Mitchell's Musings

  • 09 Apr 2016 6:45 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-11-16: What is the Point? – Part 2

    Daniel J.B. Mitchell

    Last week’s musings dealt with a lecture I gave in my course California Policy Issues on state economic policy. Basically, after watching that lecture, it seemed (to me at least) that there were a few key points in the presentation and that those points were in fact made clear. Earlier in the same course, however, I gave a lecture on fiscal policy which has some obvious overlaps with the later one. See After watching that fiscal presentation, I am less confident that all the key points that should have been made actually were made or were made clearly enough.

    In that earlier lecture the topic is really budgeting. There was a time, back when I was an undergraduate in the 1960s, in which courses were offered which dealt with that topic in economics departments under the heading of “Public Finance.”  Since that time, Public Finance has become “Public Economics” and the name change signified that the topic is now a whole lot more theoretical than in olden times. So the nuts and bolts of state and local fiscal affairs are not likely to receive much attention.

    Undergraduate students can still take courses in accounting, as I did. But such courses tend to be focused on corporate, i.e., private sector, accounting and not the kind of accounts routinely found at the state and local level. That’s a definite gap in the curriculum, particularly for students who might be considering careers in the public sector. Nonetheless, there is one benefit that a student with an accounting background would have and that benefit is a recognition of a key point in the lecture: the distinction between stocks and flows and the related notion that flows have to be defined over a unit of time (such as a fiscal year).

    The lecture does make it clear (I think) that notions of surplus and deficit should be defined as flows (and thus linked to a specified time period). In corporate accounting, for example, flows are reflected in income statements. And the profits and losses shown on those statements are roughly analogous to surpluses and deficits in government budgets.

    Similarly, the balance sheet in corporate accounting is a stock measure since it shows assets vs. liabilities at a point in time, e.g., the end of the fiscal year. But the analogy somewhat breaks down since balance sheets for governments typically value only cash as assets and omit physical assets that governments own (office buildings, roads, bridges, schools, equipment, etc.). Balance sheets for government do show debt although there are issues about what debts are to be reflected. (Should unfunded retirement-related liabilities be listed along with bond-type debt, for example?)

    What I think is not clear is that, although the lecture notes that the budget is the most complete piece of legislation establishing priorities, the budget doesn’t directly tell you much about judgment or good administration. Fiscal prudence, i.e., managing the budget so that bills can be paid both in good times and bad, doesn’t mean that budgetary priorities are the “right” ones. Right and wrong in that case are individual political preferences, not matters of accounting. And even if your priorities match those of the legislature and the budget, fiscal prudence doesn’t tell you whether the priorities are being accomplished efficiently or effectively.

    Although the budget lecture focuses on California and provides some of that state’s recent budgetary history (including the fiscal crisis surrounding the Great Recession), it omits an important observation. It doesn’t note that popular opinion judges whether fiscal affairs in Sacramento are being managed correctly by the absence of crisis. That is, if there are no dark headlines, things must be OK.

    For many years, until voters changed the rules through a ballot proposition in 2010, a budget could not be passed without a two-thirds vote of the legislature (in both houses). That requirement rarely caused significant delay in good times. In bad times, however, budgets were late – sometimes by months – creating a crisis. Bills couldn’t be paid without budgetary authorization, even if cash was on hand to do so. Thus, delay and crisis in Sacramento was a signal to the voters that something was wrong and that fiscal affairs were being mishandled. Typically, pollsters would detect a sharp drop in favorability ratings of the governor and legislature when budget delays occurred.

    Crisis via delay was a crude public signal, but it was a highly visible signal. Delays in budget enactment at least gave an indication of a problem before fiscal affairs reached a point – as occurred in 2009 – that cash couldn’t be found to pay all bills and IOUs had to be issued instead. Now that the delay signal is gone (thanks to the end of the supermajority requirement), the need for consistent budget definitions of concepts such as deficits is heightened.

