The concept of NAIRU* is one of suspect theoretical validity, I think, in part because we don't really have a great comprehensive model of unemployment and inflation; that said, it often seems to have ontological value, insofar as high-frequency changes in the unemployment rate seem to lead high-frequency accelerations in nominal wages, suggesting a possibly changing unemployment rate above which wage inflation decelerates and below which it accelerates. One of the concerns with the length of the recent employment recession, and in particular with the number of people who have been unemployed for a long time, is that these people lose skills (in various senses of that concept), suggesting perhaps that these phenomena will lead to rising NAIRU. It seems to me that, particularly framed as I have done so, this might be a testable question: is the low-frequency component of nominal wage acceleration, with the high-frequency relationship to unemployment backed out, predicted by any combination of previous unemployment rates and previous rates of long-term unemployment?
*Non-Accelerating Inflation Rate of Unemployment.
Monday, October 10, 2011
Monday, October 3, 2011
bad statistics
I was thinking today in my econometrics class that perhaps, a few years down the road, I would like to teach a course in bad econometrics. There would be a unit on data-mining (overfitting), certainly, and multiple comparisons; there could be some coverage of some of the weak IV literature from the '90's; cointegration, heteroskedasticity, colinearity, and other misspecification problems; and certainly the prosaic beginner-level material on comparing data series that have been made incomparable, for example by deflating with different inflation indexes. The hope, of course, is that students would learn to recognize and avoid these errors, but it would appeal to my temperament to try to present it "with a straight face", as it were.
If anyone else has any other suggestions, please offer them.
If anyone else has any other suggestions, please offer them.
Wednesday, August 31, 2011
anti-trust law, incentives, and coordination problems
When two companies merge, they sometimes achieve efficiencies of scope or of scale, but where they were previously competitors, the merger may reduce competition. If the former effect dominates the latter, the merger may benefit consumers, but if the latter dominates the former, consumers will be harmed, and frequently the net harm to consumers is likely to exceed the net benefit to other parties (e.g. stockholders). Even where this last inequality does not hold, it is frequently within the ambit of regulators only to consider the effect on consumers, and this may be a defensible principle. Regulators may, however, have less knowledge about the likely effects of the merger than industry sources. It would be nice if there were a way to induce industry sources to reveal useful information to the regulators.
Mankiw pointed out a couple years ago that, where a merger is likely to benefit consumers, it will do so by lowering prices and raising quality for consumers, while where it hurts consumers, the opposite will be true. Regardless of how it plays out, competitors of the prospective merger partners will be helped or harmed exactly inversely to the effect on consumers, thus, in this narrow context at least, the anti-business instincts of certain populists are actually well-justified; if competing businesses are lobbying in favor of a merger, Mankiw suggested, block it, while if they lobby against it, approve it. He noted, though, that it is necessary to keep such a policy quiet; if the companies know their lobbying actions have these perverse effects, they will no longer lobby in a way that reveals the relevant information. The policy is not, in this sense, incentive compatible.
On the other hand, what just occurred to me is that one might well be able to, openly and publicly, follow the evolution of the stock prices of competitors that are publicly traded. A potential shareholder in a competitor to the prospective merger partners will wish for the regulator to see a drop in share prices on the announcement of the potential merger when the merger would in fact benefit the company, but he still finds it in his own interest to buy ahead of other potential shareholders; similarly, if he would like regulators to see an increase, he may still wish to sell before others do. If all buyers and sellers in a particular stock could form a cartel, they would jointly find an advantage in acting to confuse the regulator; what they might narrowly view as a "tragedy of the commons" may in fact serve, in this case, to enhance the public good.
