Meet the Fed's New Intellectual Powerhouse

Here is a link to my 47th column on Quartz: “Meet the Fed’s new intellectual powerhouse.”

I have two related columns not directly linked in this piece: “Monetary Policy and Financial Stability” and my discussion of Janet Yellen’s views: “Janet Yellen is Hardly a Dove: She Knows the US Economy Needs Some Unemployment.”

What I say in the column about how a low elasticity of intertemporal substitution affects how the Fed should respond to risk premia is informed by the discussion I gave of a paper of Mike Woodford and Vasco Curdia at a Bank of Japan conference (which I mentioned and linked to here.) Claudia Sahm, Matthew Shapiro and I are working on literature review of empirical work on the elasticity of intertemporal substitution for our paper on that topic. I will have more to say on that in the future. 

Update: I wrote this column (which is about much more than Jeremy Stein himself) just in time. On April 3, 2014, Jeremy Stein announced he was resigning from the Fed. But we might see him again in the future in high government office.

One of the Biggest Threats to America's Future Has the Easiest Fix

Here is a link to my 46th column on Quartz, “One of the biggest threats to America’s future has the easiest fix,” coauthored with Noah Smith.I talked about some of the issues of capital budgeting addressed in this column a while back in my post “What to Do When the World Desperately Wants to Lend Us Money” and Noah has talked about the importance of infrastructure investment a great deal on his blog Noahpinion.

Other Threats to America’s Future: Our editor wanted to title the column “The biggest threat to America’s future has the easiest fix.” I objected that I didn’t think it was the very biggest threat to America’s future. I worry about nuclear proliferation. Short of that, I believe the biggest threat to America’s future is letting China surpass America in total GDP and ultimately military might by not opening our doors wider to immigration–a threat I discuss in my column “Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?" 

Technical Afterword to the Column (Please Read Column First)

There is a very interesting feature to our proposed capital budgeting system that we should highlight. How can the capital budget ever be negative? The capital budget plus the non-capital budget must add up to the total budget. So for a given total budget, a negative capital budget makes the non-capital budget bigger. What is going on is this: regular maintenance is like a quasi-entitlement within the non-capital budget. In any given year, regular maintenance as a component of the non-capital budget is fixed in advance and can’t be altered by the legislature. The only way it changes is that it is gradually reduced if the quantity of capital to be maintained gets lower, or gradually increased if the amount of capital to be maintained gets bigger.

In this lack of discretion about regular maintenance as a component of the non-capital budget, there is no real tying of the hands of the legislature: they could always choose to have a very negative capital budget, which would increase the non-capital budget enough to cover that maintenance. So if the legislature as a whole acted like a fully rational actor, this principle is not a constraint at all. But as political economy, it makes a difference, and a good one. The legislature can increase the non-capital budget and reduce the capital budget. But what the legislature can’t do is get more funds for other things by letting capital decay without it showing up in the accounting as an increase in the regular budget and reduction in the capital budget.

Actually, There Was Some Real Policy in Obama’s Speech

Here is a link to my 45th column on Quartz, “Actually, there was some real policy in Obama’s speech.”

I briefly considered titling this post “The 2014 State of the Union Hints at Shifts in the Overton Window.” I say a bit about the “Overton window" in my post "The Overton Window.” In brief, the “Overton window” is the set of “respectable" policies that are discussed by actual politicians and those closely associated with them.

The Case for Gay Marriage is Made in the Freedom of Religion

Here is a link to my 44th column on Quartz, “The case for gay marriage is made in the freedom of religion.”

This is a followup to my Christmas column “That baby born in Bethlehem should inspire society to keep redeeming itself.”

I am not making a narrowly legal argument in “The case for gay marriage is made in the freedom of religion." It as addressed at least as much to current and future voters and legislators as to lawyers crafting arguments for judges. 

That Baby Born in Bethlehem Should Inspire Society to Keep Redeeming Itself

Here is a link to my 43d Column on Quartz, “That baby born in Bethlehem should inspire society to keep redeeming itself.”

Make No Mistake about the Taper—the Fed Wishes It Could Stimulate the Economy More

Here is a link to my 42d column on Quartz, “Make no mistake about the taper–the Fed wishes it could stimulate the economy even more.”

Gather 'round, Children, Here's How to Heal a Wounded Economy

Here is a link to my 41st column on Quartz: “Gather round, children, here’s how to heal a wounded economy." It could also be called "Electronic Money: The Coloring Book.”

