## Thursday, August 21, 2014

### Public education as an unemployment subsidy

From Bloomberg News: Eight years of college lets Finns hide from labor market.

“When I tell people I’m a student, it tells them I’m achieving something compared to being jobless,” he said, sipping green tea at a cafe near the university’s main building. “In reality, there might not be such a big difference.”

Finnish students stay in college longer than in any other developed country save Austria, the Netherlands and Denmark, getting their first university degree on average at 29, according to a 2013 report by the Organization for Economic Cooperation and Development. That compares with 24 years for Britons, 26 for Germans and the OECD average of 27 years. Most Finns who graduate from college get a master’s degree.

Easing the long years in college is the fact that students aren’t required to pay tuition. The state also provides grants of as much as 500 euros ($670) a month plus meal support and loans of as much as 400 euros a month. [...] While Finland’s two recessions since 2008 have pushed companies to cut jobs, unemployment has risen less than in many of its European peers. At the same time, so-called hidden unemployment is on the rise. The number of people not seeking work though they’d like to find it increased 10 percent in June from a year earlier. [...] Only about 50 percent of all university students graduate in five-and-a-half years or less, Helsinki-based Statistics Finland says. One-third of graduates are 30 years old or more, compared with an EU average of 17 percent, Eurostat says. “School has traditionally acted as a buffer when the economic situation is bad,” said Ulla Haemaelaeinen, a senior researcher at the Finnish Social Insurance Institution in Helsinki. “It’s a policy choice.” ## Thursday, August 14, 2014 ### Notable pictures: Japan's female employment rate I was surprised by this chart, a version of which I originally saw on FT Alphaville: It shows the impressive rise of the female employment rate in Japan, both in absolute terms and relative to the U.S. The participation employment-population ratio is now higher in Japan than in the U.S., which is something I didn't expect. The article is perhaps too quick to chalk up this rise to Abenomics. The timing is right, but I'm skeptical that the handful of policies introduced by Abe have overcome Japan's cultural biases and institutional barriers so quickly. Among OECD countries in 2013, Japan's female employment rate (62.5) is near the median (60), and clearly above the average (57.5). How about the gap between the male and female employment rates? The FT article highlights the "20 percentage-point difference" in Japan. Is that normal? For the OECD as a whole, the male-female gap is 15.7 percentage points; in Japan it's 18.3. The largest gender gaps in the employment ratio are for Turkey (39.8), Chile (22.8), Korea (21), Italy (18.6), and Greece (18.4). Next was Japan. The smallest gaps are in the Nordic countries, followed by Portugal (!), and Canada. I was also surprised to learn about the low correlation between the male participation employment rate and the gender gap in participation employment rates. So, the female participation employment rate in Japan is now in line with that of other rich countries, but the gap between men and women is still quite higher. Edited on 8/14/14, at 4:15pm CT, to replace "participation rate" with "employment-population ratio" (or simply, "employment rate"). They're not the same thing. Sorry about that. ## Monday, August 11, 2014 ### What business economists do (?) Tyler Cowen linked to an article by Lydia DePillis on the Washington Post, a few days ago, about the "new business economist", the articulate professional with a nice suit, a telegenic face, and a masters or a Ph.D. degree, who can explain anything and everything to an audience of non-experts. My favorite passages: It’s already been quite a couple months. Flying back and forth between Redfin’s Seattle headquarters and its D.C. office, Richardson takes calls from local reporters trying to place their city’s housing markets in context. She talks to Redfin agents all over the country, and helps promote new data products, like one that calculates how likely a home is to sell within a certain period of time. [...] The market for consumer-facing economists is certainly getting crowded. Big Internet companies have had chief economists for years now; Google’s Hal Varian is an oft-quoted exponent of his employer’s capabilities and worldview. Microsoft recently hired Yahoo’s former chief economist to push a more “data-driven culture” at the tech dinosaur. But they’re not just looking for super-wonks. More importantly for Richardson, rival real estate sites Zillow, Trulia, and CoreLogic have offered their chief economists as media-friendly talking heads, always available to explain national trends: Stan Humphries, Jed Kolko, and Mark Fleming have essentially become their companies’ most visible employees, speaking at conferences and