    Yes, Governor Jerry Brown got voters to approve a “rainy day” fund that is supposed to (help) avert future fiscal crises. But the rainy day fund itself tends to obscure the issue of whether there is a deficit so long as a crisp definition of that concept is not mandated. The flows into and out of the General Fund now have to be added to the flows into and out of the rainy day fund to calculate deficits and surpluses properly.

    You can find the elements of such a conclusion in the lecture. But after a replay, I have to conclude that the implication may not be apparent. Next year, I will have to clarify. In the meantime, all that can be said is that such policy reforms as removing the two-thirds budget rule or creating a rainy day fund have unintended consequences. Perhaps that is another point that also needs to be made next year.

  • 05 Apr 2016 8:54 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-4-16: What is the Point?

    Daniel J.B. Mitchell

    The Mitchell’s Musings column resumes now that the UCLA winter quarter has ended along with the course I co-teach each winter with Michael Dukakis on California Policy Issues. UCLA’s winter quarter consists of ten weeks of instruction (plus a week for exams). Each week of the course is devoted to a different area of public policy, although there is often a significant overlap between the various subjects.

    In particular, the topic of week 8 is California economic policy. Each year, I give a presentation in that week involving PowerPoint slides and videos on state economic policy. Although the presentations each year have been similar, they are updated and evolve as events change. You can find the latest version at the link below:  (About an hour and a half in five parts.)

    There is a key point in the presentation: If you think of economic policy in the short-term macroeconomic sense (trying to flatten out the business cycle), there isn’t a great deal California can do.  The California business cycle is pretty much a reflection of the U.S. business cycle and the policy instruments needed to deal with that issue are largely in the hands of the federal – not the state - government. Much of the impotence at the state level lies with the fact that states do not have independent monetary policies since they don’t have their own currencies. The states of the United States are part of the larger U.S. dollar zone. What countries in the euro-zone have discovered, perhaps to their dismay, is that giving up their national monetary systems meant that they have become as limited in macro affairs as are states with the U.S.

    However, despite the greatly constrained capacity of states such as California to deal with macroeconomic affairs, that fact has not limited the ability of the electorate to hold governors responsible for local economic conditions. It’s best not to be a governor during a downturn. Being a governor in the expansion phase is far more pleasant. As California governor Jerry Brown recently commented while reflecting upon the current state expansion:

    "It's quite remarkable what California's been able to do. That won't always be, and when that turns around, I think the job [of governor] will be far more challenging than it is today."[1]

    During Hard Times, despite the seeming unfairness of holding a governor responsible for something that ultimately has to be dealt with at a higher level, there is often some justice in it. When they stand for election, governors and other state and local officials often take credit for good economic conditions when those circumstances are present. If they are candidates for office (but not actually in office) during election campaigns, they may well blame incumbents for Hard Times and promise to do something about conditions. So voters can’t be faulted from attributing to governors more economic authority and control than they actually have.

    There is an interesting question, one which is not raised in the class presentation since the course is confined to the state level. Numerous studies indicate that presidential elections are influenced by the state of the national macro-economy. And my presentation does note that the macro-economy is largely the province of the federal government which does have a monetary system and, thus, a monetary policy. State and local governments can’t create money; the federal government can. But in the American system, what exactly is the federal government?

    It isn’t just the President (any more than a state within the U.S. is just the governor). There are three distinct branches of government and fiscal policy, even if the President can propose a particular fiscal approach, is largely a matter for the Congress (with the judiciary chiming in on whether what Congress did is constitutional). Apart from the three branches, the Federal Reserve is quasi-autonomous by design. The President cannot order up a particular monetary policy. But as at the gubernatorial level, that fact doesn’t prevent presidents from taking credit for good economic conditions. And it doesn’t prevent presidential candidates from claiming that they will unilaterally produce improved conditions.