Thanks are due to Donna D'Souza for her help in the cause of healing the economy, starting with education about electronic money.  

In case there are any problems with the SoundCloud links in the Quartz column, here is the audio of me reading the story aloud and the audio of me singing the operatic ballad that has the words of the story as the lyrics.

Since I began writing about electronic money, many people have told me that the biggest issues with serious negative (nominal) interest rates and the subordination of paper currency to electronic money needed to make them possible are political issues. I agree. I have thought that the way to change the politics of negative interest rates is to keep explaining them, from many different angles. This is the children’s storybook angle.

I think our storybook/coloring book works as a children’s story. There is an attempt to solve a problem that fails, then there is a twist that solves the problem from an unexpected direction–using a seeming curse that is actually a blessing. See what you think.

Reactions

Greg Mankiw writes on his blog:

If my favorite textbook hasn’t simplified things enough for you…

My friend and former student Miles Kimball takes a stab at explaining some basic macroeconomics through the vehicle of a child’s storybook.

Gerald Seib and David Wessel, in the Wall Street Journal, write:

University of Michigan economist Miles Kimball posts a downloadable coloring book and colored-in storybook to explain his simplified version of how the macro-economy and monetary policy work. [Quartz]

‘The Hunger Games’ is Hardly Our Future—It's Already Here

Here is a link to my 40th column on Quartz, “‘The Hunger Games’ is hardly our future–it’s already here.” Think about our immigration policy and you will be able to map out the column in your head even before you read it.

Human Grace: Gratitude is More than Simple Sentiment; It is the Motivation that Can Save the World

Here is a link to my 39th column on Quartz: “Human Grace: Gratitude is more than simple sentiment; it is the motivation that can save the world”–my 1st Thanksgiving column!

Last year I did have a post inspired by Thanksgiving, published on the Sunday after Thanksgiving: “An Agnostic Grace.”

The Shakeup at the Minneapolis Fed and the Battle for the Soul of Macroeconomics

Here is a link to my 38th column on Quartz, coauthored with Noah Smith, “The shakeup at the Minneapolis Fed is a battle for the soul of macroeconomics–again.” Our editor insisted on a declarative title that seriously overstates our degree of certainty on the nature of the specific events that went down at the Minneapolis Fed. I toned it down a little in my title above.

Larry Summers Just Confirmed that He is Still a Heavyweight on Economic Policy

Here is a link to my 37th Quartz column, “Larry Summers just confirmed that he is still a heavyweight on economic policy.”

Note: The phrase “war on the zero lower bound” I used in the column is due to a tweet a few days ago from VerySeriousPeople.   

There's One Key Difference Between Kids Who Excel at Math and Those Who Don't

Here is a link to my 36th column on Quartz, coauthored with Noah Smith: “There’s one key difference between kids who excel at math and those who don’t.”

An early working title was “The Most Self-Destructive Idea in America."

Get Real: Robert Shiller's Nobel Should Help the World Improve Imperfect Financial Markets

Here is a link to my 35th column on Quartz: “Get Real: Robert Shiller’s Nobel should help the world accept (and improve) imperfect financial markets.”

Janet Yellen is Hardly a Dove—She Knows the US Economy Needs Some Unemployment

Here is a link to my 34th column on Quartz: “Janet Yellen is hardly a dove–she knows the US economy needs some unemployment.”

October 18, 2013 Update: Given his 780,386 Twitter followers, a tweet from Ezra Klein is worth reporting. I like his modification to my tweet: 

No, she’s a human being RT @mileskimball: Don’t miss my column “Janet Yellen is hardly a dove” http://blog.supplysideliberal.com/post/63725670856/janet-yellen-efficiency-wages-and-monetary-policy

Notes:

Andy Harless’s Question: Where Does the Curvature Come From? Andy Harless asks why there is an asymmetry–in this case a curvature–that makes things different when unemployment goes up than when it goes down. The technical answer is in Carl Shapiro and Joseph Stiglitz’ paper “Unemployment as a Worker Discipline Device.” It is not easy to make this result fully intuitive. A key point is that unemployed folks find jobs again at a certain rate. This and the rate at which diligent workers leave their jobs for exogenous reasons dilute the motivation from trying to reduce one’s chances of leaving a job. The discount rate r also dilutes any threats that get realized in the future. So the key equation is 

dollar cost of effort per unit time 

                    =  (wage - unemployment benefit) 

                                                          · detection rate

÷ [detection rate + rate at which diligent workers leave their jobs                              + rate at which the unemployed find jobs + r]  

That is, the extra pay people get from work only helps deter dereliction of duty according to the fraction of the sum of all the rates that comes from the detection probability. And the job finding rate depends on the reciprocal of the unemployment rate. So as unemployment gets low, the job finding rate seriously dilutes the effect of the detection probability times the extra that workers get paid.