testifying on Capitol Hill. That’s why Apartmentlist.com’s recent listing for a chief economist includes the following in its job description: “Act as the face of the company with key journalists for both print and tv interviews with leading publications,” “work closely with our PR and branding teams,” and have “excellent stage presence.” In a data-chic world, a chief economist is the new marketing must-have. Now Neil Irwin at the NYT (hat tip to John Cochrane) compares business economists with academic economists: There are the academic economists who study the forces shaping the modern economy. Their work is rigorous but often obscure. Some of them end up in important policy jobs (See: Bernanke, B.) or write books for a mass audience (Piketty, T.), but many labor in the halls of academia for decades writing carefully vetted articles for academic journals that are rigorous as can be but are read by, to a first approximation, no one. Then there are the economists in what can broadly be called the business forecasting community. They wear nicer suits than the academics, and are better at offering a glib, confident analysis of the latest jobs numbers delivered on CNBC or in front of a room full of executives who are their clients. They work for ratings firms like S.&P., forecasting firms like Macroeconomic Advisers and the economics research departments of all the big banks. The key difference, though, is that rather than trying to produce cutting-edge theory, they are trying to do the practical work of explaining to clients — companies trying to forecast future demand, investors trying to allocate assets — how the economy is likely to evolve. They’re not really driven by ideology, or by models that are rigorous enough in their theoretical underpinnings to pass academic peer review. Rather, their success or failure hinges on whether they’re successful at giving those clients an accurate picture of where the economy is heading. And how exactly can we judge whether those economists are giving clients an "accurate picture" if their models are not rigorous (or tested, or even internally coherent)? Is this what "business economists" are? Articulate, attractive faces who can explain things to non-economist ears? And what does "explain" mean in my previous sentence? Re-tell popular stories, or the ones that conform to the audience's views, with minimum jargon and maximum entertainment? How is the success of a business economist measured? How is his value-added measured? ## Friday, August 8, 2014 ### Escaping China's currency controls: A "gambling" trip to Macao Mainlanders looking to skirt the Chinese government's strict currency controls for a little high-stakes gambling need not look far after reaching the city of Macao. [...] mainland authorities in recent months have been taking a closer look at the ways that gamblers dodge the official, 20,000 yuan limit on the amount of cash that a mainlander is allowed to take abroad (including Macao and Hong Kong). One way around the currency rules begins with the purchase of an expensive watch or jewelry at a Macao pawn shop using a UnionPay debit card tied to a mainland bank account. UnionPay, China's state-run credit card company, bars the use of its cards in casinos but lets each card holder spend up to 1 million yuan every day at shops of point-of-sale machines, including pawn shops. [...] In the summer, Macao's streets are packed with mainlanders bustling from one casino to another. They also frequent the city's myriad pawn shops, which are overflowing with watches and jewelry. Gamblers use these pawn shops to obtain cash, so they don't flinch at steep price tags. After a purchase, a gambler-shopper quickly re-sells that expensive watch or piece of jewelry to the pawn shop for the same amount, less commission, and pockets the cash for later use in a nearby casino. If it's so easy to skirt currency controls, why hasn't Beijing plugged this hole? My theory is that China allows the "Macao way-around" (as well as the "Hong Kong roundabout") as a sort of "safety valve"--the way pressure cookers have a hole built in, through which steam continuously seeps out. If China were really serious about currency controls, this low-tech evasion wouldn't happen. Consider this: Now Beijing is getting upset that the money laundering/currency control evasion is getting out of hand. What do they do? Under orders from Macao's secretary for economy and finance, Francis Tam Pak Yuen, a moratorium on new point-of-sale UnionPay machines in casino-attached jewelry shops took effect in July. The city's Office of Financial Information, meanwhile, and its Director Deborah Ng Man Seong are busy watching local casinos for signs of money laundering. [...] Yuen's moratorium order is expected to cap but not eliminate this pawn shop practice. It does not, for example, stop the use of existing UnionPay point-of-sale machines nor prevent casino operators from moving machines from one venue to another. Doesn't sound particularly heavy-handed. Macao provides other