    In the class presentation, I note that there is a difference between macroeconomics in the short-term, business-cycle sense of the word - as we have been using it above - and long-term trends. Averaging out the business cycle, what is the underlying growth trend of a state? It could be faster, slower, or the same as the national trend of which it is a component. Obviously, there are external factors beyond state control that can affect the long-term trend. In the California case, from World War II until the end of the Cold War, the state growth rate was boosted by military-related expenditures from the federal government as can be seen in Appendix A. So world events were an important economic driver for California.

    However, even though there was an outside boost to state growth, California took advantage of the tax revenues that the boost generated to build up its physical and educational infrastructure. Those investments were expenditures that helped reinforce the effect of the external stimulus. Indeed, one could argue that much of the challenge facing California after the end of the Cold War involved (and still involves) maintaining and expanding that Cold War-era infrastructure in a period when the pie is not expanding as fast as the old trend.

    In short the lesson I hope the students in California Policy Issues take away is to be skeptical of candidates at the state and local level who promise quick economic miracles, particularly during periods of national economic difficulty. And while the federal/presidential story is more complex than the state and local version, at least I hope they will remember that under the U.S. system of governance, presidents cannot decree monetary and fiscal policies. They are not dictators, beneficent or not.


    [1] Brown was governor in the 1975-83. In 2005, he was back in California state politics and joked and philosophized about the limits of the role of governor at a conference at UCLA:


    Appendix A: California’s Post-Cold War Deviation from Cold War Employment Trend

  • 28 Dec 2015 10:44 AM | Daniel J.B. Mitchell (Administrator)

    A 1947 children’s record intended to teach kids tolerance of others – The Churkendoose – ended with a song whose refrain was “It depends on how you look at things.”[1] It came to mind when I saw a recent NPR interview with President Obama. The interview dealt largely with terrorism and Middle East policy.

    But it then turned to a variety of domestic issues including black-lives-matter protests, campus protests more generally, and issues of blue-collar workers who – the President said – have economic difficulties which are being exploited by candidate Donald Trump.[2]

    The President’s view of the problems of blue-collar workers was basically that grand forces – globalization, technology, etc. – were moving against that group and leading to “frustration.” The old deal that these workers once had, or perhaps their parents had, is gone or going. However, when you look at the chart below from the Economic Policy Institute, it suggests that the “frustration” issue may be more general than just blue-collar workers.[3] The chart focuses on all prime age workers (25-54) so trends in staying in school and/or early retirement are not likely to have much impact. The drop in the employment-to-population ratio since 2000 suggests a broader labor market issue than just one affecting blue-collar folks. The ratio is still below 1990 levels despite the marked drop in unemployment rate since the Great Recession. 

    How you look at the empirical data, as The Churkendoose song says, “depends.” The President, in his interview, sees the adversity in the labor market as something that just happened. When you view the data as something that just happened, you are tilted toward the notion that nothing could be done - could have been done - about the consequences. Blind forces such as globalization are seen as akin to the weather, i.e., forces of nature. It’s safe to say that this view of labor market trends is widely shared by many mainstream commentators. At best, they think, the only thing to be done is to offer palliative care after the fact (food stamps?) and to advise or encourage the younger generation of incoming workers to go to college. 

    Trends in technology are indeed weather-like in their genesis. Globalization, on the other hand, or at least its domestic impact, is susceptible to public policy. Indeed, from its founding in the late 18th century through at least the first half of the 20th century, the politics of the U.S. often revolved around what to do about global competition. You can call the debate protectionism vs. free trade if you like. But it was a major American political issue. And the debate was often put in terms of labor-market impacts of external competition. 

    Thus, it’s really not true that the domestic impact of globalization is like the weather. It may be cold outside. But what the temperature is indoors has a lot to do with whether you choose to open the window. In the immediate aftermath of World War II, the window wasn’t all that open. For a variety of reasons, a policy decision was made in the U.S. to open it.