(The derivation of the equation above uses the rules for dealing with fractions quite heavily, backing up the idea in the WSJ article I tweeted as follows.

The Dividing Line: Why Are Fractions Key to Future Math Success? http://on.wsj.com/15rlupS

Deeper intuition for the equation above would require developing a deeper and more solid intuition about fractions in general than I currently have.)

Solving for the extra pay needed to motivate workers yields this equation:

(wage - unemployment benefit) 

           = dollar cost of effort per unit time 

· [detection rate + rate at which diligent workers leave their jobs                              + rate at which the unemployed find jobs + r]  ÷

                                  detection rate

In labor market dynamics the rates are high, so a flow-in-flow-out steady state is reached fairly quickly, and we can find the rate at which the unemployed find jobs by the equation flow in = flow out, or since in equilibrium the firms keep all their workers motivated,  

rate at which diligent workers lose jobs * number employed

= rate at which the unemployed find jobs * number unemployed.

Solving for the rate of job finding:

rate at which the unemployed find jobs 

= rate at which diligent workers leave their jobs 

· number employed  ÷  number unemployed

Finally, it is worth noting that

rate at which diligent workers leave their jobs

+ rate at which the unemployed find jobs

= rate at which diligent workers leave their jobs 

· [number unemployed + number employed]/[number unemployed]

= rate at which diligent workers leave their jobs 

÷ unemployment rate

Morgan Warstler’s Reply: The original link in the column about Morgan Warstler’s plan was to a Modeled Behavior discussion of his plan. Here is a link to Morgan Warstler’s own post about his plan. Morgan’s reply in the comment thread is important enough I will copy it out here so you don’t miss it:

1. The plan is not Dickensian. It allows the poor to earn $280 per week for ANY job they can find someone to pay them $40 per week to do. And it gives them the online tools to market themselves.

Work with wood? Those custom made rabbit hatches you wish you could get the business of the ground on? Here ya go.

Painter, musician, rabbit farmer, mechanic - dream job time.

My plan is built to be politically WORKABLE. The Congressional Black Caucus, the Tea Party and the OWS crowd. They are beneficiaries here.

2. No one in economics notices the other key benefit - the cost of goods and services in poor zip codes goes down ;:So the $280 minimum GI check buys 30% more! (conservative by my napkin math) So real consumption goes up A LOT.

This is key, bc the effect is a steep drop in income inequality, and mobility.

That $20 gourmet hamburger in the ghetto costs $5, and it’s kicking McDonalds ass. And lots of hipsters are noticing that the best deals, on things OTHER THAN HOUSING are where the poor live.

Anyway, I wish amongst the better economists there was more mechanistic thinking about how thigns really work.

Don't Believe Anyone Who Claims to Understand the Economics of Obamacare

Here is a link to my 33d column on Quartz “Don’t believe anyone who claims to understand the economics of Obamacare.”

Here is my original introduction, which was drastically trimmed down for the version on Quartz: 

Republican hatred of Obamacare, and Democratic support for Obamacare, have shut down the “non-essential” activities of the Federal Government. So, three-and-a-half years since President Obama signed the “Patient Protection and Affordable Care Act” into law, and a year or so since a presidential election in which Obamacare was a major issue, it is a good time to think about Obamacare again.

In my first blog post about health care, back in June 2012, I wrote:

I am slow to post about health care because I don’t know the answers. But then I don’t think anyone knows the answers. There are many excellent ideas for trying to improve health care, but we just don’t know how different changes will work in practice at the level of entire health care systems.  

That remains true, but thanks to the intervening year, I have high hopes that with some effort, we can be, as the saying goes, “confused on a higher level and about more important things.”

One thing that has come home to me in the past year is just how far the US health care sector—with or without Obamacare—is from being the kind of classical free market Adam Smith was describing when he talked about the beneficent “invisible hand” of the free market. 