ways for "high rollers" from the mainland to evade capital controls. Read the whole piece, at CaixinOnline. P.S. If you're interested in the topic of illicit financial flows in and out of China, check out the Global Financial Integrity website. ## Tuesday, August 5, 2014 ### What caught my eye 1. How the government exaggerates the cost of education, by David Leonhardt at the New York Times. But it turns out the government’s measure is deeply misleading. For years, that measure was based on the list prices that colleges published in their brochures, rather than the actual amount students and their families paid. The government ignored financial-aid grants. Effectively, the measure tracked the price of college for rich families, many of whom were not eligible for scholarships, but exaggerated the price – and price increases – for everyone from the upper middle class to the poor. [...] Fortunately, the government isn’t the only organization that collects data on college tuition over time. The College Board also does, and it publishes different indexes on published tuition and net-price tuition, separately for public and private colleges. (Only scholarship grants are considered in the net-price calculation. Loans, appropriately, are treated as part of the tuition that families are really paying.) Net tuition and fees at private four-year colleges have risen 22 percent since 1992, the College Board says, and the increase has been 60 percent at public four-year colleges. Community-college tuition has declined, because aid grants have outpaced published tuition. These numbers are obviously quite different from the government’s index showing a 107 percent increase. The more challenging question is: Given the changes that we're about to see in how higher education is provided (online classes), how much will college cost in 20 years? (Hat tip to my wife, to whom I can't give a confident answer when she asks: "How much do we need to save for our [8-month-old] son's college?") 2. A measure of global systemic financial risk, from NYU Stern's V-lab, via Econbrowser, and a chart for China: 3. The U.S. can't inflate away its public debt, probably. From a recent paper by Jens Hilscher, Alon Raviv, and Ricardo Reis: Inflating away the public debt? An empirical assessment. [Ungated version.] Abstract: We propose and implement a method that provides quantitative estimates of the extent to which higher- than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant. 4. Valuing non-US equities: claims about the CAPE (cyclically-adjusted price-earnings) ratio, by Andrew Smithers. Part I. Part II. 5. The dark side of the Italian tomato. Also in French and Spanish. Italy, the third largest agricultural producer after France and Germany, vies with Spain for first place in the production of vegetables. In the past 10 years, Italy has produced an average of 6 million tonnes of tomatoes per year (FAOSTAT). According to FAO, the exportation of concentrated Italian tomatoes was facilitated in 2001 by a reimbursement by the EU of 45 euros ($61) for every tonne of product exported (FAO). But that’s not all. Overall, according to Oxfam, the EU subsidises tomato production to the tune of approximately 34.5 euros ($47) per tonne, a subsidy that covers 65% of the market price of the final product (Oxfam). But who in Brussels is aware of the paradox of subsidising an export product that dumps on local produce in Africa? The European Union subsidizes local production of farm products, which puts Africans out of work in their home countries, which drives them to migrate to Europe, lowering wages in Europe. In the end, the tomato pickers might enjoy the same expected utility in Africa than in Europe, after cost and quality of living are accounted for. European producers win, African producers go out of business. One might argue the subsidies are a net positive if tomato production is more efficient in Europe than in Africa. But if that were the case, then why would European production need to be subsidized? Leaving aside that, what's the effect of European subsidies? European farmers win, the impact on everybody else is uncertain, at best. ## Monday, July 21, 2014 ### Notable pictures: How Americans die Quite a few things to note and ponder in this chartbook on the causes of death, from the always-appealing Bloomberg Visual Data. "How Americans die": 1. The mortality rate for men has converged to that for women. 2. Mortality rates have declined almost monotonically for almost all age groups. 3. Something happened in the 25-44 group, as Bloomberg points out: mortality rates rose from the early 1980s through the mid 1990s.... 4. ...which is explained, Bloomberg says, by AIDS. 5. If you're between 45 and 54, your odds of dying haven't changed much since 1998--while everyone else's have fallen. 6. DRUGS and suicide explain much of that. 7. Drugs and suicide now end the lives of a lot more people than before, and have overtaken car accidents as the leading causes of violent death, across all ages. 8. As one would expect, a higher life expectancy comes with a rise of Alzheimer, senility, and dementia as causes of death. 