While there is a tendency to think of coordination problems as a bad thing, in fact they are frequently quite useful, if usually in combating the effects of other coordination problems (or private information problems). Most of forensic accounting, in fact, involves asking different parties to keep track of essentially redundant information; while a single agent might be able to forge all of its own records in a consistent way, getting all of its business associates to forge their records in the same way is more difficult, such that accountants can subpoena everyone's records and find inconsistency in the combined dataset. Indeed, perhaps the most famous illustration of a coordination problem, with the possible exception of the aforementioned tragedy of the commons, is the prisoner's dilemma, in which a mechanism designer has, according to the usual story, explicitly designed the coordination problem in order to turn the agents against themselves.
In the case of two agents, cooperation is more likely to obtain, especially where they know each other, than it is with multiple, anonymous agents; "incentive compatibility" as it is usually treated in the literature requires only that each agent find it unprofitable to unilaterally deviate from the prospective equilibrium supposing that nobody else does so. In actual practice, it seems likely that this condition is insufficient as long as the sets of agents required to coordinate to block such an outcome are both small and in a variety of senses are known to each other in such a way that they can solve their internal coordination problems — possibly creating what manifests itself as a coordination problem on a larger scale.
Mankiw pointed out a couple years ago that, where a merger is likely to benefit consumers, it will do so by lowering prices and raising quality for consumers, while where it hurts consumers, the opposite will be true. Regardless of how it plays out, competitors of the prospective merger partners will be helped or harmed exactly inversely to the effect on consumers, thus, in this narrow context at least, the anti-business instincts of certain populists are actually well-justified; if competing businesses are lobbying in favor of a merger, Mankiw suggested, block it, while if they lobby against it, approve it. He noted, though, that it is necessary to keep such a policy quiet; if the companies know their lobbying actions have these perverse effects, they will no longer lobby in a way that reveals the relevant information. The policy is not, in this sense, incentive compatible.
On the other hand, what just occurred to me is that one might well be able to, openly and publicly, follow the evolution of the stock prices of competitors that are publicly traded. A potential shareholder in a competitor to the prospective merger partners will wish for the regulator to see a drop in share prices on the announcement of the potential merger when the merger would in fact benefit the company, but he still finds it in his own interest to buy ahead of other potential shareholders; similarly, if he would like regulators to see an increase, he may still wish to sell before others do. If all buyers and sellers in a particular stock could form a cartel, they would jointly find an advantage in acting to confuse the regulator; what they might narrowly view as a "tragedy of the commons" may in fact serve, in this case, to enhance the public good.
While there is a tendency to think of coordination problems as a bad thing, in fact they are frequently quite useful, if usually in combating the effects of other coordination problems (or private information problems). Most of forensic accounting, in fact, involves asking different parties to keep track of essentially redundant information; while a single agent might be able to forge all of its own records in a consistent way, getting all of its business associates to forge their records in the same way is more difficult, such that accountants can subpoena everyone's records and find inconsistency in the combined dataset. Indeed, perhaps the most famous illustration of a coordination problem, with the possible exception of the aforementioned tragedy of the commons, is the prisoner's dilemma, in which a mechanism designer has, according to the usual story, explicitly designed the coordination problem in order to turn the agents against themselves.
In the case of two agents, cooperation is more likely to obtain, especially where they know each other, than it is with multiple, anonymous agents; "incentive compatibility" as it is usually treated in the literature requires only that each agent find it unprofitable to unilaterally deviate from the prospective equilibrium supposing that nobody else does so. In actual practice, it seems likely that this condition is insufficient as long as the sets of agents required to coordinate to block such an outcome are both small and in a variety of senses are known to each other in such a way that they can solve their internal coordination problems — possibly creating what manifests itself as a coordination problem on a larger scale.
Friday, August 26, 2011
stimulative corporate tax policy
Last month I turned 35, and noted that I am now old enough to be President. I was asked my platform, and gave sarcastic responses. I do have a couple of ideas of things I think would be worth trying to stimulate
The second idea is to allow companies to expense all investment for two years, and half of it in the third. Approximately, if a company spends $10,000 on a piece of equipment that will last ten years, it lists $1,000 as an expense each year for ten years; that is what it subtracts from revenue to calculate taxable profit. I'm suggesting that we allow companies to front-load the deductions; if you spend $10,000 on a piece of equipment this year, subtract the whole thing from your revenues. (You would then carry it at 0 value on the books; you would not deduct $1,000 per year in future years, and, if you sell it, the amount for which you sell it would be taxable revenue.)
