Blogging on hold

Blogging will be on hold until at least September 12, and possibly until October. For all those of you who feel the need to email me and yell "When you gonna write another BLAWG post?!" (you know who you are), please try to satisfy your Noahpinion cravings by staring at this cute picture of a lion.

“Wear and Tear” Vs. “Sudden and Accidental”

Two terms that are important to know when it comes to the reason behind an insurance claim. Those terms are “Wear and Tear” and “Sudden and Accidental”.

“Wear and tear” is defined by Wikipedia as “damage that naturally and inevitably occurs as a result of normal wear or aging.” An example on a home would be a house settling over time, a pipe that corrodes and leaks water over several months or years, or a roof that after 15 years starts to drop shingles. All these items would not be covered under an insurance policy as an insurance policy does not cover “Wear and Tear”. Insurance policies cover “Sudden and Accidental” events.

So what is “Sudden and Accidental”? The best way to define it is by giving examples. If a pipe in your house just suddenly burst from pressure or because of freezing that is sudden and was done accidently. If wind blows through your neighborhood and suddenly blows off your roof or chunks of your roof that is sudden and accidental. If a tree falls and damages your home that event is sudden and accidental.

“Sudden and Accidental” events are things people can not totally prevent which is why insurance exists and covers them. On the other hand, “Wear and Tear” damage can be prevented by making sure your property is well maintained and updated. Insurance policies are not maintenance contracts.

So next time you have damage to your property ask yourself is this “Wear and Tear” or “Sudden and Accidental”? If it is “Sudden and Accidental” be sure to call your insurance agent or if you are not sure which it falls under call your insurance agent and let them help you figure that out.

Japan's low unemployment is easily explained

Tyler Cowen, Karl Smith, Scott Sumner, and Matt Yglesias raise a question about the Japanese economy: Why is Japan's unemployment rate so low (<5%) when Japan's growth has been so low for so long?

This is not a puzzle to me. I actually know not one, but two or even three good answers to this question.

Answer 1: Many women in Japan do not work. The unemployment rate is the percent of the labor force who can't find work; if a bunch of women say "I am a housewife and am not looking for work" when the economy turns bad, that will drastically reduce the unemployment rate. This 2010 report from the Bank of Japan finds that the labor force participation rate is 5 percentage points higher in the U.S. than in Japan, with the entire difference due to women. If housewifery were completely cyclical, that right there would be enough to make up the entire difference between the U.S. and Japanese unemployment rates. So comparing U.S. and Japanese unemployment is comparing apples and oranges, because of differing gender roles.

(Note: for this explanation to work, the female labor force participation rate has to go up and down cyclically; i.e., in bad times there must be some housewives who would be willing to work if times were good, and who are therefore actually unemployed. There is some evidence that this has been happening since 1990. This is kind of the mirror image of the claim that some long-term American "unemployed" people are only halfheartedly looking for work while being supported by their families.)

Answer 2: Japan's per capita growth was not so bad in the 2000s. Karl Smith gets this right; Japan's shrinking population makes for low headline growth, but in per capita terms they did just as well as us in the last decade. Check it out:

See? Not too shabby! (Of course, per capita growth since '08 has been horrible, so this doesn't solve the whole puzzle.)

Answer 3:  Falling real wages. Observe:

Wages plummeted in the recession, but they were falling even in 06-07, when things were doing better than they had been since the 80s. If real wages fall, unemployment will not rise as much for a given growth slowdown.

(Note: One place that falling real wages will show up is if companies or governments that feel a social obligation to maintain employment levels will shift regular employees to low-wage make-work jobs in a recession. The thought that this may be happening occurred to me as I observed the massive armies of rent-a-cops thronging the streets of Tokyo and Osaka on my most recent visit. But to find out if this is really happening, would have to look in the productivity statistics, and I am too busy to go do that.)