9. What surprised me, though, is that the share of healthcare spending that goes towards nursing and retirement facilities has not increased. ## Monday, July 14, 2014 ### Forever low? A discussion of the outlook for long-term interest rates* Are low interest rates the new norm? In a 2012 TV commercial for a U.S. bank, a stage curtain goes up to reveal Tom Sargent, Nobel laureate in economics. A voice asks: “Professor Sargent, can you tell me what CD rates will be in two years?” Sargent replies with a confident “No.” The curtain goes down. Real, long-term interest rates have been slipping for 30 years. Look no further than the yields on U.S., U.K., and Japan inflation-linked bonds to see the persistent decline. For other countries, which lack liquid markets in inflation-protected bonds, economists adjust market yields for expected inflation to estimate real interest rates. Those estimates tell the same story: ever-lower real rates. Global composites, such as the IMF’s (2014), and King and Low’s (2014), show real rates declined from 4% or 5% in 1985 to about zero in 2012. Students of the real interest rate have chalked up its decline to various factors. In this essay I will discuss which ones I find most plausible, and then ponder what might reverse the trend. Why interest rates fell The most cited reason why real interest rates have tumbled is the “global savings glut.” Bernanke gets credit for the term. Faster income growth in emerging markets—according to the IMF (2014) report— lifted savings, which the West wasn’t able to absorb quickly. A persistent abundance of capital reduced its price. Saving alone, however, tells us nothing about the equilibrium interest rate. In the aggregate, saving must equal investment. Excess desired saving –or the shortfall of desired investment— is what depresses the real interest rate. For interest rates to fall, then, investment needed to fall as well, or at least rise less than desired saving. That’s presumptively what has happened since the 1970s in mature economies. The McKinsey Global Institute (2010) estimates that capital spending from 1980 through 2008 was$20 trillion less than if the investment rate had remained stable. Granted, investment in emerging countries soared, especially in China. But saving rates rose even more, so developing nations became net exporters of capital.
The lower demand for investment can be traced, in turn, to two other factors. Summers (2014) has recently argued that the entrepreneurial ventures of the 20th century (think Ford, British Petroleum, Airbus) required millions of dollars, whereas today’s startups need just a few thousands in seed capital. Also, investment demand has gone down because the relative price of capital goods has declined.  A truckload of widgets buys more computers than ever before.
Another explanation is that the income distribution changed. The capital share of income has risen, and so has wage inequality among workers. For corporations, a bigger piece of the income pie has implied more saving, because businesses’ demand for capital has grown less than profits. Among households, the saving rate is much higher at the upper end of the income distribution. When the financial crisis hit borrowing-constrained households, the gap between desired saving and borrowing grew wider.
A declining labor force implies a falling natural interest rate as well. This point was famously made by Alvin Hansen (1939) in a speech where he laid out his secular stagnation hypothesis. He guessed the decline in population growth and “the failure of any really important innovations” would hold back growth and depress interest rates. The next 30 years proved Hansen spectacularly wrong—clearly on the innovation count—but the demographic concern seems relevant in the 21st century.
Man-made barriers can contain investment too. That’s an explanation favored by the “supply siders” in this debate, such as John B. Taylor and John Cochrane. Policy uncertainty, bad regulation, and distortions, they say, has discouraged investment.
Finally, besides a mismatch between intended saving and investment, a portfolio shift took place. The relative demand for safe assets increased, primarily by central banks and sovereign wealth funds in emerging countries. This shift further pushed down yields on liquid, “safe” assets, as the IMF (2014) has argued. On this count, then, declining interest rates reflect scarcity of “safe,” liquid assets. (Bernanke has mentioned this also.) Quantitative easing may have compressed term premiums as well since 2008, although it’s unclear how much.
Back to historical “normal”? Don’t take it for granted
What might undo this decline of interest rates? A big player is China. Between 2001 and 2013 the Asian mammoth exported more capital than all other emerging countries combined, as measured by current account balances. China, then, probably did more to depress interest rates than any other country, due to policies that curb consumption. Going forward, this will change, but it’s not obvious what that means for global interest rates.