The third idea is to cap each company's payroll tax contributions at, say, 80% of its level from some recent previous year; this provision, too, would hold for a few years. A company that is already paying less than that would, of course, not be affected; for a company that is affected, decisions related to changing payroll are now changed by the fact that another $1 in salary paid does not cost the company $1.075 (or thereabouts). Creating a new $30,000 job costs the company $2,250 less per year than it would have otherwise; creating a new $40,000 job costs $3,000 less; laying off a $40,000 worker will save $3,000 less than it otherwise would have. Further, again because of the declining corporate tax rate, a company that thinks it will want to hire two or three years from now has a bit more incentive to bump up its payrolls now.
Finally, while I view as a feature that the third idea encourages companies to create higher-paying jobs to some extent, we can also allow the wages of any hourly worker to be deducted as though they were $10 per hour; e.g. if a company pays an employee $7.50 for 20 hours, it lists an expense of $200 on its taxes rather than $150. This creates a little bit more incentive to create a job at the low end of the scale rather than not to create it, but it also means that raising the employee's pay to $9 per hour will not benefit the company through a lower corporate tax. This one is accordingly a bit dangerous, and is kind of intended to offset any harm done to especially low-skilled worker by recent increases in the minimum wage.
I should note that the second and third ideas in particular are not entirely my own idea; expensing investments is naturally what one would do in a more consumption-based tax system, and Mankiw has recently noted that temporary pro-investment tax provisions, such as an investment tax credit, would in many ways lower the effective interest rate that is used in investment decisions, thus giving a way around the zero-bound on nominal interest rates. Singapore actually uses a countercyclical employment payroll tax, reducing the employer's share of payroll taxes when unemployment is high (to reduce the cost of hiring) and raising it when unemployment comes down (to raise the necessary funds over the long-term). I've essentially taken the marginal rates all the way to 0, but with the 80% offset designed to mimic proposals by people who seek to raise more nearly the amount of revenue that is raised by current levels of payroll taxes.
* I want to emphasize that "stimulate" is supposed to indicate an emphasis on short-term; I'm not discussing here ideas that would focus on creating a good climate in the long-run for sustained growth. The ideas presented, though, should not do great violence to long-run growth, either, and are partly constructed with them in mind.
The second idea is to allow companies to expense all investment for two years, and half of it in the third. Approximately, if a company spends $10,000 on a piece of equipment that will last ten years, it lists $1,000 as an expense each year for ten years; that is what it subtracts from revenue to calculate taxable profit. I'm suggesting that we allow companies to front-load the deductions; if you spend $10,000 on a piece of equipment this year, subtract the whole thing from your revenues. (You would then carry it at 0 value on the books; you would not deduct $1,000 per year in future years, and, if you sell it, the amount for which you sell it would be taxable revenue.)
The third idea is to cap each company's payroll tax contributions at, say, 80% of its level from some recent previous year; this provision, too, would hold for a few years. A company that is already paying less than that would, of course, not be affected; for a company that is affected, decisions related to changing payroll are now changed by the fact that another $1 in salary paid does not cost the company $1.075 (or thereabouts). Creating a new $30,000 job costs the company $2,250 less per year than it would have otherwise; creating a new $40,000 job costs $3,000 less; laying off a $40,000 worker will save $3,000 less than it otherwise would have. Further, again because of the declining corporate tax rate, a company that thinks it will want to hire two or three years from now has a bit more incentive to bump up its payrolls now.