So to me, low Japanese unemployment is not a puzzle at all. The problem, if anything, is overdetermined; given housewives, falling real wages, and robust per-capita growth in the 2000s, the real puzzle might be why Japanese unemployment is so high. (The solution to this counter-puzzle may be that some young people say they are looking for jobs but aren't really; see Karl Smith's graph of youth unemployment.)

(Final note: A word to the wise...if you ever do an image search for "Japanese housewife," make sure SafeSearch is ON.)

Update: Looking at more data, I'm starting to really doubt that my first explanation is driving much of the "puzzle," here, since female labor force participation hasn't fallen much in this recession (unlike in the recession of the late 90s, when it fell by quite a bit). I therefore think falling wages must be driving most of it.

Are we replacing robots with Chinese people?

OK, REALLY, dissertation committee, this is my last blog post for a while. PROMISE.

But this Tyler Cowen article was too good to pass up. I just had to blog it. The article is about new data that show that productivity growth has stagnated since 2009. There's lots of good stuff in the article, but I want to focus on one part that really caught my eye:

One problem may be offshoring by American companies, as stressed in a study by Michael Mandel, chief economic strategist of the Progressive Policy Institute, and Susan Houseman, senior economist with the W. E. Upjohn Institute for Employment Research. Some productivity gains from the manufacturing of the iPad are captured by workers in China, who make important parts of the device, rather than by American workers. American companies often save on costs by finding lower wages abroad, not by enhancing the abilities of American workers. That would help explain why measured productivity has often been high over the last decade while despite year-to-year variation domestic wages and job creation have been flat.

I've been critical in the past of Mike Mandel's thesis. After all, productivity gains from outsourcing are real. Suppose I am a guy who designs and builds widgets. Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply (minus the small amount I pay the Chinese workers).

BUT...productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented. This is what Mandel claims has been responsible for the large productivity gains in the U.S. over the past 10 years. I tend to believe him.

So why should we care whether our productivity comes from robots (technology) or from cheap Chinese labor (trade)? One answer - and I feel like this is what Cowen and Mandel may have been getting at - is that one may crowd out the other. And this brings me to the theory of endogenous growth.

Paul Romer (a physics undergrad like me!) invented the theory of endogenous growth back in the 80s. The idea is that technological progress does not simply arrive out of nowhere, but is a byproduct of economic activity. Since ideas are a nonrival production input (a.k.a. a "public good"), there is no guarantee that the market will produce enough of them. Some growth models may be a lot better at innovation than others, and policy can make a big difference. If we're not channeling enough of our economic output into the production of new technology, we'll all be poorer down the line.

And here's the interesting part. Romer's first crack at a theory of endogenous growth was this 1987 paper. His model uses this very interesting assumption:

I also assumed that an increase in the total supply of labor causes negative spillover effects because it reduces the incentives for firms to discover and implement labor-saving innovations that also have positive spillover effects on production throughout the economy.

In other words, if we suddenly get access to a bunch of cheap Chinese labor, we don't bother to invent robots. Then tomorrow, when the cheap Chinese labor runs out, we find ourselves without any robots.

This is just an assumption, of course. Even if the model works well, the assumption may be wrong. But it's an interesting idea, isn't it? What's even more interesting is that this exact same idea is one of the leading explanations for the "Great Divergence" between Europe and China that began around the 1600s. The idea is that European countries, flush with capital but short of labor, invented modern industrial technologies to compensate for their labor scarcity, while China, with a huge labor surplus, felt no need to invest in fancy machines. For more technical formulations of this notion, see Basu & Weil (1998), and this recent survey by Allen. But the basic idea is pretty clear: cheap humans crowd out robots.

So here's the question: what if our slow rate of innovation is due not to an inexplicable slowdown in the arrival of new ideas, but from the fact that China has made the discovery of those ideas less urgent? If that were true (and I'm only raising the possibility), what would be our best response? Would shutting ourselves off from cheap Chinese labor force us to become like 1600s Netherlands and invent a bunch of cool robots? Or would it just cause companies to pack up and leave the U.S. entirely, rendering us a protectionist backwater? If there is a "negative labor spillover" going on, is our only choice simply to wait until it runs out? And is it already running out?