    The decision to reduce protection, starting with the Kennedy administration, was made with regard to foreign affairs considerations in the context of the Cold War. But in recent years, it is less protection that is the issue when it comes to the domestic labor market impact and more the U.S. trade (im)balance. The U.S. could – as we have noted in many prior musings – have chosen to take steps to reduce and eliminate the trade deficit. It has chosen not to do so, apparently for foreign policy reasons related especially to relations with China and Japan. (We want China to cooperate on such problems as North Korea and Iran. And we want Japan to be a counterweight to China.) So while the President and his predecessors have depicted the labor market impacts of globalization as something over which they have no control, that stance depends on a view that no policy decisions were, or are, involved.

    In short, it depends on how you (choose to) look at things - and how you then frame them.
    NOTE: During the 2016 winter quarter at UCLA, I will be teaching. Hence, weekly Musings posts will not resume until April 2016. However, if some issues arise before April on which I can’t resist commenting, I will do so.


  • 21 Dec 2015 2:06 PM | Daniel J.B. Mitchell (Administrator)

    I went to a play entitled “Straight White Men” at the Kirk Douglas Theater in Culver City, California recently. The play, written by an Asian female, tells the story of a retired father and his three adult sons who are home for Christmas. Mom has died earlier and there are no wives or other women in the cast. It wasn’t exactly clear what Dad had done for a living in the past but all appeared to be middle class, college educated men. One son was a banker (divorced). Another was some kind of academic or teacher who was in therapy. The third, around whom the play revolves, is a Harvard grad who seems to be clinically depressed. He bursts out crying at one point without an obvious cause, to the dismay of the other characters.

    The Harvard son was apparently expected to do great things in the world of do-good nonprofits, but he has apparently drifted from job to job taking on only menial roles. At present, he seems to be running a copying machine for some nonprofit organization. He has moved back in with Dad due to his monetary problems: low earnings and unpaid college debt. Dad offers to pay off the debt, academic son recommends therapy, and banker son and Dad try to teach the Harvard son how to interview for better jobs (look the interviewer in the eye, etc.). However, the depressed son won’t cooperate and, at the end, Dad gives him some money and tells him to leave the house. Interspersed in the play were occasional references to white privilege.

    I can’t tell you what this drama was supposed to mean. After the play ended, there was an organized session of audience discussion which wasn’t very enlightening. But there is an interesting question, apart from the family drama. Assuming the characters in the play were supposed to represent straight white men, how representative were they? Again, forget the “social significance” element. I am just talking demographics.

    The characters come from what appears to be a well off middle class family with college educations. (Harvard, no less, for the depressed son!) What fraction of the group they are supposed to represent fit that model? Let’s look at Census data on educational attainment by race for men. What percent of various racial groups had a BA (or more) in 2014? The table below gives the numbers.[1] I list the results for all men 25 years old and older, 45-49 years (maybe the sons’ age group), and 65-69 (maybe Dad’s age).

                    White         Asian        Black       Hispanic*
    All 25+         35.9%         54.7%        20.4%          14.2% 
    45-49           37.7          56.4         20.9           16.2
    65-69           37.2          50.9         19.3           20.3
    *Any race

    Now the Census does not give a further breakdown by sexual orientation. But as best we can determine, well over 60% of adult white non-Hispanics of whatever orientation don’t have a college degree.

    Ironically for a play written by an Asian female, the only demographic group where at least a majority of adult men have a college degree is Asians. The biggest contrasts in college degree attainment are Asian vs. black and Asian vs. Hispanic.

    It’s unlikely that the 60-plus percent of non-college degree white males are having conversations about white privilege. (For that matter, it’s unlikely that they are the typical of patrons of the Kirk Douglas Theater.) Again, numbers tell the story.

