because only money can be hoarded. Savings that are lent out at a positive interest rate means that the money is merely being transferred to a borrower who has an incentive to spend the money on something productive because the borrower is paying a real interest rate that prevents hoarding. That is why savings continue to circulate in the economy and hoardings don’t. Savings are lendings that are used to buy durable goods the yield a real stream of benefits and hoardings are where demand is simply sucked out of the economy altogether. Any financial asset that is being lent at a zero nominal interest rate (like T-bills during the Great Recession) is clearly being hoarded because a zero nominal interest rate is the same interest rate as money. Similarly, money that is saved at a negative real interest rate (when the nominal interest rate that is less than the expected inflation rate) is probably being hoarded because a negative real interest rate signals that the savings are achieving zero productivity.** Because risk is proportional to return, a negative expected return signals the low risk tolerance of a hoarder. Similarly, any for-profit business that keeps persistent balances at zero real interest or less (above the amount of cash needed to manage cash flow) is hoarding. Unfortunately, during the Great Recession, many private business like
Apple were run by executives with so little imagination and so little competition that hoarded billions of dollars at negative real interest rates rather than spending it on something productive. So big, profitable corporations were also guilty of hoarding.

It is harder to use interest rates to determine when the median individual is hoarding because average people are often liquidity constrained, have higher transactions costs, and have little knowledge of how to invest at a positive real interest rate, but the same kind of logic would apply if we could actually measure the money stocks that each individual holds, but we cannot, so the true quantity of money that is being hoarded will always be unmeasurable.


* ‘Austerians’ are people who want the opposite of Keynesian policies. In many cases it is because they actually believe the broken window fallacy is a fallacy. Unfortunately, there has been little support for Keynesian policies in government after the beginning of the 2008 recession. Obama was Keynesian only for his first year in office and then he abandoned Keynesianism and became an austerian. I supports Keynesians against austerians like the latter-day Obama, Michael Kinsley, and the BIS.

**During deflationary periods (negative inflation), the interest-rate definition of hoarding is a bit different because hoarders get a positive real return by simply hoarding cash. There is always a positive real return on hoardings during deflation which is why hoarding gets so bad during deflation. During deflation, hoardings are balances that are expected to earn zero nominal interest. If inflation is positive, hoardings are balances that expect to earn zero real return (or less) for at least six months. Savings are balances that earn an income greater than hoardings without any turnover for at least six months. Some balances that do not earn a real return are used for short-run transactions. This is a transactional balance that turns over with cash flow. That is neither part of savings nor hoardings because it is not intended to be used as a store of value, but as a medium of exchange.



For further reading describing a more formal model, see how the textbook macroeconomic model of recessions should be written.




Hoardings cease to be used as money for facilitating transactions. Even when the government borrows at a negative interest rate, corporate bonds usually pay a positive real interest rate.



Savings is a hybrid between money and durable consumption goods because savings are lent to people who use the money to buy things that earn them a value in use and then they pay the saver part of the use value in use in the form of an interest payment. The only way to keep deflation from increasing hoarding is if the real return on investment for lending is high enough to keep the nominal interest rate from reaching zero.

Posted in Macro

Why tariffs won’t boost the economy like Trump thinks

Trump tweeted

We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!

and he followed up by tweeting,

“When you’re already $500 Billion DOWN, you can’t lose!”

Mattew Yglesias comments that.

This reflects a view that Trump has consistently maintained in his personal rhetoric and that has been reflected in the official documents put out by some of the members of his trade team — trade deficits are per se bad, reducing them induces prosperity mechanically, and so there is no downside to a trade war with a country with whom the United States runs a large trade deficit.

One big question hanging over Trump even since the campaign has been whether this is something he really believes and is prepared to act on as president, since it happens to be totally wrong. And while so far nothing Trump has actually done on trade is all that significant in the grand scheme of things [so far], perpetually making policy on the basis of a total misunderstanding of the issue is potentially quite dangerous.

…[Trump’s] Commerce Secretary Wilbur Ross and trade adviser Peter Navarro were the co-authors of an important policy paper the Trump campaign put out during the election season that… was incredibly shoddy. George Mason University’s Scott Sumner describes it as “a complete mess,” which, if anything, is too kind. When Adam Davidson profiled Navarro for the New Yorker, he wrote that …Navarro …couldn’t find a single other economist who fully agreed with him on trade and China. Which is about what you would expect, since the Ross-Navarro trade policy analysis is based on a mistake that would get you flunked out of an AP economics class.

“When net exports are negative,” Ross and Navarro write, “that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.”

Ross and Navarro believe that tariffs will automatically increase GDP by eliminating the trade deficit:

“To score the benefits of eliminating trade deficit drag, we don’t need any complex computer model… Trump proposes eliminating America’s $500 billion trade deficit…. Again assuming labor is 44 percent of GDP, eliminating the [trade] deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion.”

This idea is ^%@#$^!. The trade deficit means that imports are larger than exports. Ross and Navarro advocate using tariffs to eliminate the trade deficit by reducing imports, but that would only boost GDP if the tariffs had no effect on anything else. That is ridiculous. Nearly half of the trade deficit is the deficit in petroleum. We could eliminate that deficit by imposing a tariff of 200% because domestic prices would rise so much that American consumers would buy less petroleum products and American oil producers would extract more domestic oil by fracking more aggressively. However, we know from experience that GDP would not rise because we have been through this kind of experience before.