Reactions: Gerald Seib and David Wessel Included this column in their “What We’re Reading” Feature in the Wall Street Journal. Here is their excellent summary:

The key to the long-run impact of Obamacare will be whether it smothers innovation in health care – both in the way it is organized and in the development of new treatments. And no one today can know whether that’ll happen, says economist Miles Kimball. [Quartz]

(In response, Noah Smith had this to say about me and the Wall Street Journal.) This column was also featured in Walter Russell Mead’s post “How Will We Know If Obamacare Succeeds or Fails.” (Thanks to Robert Graboyes for pointing me to that post.) He writes:

Meanwhile, at Quartz, Miles Kimball has a post entitled “Don’t Believe Anyone Who Claims to Understand the Economics of Obamacare.” The whole post is worth reading, but near the end, he argues that the ACA’s effect on innovation could eventually be the most important thing about it’s long-term legacy…

From our perspective, these are both very good places to start thinking about how to measure Obamacare’s impact. Of course, Tozzi’s metric is easier to quantify than Kimball’s: it will be difficult to judge how the ACA is or isn’t limiting innovation. But that doesn’t mean we shouldn’t try: without innovation, there’s no hope for a sustainable solution to the ongoing crisis of exploding health care costs.

I have also been pleased by some favorable tweets. Here is a sampling:

• Matthew Yglesias: “Solid @MilesKimball column on the very uncertain long-term impact of Obamacare”
• Adam Gurri: “Great piece by @mileskimball on the nuances of figuring out what Obamacare even does”
• Ramez Naam: “Thought provoking piece by @mileskimball on how little we understand health care economics, & how key innovation is.”
• Philip Walach: “Epistemological modesty is in much too short supply. @mileskimball has refreshingly honest take on ACA: nobody knows.”

Talk Ain't Cheap: You Should Expect Overreaction When the Fed Makes a Mess of Explaining Its Plans

Here is a link to my 32d column on Quartz, “Talk Ain’t Cheap: You should expect panic when the Fed makes a mess of explaining its plans.”

You can see my other posts on monetary policy on my Monetary Policy sub-blog (which also has a permanent link on my sidebar).

America's Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks

Here is a link to my 31st Quartz column, “America’s huge mistake on monetary policy: How negative interest rates could have stopped the Great Recession in its tracks.”

This post is a rearticulation of my argument for electronic money, focusing on the negative interest rates themselves.

Cutout. An early draft had a lead paragraph that was cut for reasons of brevity and focus, but that I think will be of independent interest for many readers:

John von Neumann, who revolutionized economics by inventing game theory (before going on to help design the first atom bomb and lay out the fundamental architecture for nearly all modern computers), left an unfinished book when he died in 1957: The Computer and the Brain. In the years since, von Neumann’s analogy of the brain to a computer has become commonplace. The first modern economist, Adam Smith, was unable to make a similarly apt comparison between a market economy and a computer in his books, The Theory of Moral Sentiments or in the The Wealth of Nations, because they were published, respectively, in 1759 and 1776—more than 40 years before Charles Babbage designed his early computer in 1822. Instead, Smith wrote in The Theory of Moral Sentiments:

“Every individual … neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Now, writing in the 21st century, I can make the analogy between a market economy and a computer that Adam Smith could not. Instead of transistors modifying electronic signals, a market economy has individuals making countless decisions of when and how much to buy, and what jobs to take, and companies making countless decisions of what to buy and what to sell on what terms. And in place of a computer’s electronic signals, a market economy has price signals. Prices, in a market economy, are what bring everything into balance.

How to Avoid Another NASDAQ Meltdown: Slow Down Trading (to Only 20 Times Per Second)

Here is a link to my 30th Quartz column “Speed Limit–How to avoid another Nasaq meltdown: Slow down trading.”

Let me mention one thing to watch out for if (to bolster the argument that high-frequency trading adds to liqiuidity) someone brings to the table empirical evidence on the effect of high-frequency trading bid/ask spreads: front running by the market makers can raise trading costs too. The extra trading costs from the front running of high-frequency trading should be added to the usual bid/ask spread; just because a trading cost is less visible than bid/ask spreads doesn’t mean it doesn’t count.

Miles and Noah: The Complete Guide to Getting Into an Economics PhD Program

Here is a link to my 29th Quartz column, coauthored with Noah Smith: “The complete guide to getting into and economics PhD program.”