Finally, while I view as a feature that the third idea encourages companies to create higher-paying jobs to some extent, we can also allow the wages of any hourly worker to be deducted as though they were $10 per hour; e.g. if a company pays an employee $7.50 for 20 hours, it lists an expense of $200 on its taxes rather than $150. This creates a little bit more incentive to create a job at the low end of the scale rather than not to create it, but it also means that raising the employee's pay to $9 per hour will not benefit the company through a lower corporate tax. This one is accordingly a bit dangerous, and is kind of intended to offset any harm done to especially low-skilled worker by recent increases in the minimum wage.
I should note that the second and third ideas in particular are not entirely my own idea; expensing investments is naturally what one would do in a more consumption-based tax system, and Mankiw has recently noted that temporary pro-investment tax provisions, such as an investment tax credit, would in many ways lower the effective interest rate that is used in investment decisions, thus giving a way around the zero-bound on nominal interest rates. Singapore actually uses a countercyclical employment payroll tax, reducing the employer's share of payroll taxes when unemployment is high (to reduce the cost of hiring) and raising it when unemployment comes down (to raise the necessary funds over the long-term). I've essentially taken the marginal rates all the way to 0, but with the 80% offset designed to mimic proposals by people who seek to raise more nearly the amount of revenue that is raised by current levels of payroll taxes.
* I want to emphasize that "stimulate" is supposed to indicate an emphasis on short-term; I'm not discussing here ideas that would focus on creating a good climate in the long-run for sustained growth. The ideas presented, though, should not do great violence to long-run growth, either, and are partly constructed with them in mind.
Wednesday, July 27, 2011
production of capital goods
The whole philosophy of macroeconomics since Keynes more or less invented it has been to aggregate variables like "consumption" and "investment" and ignore differences between different kinds of consumption, as well as structural details about what specific goods are used to produce what other specific goods. The approach has its uses, and macroeconomists have shed some useful light on the workings of the economy this way, but even on what one would think of as a macro basis it seems likely that some details will make differences in some circumstances. One of the big changes over the past generation or two that might be important is the changing nature of the production of capital goods.
Forty years ago, "capital" meant heavy machinery — factory equipment, earth movers, that sort of thing. People who produced capital goods were to a large extent machinists and factory workers. Today a lot of "capital" is software. Software is "nonrival", meaning that producing software for 1,000,000 customers is not largely more expensive than producing the same software for 10 customers; it is also the case that a lot of software production builds on previous versions of similar software. "Fixed investment" has been supporting the recovery to a greater extent than in previous recoveries, but in 2011 that means more software and fewer tools than it would have 30 years ago.
Institutional capital, which I'm largely leaving out, may also be more important now than it was 40 years ago; more of the labor force consists of people for whom an important part of their value to their current employer is detailed knowledge of coworkers, workplace culture, and procedures than I think was the case forty years ago. This is especially true in the production of modern forms of capital as compared to production of older forms of capital; engineers and computer programmers working on projects too big for any one of them to complete alone are harder to replace with other experienced employees with the same generic training than is the case for machinists. (This is not an absolute truth, but is broadly the case; certainly any sizable company will benefit from employees who know the idiosyncrasies of that company, or even of its particular workplaces. I believe it to be more true, in general, of engineering kinds of work than of machining or factory work.) Related human capital is also likely to be more important for more modern forms of capital than for older forms.
Confident answers are not in the purview of this blog, but it seems reasonably likely to me that this contains a partial explanation for the slow recovery of employment after recessions that has been increasingly witnessed over the past 25 years. When demand shows its first signs of renewal firms may turn first toward replacing their capital, whose prices are more likely to drop than are wages; the producers of capital themselves need not hire a lot of new workers nor raise the prices of their products a great deal until demand is quite substantial, and (especially in times of uncertainty) may be slow to increase employment too quickly because of the investment this would require in institutional capital as well.