    The Appendix to this musing has some data on trends of three sectors of the economy that are heavily male in employment and heavily using of folks with less than a college degree. I also pulled some recent data together that suggest that the three sectors would collectively have a workforce that would be well over half non-Hispanic white male. Manufacturing, the biggest, has been in a long term decline since the 1980s. In contrast, construction was doing OK until the Great Recession. But, while it’s now improving since the bottom of that recession, construction employment is still at the absolute levels of the late 1990s. The smallest of the three sectors, mining and logging, is heavily affected by the ups and downs of oil prices (oil extraction is classified as “mining”), but that sector is essentially trendless over the long period shown. Moreover, the recent decline in oil prices has now adversely affected this sector.

    In short, the job market doesn’t look so hot for those non-college degree white males, straight or otherwise. And those males comprise the core of the disaffected group that some recent opinion polls suggest is behind the Trump phenomena in the Republican presidential race. So perhaps thinking about the job prospects for this group was what was depressing the play’s socially-minded Harvard son. Perhaps the Harvard son, unlike the playwright apparently, had cared to look up the numbers.

    [1] Source: 

  • 14 Dec 2015 9:57 AM | Daniel J.B. Mitchell (Administrator)

    Organizations nowadays have business plans for the lines of activity in which they hope to succeed. The business plans for terrorist groups – even if not formalized as such - involve recruitment by commission of the most outrageous atrocities they can conceive. For example, the attacks in Paris seemed to be mainly a recruitment tool for those attracted to such behavior, thus perpetuating the organization. The new recruits join the organization and follow its coordinated plans or, without formally joining, they commit similar atrocities that they choose on their own (as appears to be the case in San Bernardino). Thus, even though such attacks are often suicidal, enough new recruits are attracted to replace those who perish. 

    Of course, the leaders of organizations such as ISIS and al-Qaeda don’t themselves commit suicide or die in such acts. Osama Bin Laden did not crash a plane into a building. Instead, leaders like Bin Laden induce others to commit suicidal acts for them. It’s a viable, working business model that has so far been a success.

    The terrorism marketplace seems to operate within a kind of circular “Say’s Law” framework in which supply creates its own demand.[1] Supply (of new atrocities) creates demand for more among a subset of external witnesses for whom the Internet and conventional news media make the images available. A sufficient number of those individuals (it doesn’t have to be a large percentage) who are attracted to such events are induced to supply more of them. The process gives the phrase “vicious cycle” an entirely new meaning.

    I’m no expert on terrorism but I do think that official statements by government authorities indicating that terrorists are being defeated miss the point. Individual terrorists may be defeated. But the overall terror enterprise has developed a successful business plan, in part dependent on social media. Like “crime,” it probably can’t be defeated if defeat is defined as no attacks anywhere, or even just not in the U.S. But like crime, it can be suppressed and discouraged. The sad fact is that terrorism as a problem can be managed, but not solved.

    Terrorism is the extreme example of the phenomenon of outrageous behavior as a successful business strategy. However, there seems to be a related development in less extreme circumstances. The recent statements by GOP candidate Donald Trump – banning Muslims from entering the U.S., etc. – fall into that category. It’s not that other GOP candidates are induced to say exactly the same thing or to say even wilder things. But making outrageous statements attracts both media coverage and supporters. From the news media perspective, even if there are angry editorial denunciations of the remarks, the coverage of them attracts readers, listeners, and viewers. The denunciations, in fact, seem to reinforce the enthusiasm of Trump supporters. So the supply of outrageous statements seems to create a demand for more of them.

    Say’s Law applied to public discourse seems to invoke yet another 19th century economic law: Gresham’s proposition that bad money drives out good.[2] Gresham’s Law was a product of the U.S. bimetallism (gold vs. silver) monetary standard of that era. Under Gresham’s law, the metal which is of relatively high value disappears from circulation as a currency and is replaced through market forces by the low-value metal. The contemporary version is that bad discourse drives out good. Outrageous statements are a successful business strategy.