For example, in 1973, OPEC imposed an oil embargo on the US as punishment for US support of Israel in the Yom Kippur war and US oil imports plummeted, but oil higher prices hurt household consumption and caused a nasty recession. Plus, as the following graph shows, net exports didn’t change much because there are other forces (such as national savings rates) which cause imports and exports to tend to move in parallel. If Trump imposes tariffs, that will reduce imports, but it will also tend to reduce exports which will hurt jobs in export-oriented industries.

Then it happened again in 1979 due to the Iranian revolution shutting down its massive oil exports. Again, US oil imports dropped, prices rose and the US suffered a nasty recession.

Ross and Navarro are essentially arguing that if the US would ban oil imports, that would eliminate half the trade deficit. Suppose the US had a $100 billion trade deficit (is it much bigger, but let’s use round numbers to simplify the arithmetic). And Trump used the same numbers when he tweeted, “…when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

Trump argues that banning this import would automatically boost GDP by $100 billion! His economic team (Ross & Navarro) calculated that because “labor is 44 percent of GDP” their logic figures that $44 billion of that income would go to household wages. They calculate, “that additional wage income would be taxed at an effective rate of 28 percent” which would yield additional tax revenues of ($44b * 28%) = $12.3 billion. Super simple, right?

This analogy was inspired by an example from Mattew Yglesias who goes on to ask:

So why doesn’t Congress take this simple, easy step to boost growth and create jobs [by banning oil imports]?

Well, because it’s ridiculous.

What would actually happen is that gasoline would become much more expensive, consumers would need to cut back spending on non-gasoline items, businesses would face a higher cost structure, and the overall economy would slow down with inflation-adjusted incomes falling. Modeling the precise impact of a total shutdown of oil imports is hard (hence the computer models). But we know from experience that the directional impact of sharp disruptions in the supply of imported oil, and it’s not at all what Ross and Navarro say it would be.

Ross and Navarro made a subtle but basic error

…Gross domestic product (GDP) is meant to measure the dollar value of everything produced in the United States. To calculate GDP, you take everything the government purchases (G for government purchases), then add everything households purchase (C for consumption), then add everything businesses buy but don’t sell to customers (I for investment). That gives you a picture of everything that was bought in America. But then you need to adjust for the fact that Americans buy some foreign-made stuff (imports) and sell some stuff to foreigners (exports) — so you add that together and get net exports (NX), which need to be added or subtracted from the total.

That’s written down as an equation: GDP = G + C + I + NX.

But this is an accounting procedure, not a causal theory. The accounting procedure says that government purchases are an element of GDP — higher G means higher GDP, and absolutely everyone agrees on that. But whether increasing government spending will boost or harm the economy is obviously a hot topic of political debate. A sensible high-level take would be “it depends.” It matters what you spend the money on; it matters how you raise the revenue and what the larger economic situation is.

The net exports situation is just the same. If America’s net exports grow because America becomes a fashionable tourist destination and sales of Boeing airplanes surge, then that will boost the economy. But if America’s net exports grow because new Trump-imposed taxes cause the price of imported goods to surge, then the economy is going to shrink.

It is reasonably common for [uneducated] people to make the kind of mistake that Ross and Navarro are making here, which is why [economists] generally make it a point of emphasis when introducing the GDP concept to students. Why a credentialed economist would do it in a policy paper for a presidential candidate is [^%@#$^!].

In theory, a tariff could boost GDP, but in practice it is nearly impossible and I’m not aware of any real-world example where it actually worked. It certainly hasn’t ever worked for the US. For a tariff to boost GDP would require several preconditions that we do not have. A tariff could only work to boost GDP IF

  1. There is no trade war. If other nations retaliate by raising tariffs of their own, then net exports will not rise and all nations will suffer because production will simply fall everywhere. Trump was wrong when he tweeted, “trade wars are good, and easy to win.” That was the day after Trump imposed new tariffs on steel and aluminum, so he is serious about it, but he is wrong.
  2. There is slack in the economy (i.e. a recession) so that there is flexibility to increase production without merely reshuffling production from somewhere else. If there were zero unemployment, it would be impossible to increase GDP by increasing tariffs because everyone is already working as much as they can. We are pretty close to full employment right now, so tariffs would be particularly useless as a boost to GDP at this time.
  3. The eliminated imports can be efficiently substituted with domestic production. This was a big problem during the oil shocks of the 1970s, and because oil is still about half of our trade deficit, it is still a substantial problem today. US producers simply cannot produce everything as efficiently as foreigners. Chinese-made clothing, computers, and TVs will simply rise in price which will hurt consumers and reduce their demand for American-made goods due to higher prices.

There are more conditions too such as needing domestic savings rates to rise, but listing everything would be like beating a dead horse. The fact is that I know of no PhD economist who doesn’t work for Trump, zero, who agrees with Trump and his economist flunkies, Ross and Navarro, about tariffs and trade wars.  Navarro couldn’t come up with anyone either.  No Keynesians on the left like Paul Krugman, nor Keynesians on the right like Greg Mankiw, nor conservative libertarians like Scott Sumner, nor probably any Real Business Cycle theorists although it is hard to know what they would say because they don’t usually come out of their ivory towers to sully themselves with commenting on policy much.

Posted in Globalization, Macro

Median income of black men as a % of white men in America

Via Kevin Drum. Presumably this is using personal income.

Posted in Discrimination

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