Forty years ago, "capital" meant heavy machinery — factory equipment, earth movers, that sort of thing. People who produced capital goods were to a large extent machinists and factory workers. Today a lot of "capital" is software. Software is "nonrival", meaning that producing software for 1,000,000 customers is not largely more expensive than producing the same software for 10 customers; it is also the case that a lot of software production builds on previous versions of similar software. "Fixed investment" has been supporting the recovery to a greater extent than in previous recoveries, but in 2011 that means more software and fewer tools than it would have 30 years ago.
Institutional capital, which I'm largely leaving out, may also be more important now than it was 40 years ago; more of the labor force consists of people for whom an important part of their value to their current employer is detailed knowledge of coworkers, workplace culture, and procedures than I think was the case forty years ago. This is especially true in the production of modern forms of capital as compared to production of older forms of capital; engineers and computer programmers working on projects too big for any one of them to complete alone are harder to replace with other experienced employees with the same generic training than is the case for machinists. (This is not an absolute truth, but is broadly the case; certainly any sizable company will benefit from employees who know the idiosyncrasies of that company, or even of its particular workplaces. I believe it to be more true, in general, of engineering kinds of work than of machining or factory work.) Related human capital is also likely to be more important for more modern forms of capital than for older forms.
Confident answers are not in the purview of this blog, but it seems reasonably likely to me that this contains a partial explanation for the slow recovery of employment after recessions that has been increasingly witnessed over the past 25 years. When demand shows its first signs of renewal firms may turn first toward replacing their capital, whose prices are more likely to drop than are wages; the producers of capital themselves need not hire a lot of new workers nor raise the prices of their products a great deal until demand is quite substantial, and (especially in times of uncertainty) may be slow to increase employment too quickly because of the investment this would require in institutional capital as well.
Friday, July 15, 2011
price changes
I'm interested in markets, and one of the complicated things about markets is that they involve people. Netflix has gotten itself some flack recently for revamping its price structure, breaking apart (as I understand it) for sale separately (and without a joint discount) two services that were previously bundled, such that the total price of the original package, for those wishing to replicate it, has gone from $10 per month to $16 per month. One of the comments I saw was "this is too big a price change to implement all at once"; if we take this complaint at face value, it might have created less of a stir if they had offered a $3.50 discount on the bundle for a period of time. This is similar to something I heard at the annual meeting of my cooperative apartment; we're being hit with some big expenses in a year or two, so the board decided to increase our monthly maintenance payments this past year so that the increase next year won't be one big jump.
I'm curious as to what kinds of price changes strike people as "unfair" and what kinds don't. Stock prices change quite frequently, but the buyers and sellers are very dispersed and anonymous; I think people have less of an emotional "fairness" response to stock price moves than to other kinds. Gold, at least as traded on financial markets, is similar; so, though, is oil. Most people purchase their oil distillates, though, from recognizable brands, and even though they're usually mercenary about it themselves — most people, choosing between Exxon and BP, will go with whichever is cheaper on the given day — seem to object to higher prices than they're used to. This is likely also a function of the fact that people build their habits around consuming oil distillates at a constant rate, and don't like responding to prices; demand elasticity of gasoline, especially in the short run, is very low (which is precisely why the price is sometimes so volatile).
If the shop on the corner raises its prices, my understanding is that people tend to regard this more favorably if the retailer's costs have recently gone up than if it's simply an attempt to ration rising demand in the face of potential shortages. (It's worth noting in this context, though, that part of Netflix's decision seems to have been related to costs.)
And, as suggested at the beginning, it may be that increases of a certain size produce a certain amount of sympathy, especially in the face of rising costs, but that there are certain breakpoints where the customer would respond less viscerally if the change were phased in. What interests me in particular here is to what extent it's an abrupt change in expectations rather than an abrupt change in prices that creates the angst. If Netflix had announced this change 18 months ago, would it have produced as much complaint then as it is now, or as much complaint now as it is, or would it have spread it out or even reduced it? If the old rates had been (credibly) portrayed, as soon as the bundled items were being sold together, as a special, trial offer, would the new price structure have been more readily accepted? (If you give away an item for free for two months, any increase in price will exceed 60%, but would presumably be more accepted; there would be an expectation that this was a limited-time offer.) I note in this context that O'Hare airport some years back raised its parking rates by announcing, at the beginning of the holiday season, that it was offering "special holiday rates" that equalled the rates in October; they actually raised the rates at the beginning of January by allowing the "special rates" to expire.