    As the Gresham effect has operated in recent days, economic concerns seemed to have totally disappeared from the presidential campaign. Remember the debate about the proposed TPP (Trans-Pacific Partnership) accord and its potential effects on the domestic economy? Whatever you may think about that issue, you haven’t seen much about it of late. Similarly, the Pew Research Center a few days ago released a report documenting the relative decline of the American middle class.[3] Not much discussion was to be found about that development, either. 

    That lack of attention is especially of interest since declining economic opportunity seems to be an underlying influence animating the most enthusiastic Trump Republican supporters: individuals with less than a college degree. In fact, neither political party can claim to have done much for them in that area. Telling them to get their degrees and even promising subsidies to do so – the Democrats’ response – is not all that helpful.

    In fact, the days of presidential campaigns based on “it’s-the-economy-stupid” seem to have evaporated in the market for outrage. Undoubtedly, another recession would refocus the public discussion on the economy, but a recession is hardly a result to be desired. And there is an interesting question of whether, if a recession did occur, public policies could be mounted – as they were in 2008 – to prevent a disastrous downward spiral. 

    We now, post-2008, have banks supposedly too large to fail and political gridlock and polarization that might let them fail. That possibility alone should be of concern to presidential candidates and the electorate. But you haven’t heard much about it, have you? In the marketplace for outrage, you probably won’t. Still, the odds that you will be adversely affected by a recession in the future are much greater than the odds you will be the victim of a terrorist.

    Happy Holidays.


    [1] Say’s Law is the 19th century economic proposition that supply creates demand (because the income paid out to those who produce the supply becomes their demand for products). You can find numerous expositions on the web, e.g.,  



  • 07 Dec 2015 4:19 PM | Daniel J.B. Mitchell (Administrator)

    Concerns about “profiling” seem to rise and fall as a result of incidents that receive substantial public attention. Police shootings of blacks in various confrontations around the country are examples. Terrorist incidents such as the recent Paris and San Bernardino events are another. Unfortunately, the popular discussion of profiling is often muddled. 

    In a sense, profiling involves the use of perceived probability. For example, now that we are in our seventies, my wife and I are often directed to the faster “pre-check” line for airport security. People with pre-check status have been determined by TSA to be less at risk for causing a terrorist incident than others. Normally, if you want such status, you have to pay for it and then be willing to be “profiled.” That is, TSA examines whatever personal characteristics you have that someone thinks makes you more or less likely to engage in terrorism. If you seem to be at low risk for being a terrorist, you get pre-check status. 

    Apparently, the same someone has decided that folks in their seventies are low risk for terrorism so, although we don’t pay for the privilege, we often get pre-check status anyway. Note, however, that low risk is not the same thing as no risk, paid or unpaid. And one could ask whether by revealing that older folks are considered less suspicious, TSA is not raising the risk that a terrorist group might use elderly people in an attack. (But that is another conversation.)

    It is hard, in fact, to make decisions without their being some perceived probability in the background. A whole field of behavioral economics has developed showing how choices that people make can be influenced by such perceptions. I am told that there is evidence that the more adjectives which are used to describe a product (even if you have no knowledge suggesting that the adjectives carry real information), the more the product seems appealing. I recall a journal article from a marketing colleague in which retail lumber sold better if it was described as originating in a “northern forest,” or some such meaningless descriptor. Presumably, customers have a belief that if an adjective is  used, it must have meaning and thus the perceived probability of obtaining a higher quality product rises with the number of adjectives. 

    Workplaces and their decisions are filled with such assumed probabilities. Interviews of job candidates are ultimately based on the subjective probabilities of the interviewers as to what will make a successful employee. Even seemingly objective data such as educational attainment (receiving a degree, receiving a degree from a prestigious school) when used in recruitment are based on subjective probabilities in most cases. And, of course, the subjective probabilities may be incorrect.