I can't claim to have the answers. But I feel like Mike Mandel and Tyler Cowen (and Paul Romer and Basu & Weil) are on to something here.

Sadly, macroeconomics IS based on common sense.

This article by Stephen Moore in the WSJ basically sums up the economic viewpoint of naive conservatives. Key excerpts:

I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense... 

How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head... 

As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics."..."All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

I won't bother to rebut the article, since David Glasner and Paul Krugman do a good job of it. I just want to add two points. 

First of all, a minor point. Students do not hate macroeconomics because it is counterintuitive. They hate it because it has more math than they expected it to have. A lot of econ students are business majors who simply don't think of themselves as "math people," and are surprised to find themselves in an applied math course. But this is kind of unavoidable; since so much of business requires math skills these days, MBA types will have to toughen up some time, and econ classes are as good a time as any. Cheer up, business majors, taking derivatives builds character!

But anyway, on to my main point. Moore is wrong; much of macroeconomics is, in fact, based on "common sense" very similar to Moore's! I am referring, of course, to the "neoclassical" (or "freshwater" or "RBC") school of macro, whose theories have more-or-less dominated the field since the early 80s. These theories use plenty of math, but no more than their chief rivals, the Neo-Keynesian theories. The reason neoclassical models retain such popularity is that their assumptions are considered plausible by many economists - in other words, the assumptions seem like "common sense."

What are those assumptions? Well, they're pretty much the same as Stephen Moore's! "Real" business cycles are assumed to be driven by supply shocks, as Moore feels they must be. These supply shocks can take the form of technology shocks, or changes in people's willingness to work - as in Moore's example of his lazy son, unemployment in freshwater models is often a result of people deciding to "sit on their duff." As for taxes, neoclassical theorists assume that the Frisch elasticity of labor supply is really high, meaning that income taxes strongly discourage people from working. And neoclassicals assume that fiscal stimulus causes people to anticipate higher future taxes ("the money has to come from somewhere!"), rendering stimulus ineffective.

To reiterate: 1) All of these assumptions are exactly the same as Moore's "common sense." 2) Models that use there assumptions are widely accepted because the assumptions are considered plausible - i.e., because they are "common sense." And 3) The implications of these models - that fiscal stimulus, taxes, and unemployment benefits are bad for the economy - are exactly what Moore's "common sense" leads him to conclude.

In other words, Stephen Moore's intuition has allowed him to reproduce much of freshwater macro in his head. Should we conclude that common sense is in fact a very good tool for understanding the economy? Or should we conclude that the highly formalized math of freshwater macro is little more than window-dressing for a conservative worldview that people believe in because it just sort of feels right? I tend to lean towards the latter, given how little use common sense has been in the development of physics, chemistry, biology, and psychology. But who knows. Maybe I am wrong, and economics is in fact simpler and more intuitive than the natural sciences.

In any case, Stephen Moore should cheer up. Every business-cycle theory that has won a Nobel Prize since 1981 is squarely in line with his common sense.


Update: Stephen Williamson thinks that this post was meant to ridicule Ed Prescott. Far from it! Williamson must be thinking of this post, this post, and this post. ;-)

Insurance and Your College Kids

Out in front of our Oxford, OH insurance office, it is a busy place. Today 16,000+ Miami University students return to begin a new school year. This annual pilgrimage brings up potential insurance issues pertaining to what parent's personal insurance policies cover or don't cover. Three areas that parents should be aware of:

(1) If your son or daughter is going away to school over 100 miles from home without a car, most companies will rate your Personal Auto Policy for them being married which is a nice discount. Let us know if this discount might apply to your family and your Personal Auto Policy.