If China hits a debt wall –as I think they will— investment will fall, perhaps even in absolute terms. Reducing private saving shouldn’t be difficult, as the government policies that repress consumption seem to be binding. This may or may not reduce China’s excess saving, depending on the size of the investment and consumption shifts. If done the “right way,” as Michael Pettis (2013) calls it, saving would decline more than investment, and the current account balance would shrink. This has been happening already: China’s current account balance may have peaked in 2012.
Things could go differently tomorrow, though. The IMF projects that China’s excess saving will creep up through 2019. Pettis explains Beijing is finding it hard to raise consumption. If saving is sticky, and China heeds recommendations to lower investment, net saving could easily rise. Besides, policymakers in surplus countries like China and Germany see net saving as a virtue, and routinely resist calls to reduce their current account balances.
How about other countries? In the future developing countries may not grow as fast as they used to. A new study by the IMF (2014b) shows the potential growth rate in emerging markets is now 1.25% lower than in the 2000s. Lower growth can sap saving, pushing interest rates up.
The McKinsey Global Institute (2010) also thinks we should say goodbye to cheap capital—but for the opposite reason. The McKinsey paper posits that an investment boom is imminent in developing economies. Rapid urbanization is lifting the demand for roads, ports, power grids, schools, hospitals, and housing. That, plus a decline in saving, will reverse the secular decline in real long-term interest rates.
Three things bother me about this hypothesis. One, it may underestimate the likely slowdown of investment in China, by far the largest of emerging markets. Two, those projections are tied to the fact that, in emerging markets, the capital stock per capita is low. Yes, poor countries grow faster. But Korea and Taiwan remained capital-poor for centuries. The investment-led race to riches is open to others, like India or Indonesia, but we don’t know whether the gates will open in 2014, 2020, or 30 years from now. Three, the investment surge will be smaller if we use today’s GDP growth forecasts than the ones from 2010, when the paper was written.
Age-related spending will too weigh on saving, public and private, in mature economies. The population older than 60 will peak by 2030, and pension and healthcare spending will balloon with it. Households will begin dissaving. It doesn’t help that productivity increases more slowly in healthcare and domestic help services than in other sectors. This additional consumption will put upward pressure on interest rates.
Other factors, however, indicate interest rates will stay low. Aging, for instance, operates through the portfolio channel to decrease the interest rate. As baby boomers retire I would expect a rebalancing towards income portfolios, which would hold interest rates down.
Oil exporters made up at least 30% of the world’s combined current account surpluses in 2001-13, and a big fall in their saving is unlikely unless the price of oil collapses.
Another reason interest rates may stay low is that policymakers want it that way. Interest payments in Western Europe, U.S., and Japan, whose governments are deeply in hock, may become unsustainable if rates go up. To ensure the cost of debt stays low they may engage in “financial repression.” The term describes a host of fiscal and regulatory measures that work to hold interest rates down. One example is stuffing public pension funds and government-owned entities with sovereign debt; another one is capital requirements that nudge banks and insurers to hold Treasury securities.
Higher soon, uncertain later
So can we predict which way rates will go? I’m positive Tom Sargent’s discussion would be better than mine. But I bet his bottom line would be “No.”
If I must produce an outlook, I think real interest rates will go up through the next recession. In the short term monetary policy will steer market interest rates higher, especially at the Fed and the Bank of England. The European Central Bank and the Bank of Japan lag behind, but will eventually follow.
Beyond cyclical ups and downs, however, real interest rates are subject to multiple, moving forces. I began this essay with one question, and I end up with many more: Can India become the new locomotive of global investment? Will wage inequality keep rising? Will the return to capital exceed the rate of economic growth, thus widening income inequality? Will the renminbi become a convertible currency, thus expanding the potential supply of liquid, “safe” assets? Will internet-based technologies spur productivity growth, overcoming stagnation? Any one of these questions may shape the path of real interest rates.