Personally, I would rather read Noah’s blog than any other blog in cyberspace. That brilliant style shows through here; I think I managed not to spoil things too much in this column.   

In case you are curious, let me say a little about the financial costs and benefits of an economics PhD.  At Michigan and other top places, PhD students are fully funded. Here, that means that the first year’s tuition and costs are covered (including a stipend for your living expenses). In years 2 through 5 (which is enough time to finish your PhD if you work hard to stay on track), as long as you are in good standing in the program, the costs of a PhD are just the work you do as a teaching assistant. So there are no out-of-pocket costs as long as you finish within five years, which is tough but doable if you work hard to stay on track. Tuition is relatively low in year 6 (and 7) if you can’t finish in 5 years. Plus, graduate students in economics who have had that much teaching experience often find they can make about as much money by tutoring struggling undergraduates as they could have by being a teaching assistant.

When a school can’t manage full funding, the first place it adds a charge is in charging the bottom-half of the applicant pool for the first year, when a student can’t realistically teach because the courses the grad students are taking are too heavy. That might add up to a one-time expense of $40,000 or so in tuition, plus living expenses.

On pay, the market price for a brand-new assistant professor at a top department seems to be at least $115,000 for 9 months, with the opportunity to earn more during the summer months. If you don’t quite make it to that level, University of Michigan PhD’s I have asked seem to get at least $80,000 starting salary, and Louis Johnston tweets that below-top liberal arts colleges pay a starting salary in the $55,000 to $60,000 range. But remember that all of these numbers are for 9-month salaries that allow for the possibility (though not the regularity) of earning more in the summer. Government jobs tend to pay 12-month salaries that are about 12/9 of 9-month academic salaries at a comparable level.

There is definitely the possibility of being paid very well in academic economics, though not as well as the upside potential if you go to Wall Street. For example, with summer pay included, quite a few of the full economics professors at the University of Michigan make more than $250,000 a year. (Because we are at a state university, our salaries are public.)

The bottom line is that the financial returns are good enough that you should have no hesitation begging or borrowing to finance your Economics PhD. (Please don’t steal to finance it.)

What about the costs of the extra year it might take to study math the way we recommend? If you have been developing self-discipline like a champion, but are short on money and summers aren’t enough, you could spend a gap year right after high school just studying math, living in your parents’ house at very low cost; most colleges will let you defer admission for a year after they have let you in.    

Update

I liked this comment that Kevin C. Smith (an MD) sent to Quartz:

Great advice!

I almost flunked Grade 8 because my math was so bad [back in the day they would flunk you for that, at least in Alberta.]

I wound up heading for medicine. A friend who was a few years ahead of me warned: “You’ll never make it if you are not good at math!”

I hired a math tutor in August [before University started], and did every question at the end of every chapter in every one of my text books. I couldcall my tutor when I got stuck [God bless her, wherever she is in the world today!] Math got to be fun after a while [like being really good at solving puzzles.]

You might add to you list of suggestions: hire a tutor do all the questions in all your textbooks

Long story short, I won the Gold Medal for Science, and have found that a really good grasp of math has helped my enjoyment of the world and of my work a lot.

Benjamin Franklin's Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?

Here is a link to my 28th column on Quartz “Benjamin Franklin’s strategy to make the US a superpower worked once, why not try it again?”

Update: Steve Sailer has an interesting post pointing out the importance of birth rates, as well as the immigration rates I emphasize in the column. In order to keep an open mind, before reading Steve Sailer’s post, I recommend reading my post “John Stuart Mill’s Argument Against Political Correctness.” In his post Steve also points out that Ben Franklin favored English immigration over German immigration. 

Ezra and Evan’s Flag. I was very pleased to see Ezra Klein and Evan Soltas flag the column, and intrigued by the way they boiled it down:

KIMBALL: The Ben Franklin strategy to a U.S. renaissance. “The reason China’s economic rise matters for US grand strategy is that China has a much larger population than the United States…An excellent answer is to do everything possible to foster long-run growth of per capita GDP in the US. At a minimum, this includes radical reform of our system of K-12 education, removing the barriers state governments put in the way of people getting jobs, and dramatically stepped-up support for scientific research…The key to maintaining America’s preeminence in the world is to return to Ben Franklin’s visionary grand strategy of making many more of the world’s people into Americans.” Miles Kimball in Quartz.