(2) Most insurance companies will extend personal property (contents) coverage and personal liability for your son or daughter while they are in college and living in a dormitory. Some, but not all, will also extend coverage if they are living in off campus facilities such as an apartment or other student housing. Please check with us to see if your insurance company provides this extended protection. If not, we should be able to write a Tenant/Homeowner for your student to cover both their personal property and personal liability while they are an undergraduate. If they are in graduate school, they should definitely have their own Tenant/Homeowner Policy.

(3) If you or your children are using a rental truck to take their things back to college, U-Haul, Penske, Hertz and other will offer you coverage on the vehicle (collision damage waiver) and extended liability. While these may be covered by your Personal Auto Policy, not all companies extend the protection, so check with us before renting the vehicle. Whether or not they are covered will depend on the length and Gross Vehicle Weight of the vehicle and several other factors. We may be suggesting you buy the extra protection from the rental company before your trip.

Envy, or self-esteem?

More interesting thoughts on envy from the guys at the Cato blog. Bryan Caplan says we should "count our blessings"; I agree, though that's easier said than done. David Henderson says that he got rid of his envy of rich people by convincing himself that rich people earned what they have.

I think you may encounter that story a lot among libertarian people. Libertarians tend to believe very strongly that people earn every penny they make - and, therefore, that the poor deserve their poverty. This belief may often be, as Henderson points out, a way of coping with envy.

I guess that's why I can let myself be so skeptical of the notion that high incomes are "deserved"; I was never envious of rich people. This is a result of my own childhood experiences My father was a lower-middle-class professor, and his brother was a rich entrepreneur. I got to see both lifestyles up close. And you know what? They weren't that different! My dad and my uncle both love their jobs, they both enjoy the same things (sports, movies, cooking, dirty jokes), they each have two kids and a house etc. My uncle's mid-life crisis car is a Porsche, my dad's is a Mustang...so what?

What I was learning about was the diminishing marginal utility of consumption It sucks to be poor, but being rich is not much better than being middle-class. For me, that tacit knowledge freed me from any sense of income envy.

The fact is, a lot of income is not "earned" in the marginal product sense. Some is, but some is a function of luck; some lucky plays in the financial market, a lucky business idea, a lucky personal connection. But who cares? I'm fine with that, because I don't envy the lucky.

I think a lot of people are like me, instead of like David Henderson. I doubt there are a lot of poor people out there who go around feeling resentful because they can't afford sports cars and mansions. But I do think there are a lot of poor people out there who go around feeling like "losers" because their jobs are not prestigious. And I think this is the real problem with inequality.

In American culture, the word "successful" is a synonym (euphemism?) for "rich." There seems to be a widespread notion that the rich are "winners" who have defeated the poor in some sort of ultimate game. I personally could never stand that point of view. There are plenty of people out there who just want a middle-class lifestyle. They want a family, a job they like, friends, a comfortable life, a sense of pride in their work, and a community. Maybe a dog or a cat. If you dumped a pile of money in their laps they'd surely take it, but they don't see their lives as "unsuccessful" because they don't have cabins in Aspen.

And yet I think there are a substantial number of people who do buy into this notion, that your bank account makes you a "winner" or a "loser." And I think that a great deal of the negative behavior that we see among America's poor people - drug use, broken families, violence - is a result of that feeling of loserhood. Contrast this with Japan. Over here, they treat sushi chefs or (perhaps) rent-a-cops as skilled professionals. Even cashiers and clerks get respect, just because they have a job and show up on time and do their best. A man who works his whole life in a restaurant doesn't feel so ashamed of his "loser-hood" that he feels the need to compensate by abandoning his kids and sleeping around. And he doesn't feel that a high-risk career as a drug dealer is his only ticket to "winner-hood." And best of all, he doesn't feel such a need to pretend he's rich that he spends his whole paycheck every month.

I wish we had more of that in America. Rather than shaming people who mention inequality, I think we should simply spread the idea that there is more than one dimension of success. It's a lot more satisfying to count your blessings when your blessings aren't all in your bank account.

(OK, last post for a while. Gotta work!)