    Some profiling is based on hard data, notably in insurance. It is profiling when an insurance company charges a lower premium to a 25 year old than to a 65 year old for life insurance. But the profiling is based on actuarial tables. At age 25, the probability you will die in the next year is under 0.1%. At age 65, the probability is about 1.3%.1 So the cause of the higher premium for the latter is evident. But, of course, a 25 year old might be killed in a traffic accident before reaching 26. And a 65 year old might live to be 100. The future cannot be known with certainty, even with evidence-based profiling.

    Actuarial tables, because they are based on hard numbers, are not subjective unlike, say, personal factors that might persuade you as a recruiter to hire someone. The tables can show you things that you think are so, but are not. Suppose I asked you to rank non-Hispanic whites, non-Hispanic blacks, and Hispanics by life expectancy at birth (by descending order of expectancy, i.e., longest first). Without looking it up, i.e., based on your pre-existing knowledge, what would your ranking be? Would you have selected Hispanics as having the longest life expectancy of the three groups? Unless you were an expert in demographics, you likely instead would have picked non-Hispanic whites. (White privilege?) But here are the numbers in years of life (for the year 2011 based from 2015 Centers for Disease Control and Prevention data):

    Life expectancy at birth
    Group                Both sexes   Male   Female
    Non-Hispanic white      78.8      76.4    81.1
    Hispanic                81.6      79.0    83.3
    Non-Hispanic black      74.9      71.7    77.9
    All                     78.7      76.3    81.1

    So it turns out that Hispanics have longer life expectancy than the other two groups, perhaps contrary to your expectations. In terms of life expectancy, your best bet in the U.S. is to be an Hispanic female.

    Even though there may be hard statistical evidence of some tendencies, we sometimes choose not to profile. For example, if you obtain life insurance through your employer (as opposed to the external retail insurance market), you will pay the same for given coverage (or get the same coverage at no difference in cost) regardless of your sex. Because we outlaw discrimination in employment by sex, employers will charge the same and/or offer the same coverage. In effect, however, the equality in this case amounts to a transfer from females to males. (Females have lower death rates so are cheaper to insure.)

    On the other hand, in the case of job-based defined-benefit pensions (or annuities obtained through employers based on defined-contribution pensions), since the same terms are offered to males and females, there is an implicit transfer from males to females. (Males on average will collect pensions for fewer years and thus are cheaper.) By law, we choose to ignore statistical profiling by sex (and race and national origin) when it comes to employment.[2]

    In short, profiling by itself is a neutral term based on using perceived probability for decisions. Sometimes that perception, however, is incorrect and not based on hard evidence. Sometimes – as with ignoring sex and other characteristics for job-based insurance purposes – we choose through public policy not to use available information. And sometimes, for reasons of civil liberties, we make a special effort not to use it. Profiling is a neutral concept. What you do with it, however, has consequences.

    [1] . This source is also used for the table below in the text.

    [2] The pension area is in fact more complex. First, survivor/dependent benefits tend to even out the male/female differential, since survivors/dependents are likely to be of the opposite sex. Second, defined-benefit pensions tend to involve implicit subsidies from short-term, higher turnover workers to long-term career employees. So if women have shorter careers, they may be subsidizing males with longer careers.

  • 30 Nov 2015 10:04 AM | Daniel J.B. Mitchell (Administrator)

    Academia has long been called an “ivory tower,” presumably implying isolation from reality. Perhaps the notion of being inside a bubble might be a better representation of the concept; the view from a tower, after all, is wide. But apart from the analogy, the key question is how realistic these representation are at present?

    Unless you have been in a very small bubble, you must be aware of the campus unrest going on at many universities. Some of it seems linked to a slice of outside reality, particularly the “black lives matter” protests. But other elements do seem divorced from the external world. There has been much written about “micro-aggressions,” “trigger” warnings, and “safe spaces,” all notions that invite parody. In some cases, demands related to all of these concerns have led to resignation of university leaders.