Another anecdote: about ten years ago, I was a regular in a sandwich shop, and recognized as such; they increased the price of a sandwich by 10 cents at one point, but comped me a free sandwich when they made the change. I imagine them imagining me thinking, "They're nice people and they like me, so I understand that they have to raise their prices once in a while."
I'm not offering grand theories, but my speculative observations are that upset increases when
I'm curious as to what kinds of price changes strike people as "unfair" and what kinds don't. Stock prices change quite frequently, but the buyers and sellers are very dispersed and anonymous; I think people have less of an emotional "fairness" response to stock price moves than to other kinds. Gold, at least as traded on financial markets, is similar; so, though, is oil. Most people purchase their oil distillates, though, from recognizable brands, and even though they're usually mercenary about it themselves — most people, choosing between Exxon and BP, will go with whichever is cheaper on the given day — seem to object to higher prices than they're used to. This is likely also a function of the fact that people build their habits around consuming oil distillates at a constant rate, and don't like responding to prices; demand elasticity of gasoline, especially in the short run, is very low (which is precisely why the price is sometimes so volatile).
If the shop on the corner raises its prices, my understanding is that people tend to regard this more favorably if the retailer's costs have recently gone up than if it's simply an attempt to ration rising demand in the face of potential shortages. (It's worth noting in this context, though, that part of Netflix's decision seems to have been related to costs.)
And, as suggested at the beginning, it may be that increases of a certain size produce a certain amount of sympathy, especially in the face of rising costs, but that there are certain breakpoints where the customer would respond less viscerally if the change were phased in. What interests me in particular here is to what extent it's an abrupt change in expectations rather than an abrupt change in prices that creates the angst. If Netflix had announced this change 18 months ago, would it have produced as much complaint then as it is now, or as much complaint now as it is, or would it have spread it out or even reduced it? If the old rates had been (credibly) portrayed, as soon as the bundled items were being sold together, as a special, trial offer, would the new price structure have been more readily accepted? (If you give away an item for free for two months, any increase in price will exceed 60%, but would presumably be more accepted; there would be an expectation that this was a limited-time offer.) I note in this context that O'Hare airport some years back raised its parking rates by announcing, at the beginning of the holiday season, that it was offering "special holiday rates" that equalled the rates in October; they actually raised the rates at the beginning of January by allowing the "special rates" to expire.
Another anecdote: about ten years ago, I was a regular in a sandwich shop, and recognized as such; they increased the price of a sandwich by 10 cents at one point, but comped me a free sandwich when they made the change. I imagine them imagining me thinking, "They're nice people and they like me, so I understand that they have to raise their prices once in a while."
I'm not offering grand theories, but my speculative observations are that upset increases when
- demand for the good is inelastic
- price increases result from cost increases, rather than shortages
- price increases are "big"
- price increases are unexpected
- markets are less anonymous.
Wednesday, July 6, 2011
informational complementarities of production
I've had recent occasion to discover that there are certain brands of baby-good manufacturers that produce a number of different items for babies — my wife could tell you the names of some of the brands. These different items often seem to have relatively little in common other than being small consumer-grade manufactured items; it's not clear where a single company would have a production efficiency in producing this set of goods and why e.g. Black and Decker couldn't just as logically produce a stroller. (Perhaps there's some valuable cross-product knowledge about the range of shapes and sizes of babies bodies.) What seems, based only on anecdotal evidence and my own speculation, to drive this more is the reputational complementarity; it would, in fact, not surprise me to learn that the items are produced by third parties and rebranded. A new mother who studies up on products and develops a sense that a brand of one product is good can transfer that impression to other products under the same brand name.
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