References
Hansen, Alvin, 1939, “Economic progress and declining population growth,” American Economic Review, vol. 29, no. 1, pp.1-15.
International Monetary Fund, 2014, “Perspectives on global real interest rates,” World Economic Outlook, April 2014.
International Monetary Fund, 2014b, “Emerging markets in transition: Growth prospects and challenges,” Staff Discussion Note 14/06.
King, Mervyn, and David Low, 2014, “Measuring the ‘world’ real interest rate,” NBER working paper 19887.
Pettis, Michael, 2013, “Avoiding the fall: China’s economic restructuring,” Carnegie Endowment for International Peace.
Summers, Lawrence H., 2014, “U.S. economic prospects: secular stagnation, hysteresis, and the zero lower bound,” Business Economics, vol. 49, no. 2, pp. 65-73.

*This is an edited version of an article that will appear in the August issue of Morningstar Magazine. Morningstar Inc. is my employer.

## Monday, July 7, 2014

### Keynesian Yellen vs. Wicksellian BIS

Gavyn Davies writes an excellent summary of the debate between the"mainstream-central bank-Keynesian" view of the economy and the "alternative-BIS-Wicksellian" view. (It's on the blog section of the Financial Times, but I'm not sure if it's gated.)

Davies juxtaposes a recent speech by Yellen to the BIS annual report, both of which, I'm sure, are excellent readings.

Similarities between the two views:
There is agreement that financial crashes that trigger “balance sheet recessions” lead to deeper and longer recessions than occur in a normal business cycle. There is also agreement that inflation is not likely to re-appear any time soon, and that the current recovery should be used to strengthen the balance sheets of the financial sector through regulatory and macro-prudential policy.
Wicksellians and Keynesians have radically opposed views, however, on what caused the great financial crisis:
The BIS views the crash as the culmination of successive economic cycles during which the central banks adopted an asymmetric policy stance, easing monetary policy substantially during downturns, while tightening only modestly during recoveries[...]On this view, monetary policy has been too easy on average, leading to a long term upward trend in debt and risky financial investments. The financial cycle, which extends over much longer periods than the usual business cycle in output and inflation, eventually peaked in 2008[...]In contrast, the mainstream central bank view denies that monetary policy has been biased towards accommodation over the long term. Ms Yellen’s speech claims that higher interest rates in the mid 2000s would have done little to prevent the housing and financial bubble from developing. She certainly admits that mistakes were made, but they were in the regulatory sphere, where there was insufficient understanding of the new financial instruments that would eventually exacerbate the effects of the housing crash. Higher interest rates, she says, would have led to much worse unemployment, without doing much to reduce leverage and dangerous financial innovation.
Because central banks are using the "wrong model," their policies are inadequate, and even exacerbating some problems:
[...]even now, the BIS says that the central banks are attempting to validate the long term rise in debt and leverage, instead of allowing it to correct itself. Excessive debt, it contends, is preventing the rise in capital investment needed for a healthy recovery. Financial and household balance sheets need to be repaired (ie debt needs to be reduced) before this can take place.[...]The BIS argues that zero interest rates and quantitative easing are becoming increasingly ineffective in boosting GDP growth. Instead, they are artificially inflating asset prices, and blocking a necessary correction in excessive debt. Macro-prudential and regulatory policy might be helpful here, but will not be sufficient. The main risk is that the exit from these accommodative monetary policies may come too late.
The Yellen view is in sharp contrast to this. There is no admission that quantitative easing is becoming ineffective, or that excessive debt should be reversed [3]. There is an outright rejection of the view that interest rates have been too low throughout previous cycles. If anything, the “secular stagnation” argument is adopted, suggesting that real interest rates have been and remain too high, because the zero lower bound prevents them from falling as far as would be required to reach the equilibrium real rate. On this view, the danger is that the exit from accommodative monetary policies will come too early, not too late.
One massive difference between the two views of the economy is that the BIS would prefer to see a tightening of both monetary and fiscal policies, whereas Keynesians think that neither should be tightened "too soon." On fiscal policy:
This divergence of views on economic capacity leads in turn to a major difference on appropriate fiscal policy. The BIS implies that cyclically-adjusted fiscal policy is looser than it seems, because GDP can never return to its earlier trends. The Keynesian/Yellen view is that fiscal policy should not be tightened too soon, and perhaps not at all until output has fully recovered.