    That trend – the demand for top-level resignations - seems to have started at the University of Missouri, perhaps largely reflecting local issues there.[1] (All politics are local, etc.)  But the idea of demanding resignations has spread. Undoubtedly, university leadership around the country was particularly thankful for the Thanksgiving holiday which sent students away from their campuses before too much job loss had occurred. And, undoubtedly, when the students return university leaders will be awaiting the Christmas break just as eagerly.

    But it isn’t just administrators that find their jobs in peril. The resignation calls have moved to demands to get rid of faculty.[2] And some faculty seem bent on going along with the idea of self-criticism and confession, perhaps hoping that speech codes and a mea culpa will make the issue go away.[3] But not all faculty are convinced that such steps are the appropriate response. To the contrary.[4]

    Some of what has occurred of late is simply bizarre, e.g., the suspension of Yoga lessons at a Canadian university based on some ill-defined cultural objections.[5] Some of what has occurred may affect university funding, particularly at schools that depend on alumni funding. One wonders, for example, whether the demand to rid Princeton of the name of its past president Woodrow Wilson for his racial attitudes and actions may play out (even though the august New York Times seems now to favor the erasure).[6] Thomas Jefferson (slave owner) is reported to be the next target.[7]

    Moreover, apart from big buck donors, one wonders how current events at universities will affect the external political scene. There are a lot of parents out there paying tuitions or contemplating doing so in the future. In California in the mid-1960s, the interplay of the Watts Riots and student demonstrations at Berkeley played an important role in unseating incumbent liberal Democratic Governor Pat Brown and in his replacement by the conservative Republican Ronald Reagan. There were then repercussions at Berkeley and the rest of the University of California UC). UC President Clark Kerr was fired, tuition rose, and the impact was felt in the university’s budget. And there are other precedents for the notion that the appearance of disorder pushes politics to the right. Law and order as a campaign element appealing to the “silent majority” helped elect Richard Nixon in 1968.

    Are we going to see a repeat of history today? Of course, there are differences between then and now. California, for example, is much more firmly in the hands of Democrats than it was in the 1960s and its demographics are quite different, too. But even in California, you can see symptoms of establishment concerns about university developments. The generally liberal Sacramento Bee’s editorial board, for example, seems to be exasperated with recent campus events.[8] Members of the dominant (Democratic) political class are uneasy.[9] Indeed, even the editors of the UC-Berkeley student paper seem annoyed.[10] And there are reports of a student backlash elsewhere where demonstrations have occurred.[11]

    It’s easy (at least in the bubble) to dismiss the (counter) reaction as just that, reactionary. White supremacists, for example, have jumped into the fray by creating “white student union” Facebook pages at various universities.[12] (Facebook seems to take some of them down after complaints, but not others.) But as you move away from the extremes, you come to more conventional types. Thus, a conservative online publication asks why, at UC-Merced, after an incident in which a Muslim student stabbed others on campus before being shot and killed by campus police, there was a “teach-in” event which seemed dedicated to “understanding” the stabber.[13] That may not have been an accurate description of what occurred, but it seems unlikely that the event’s organizers considered how what they were doing might be interpreted externally. Or perhaps they didn’t care what someone might say.

    The external reality, however, should make one care, at least in the view of this author. Basically, in the last two presidential elections, the popular vote has more or less split between the major candidates. We live in a divided country. The midterm election of 2014 moved the U.S. Senate into conservative hands (along with a variety of state and local contests). There are now a lot of politicos out there with no strong love for academia and its values.

    Recent terroristic attacks in Paris are making ordinary folks nervous. Could what happened in Paris happen in the U.S.? Disorder and threat to security can drive a lot of votes, as it did in the 1960s. Do I really have to point to the rise of Donald Trump in contemporary times to make this point? Or to the fact that he has driven other GOP presidential candidates toward his positions?

    One of the nice things about being a retired faculty member who, nonetheless, does the blogging for the UCLA Faculty Association is that I can point to impending academic train wrecks coming without being on the train. I watch the train go by from aside the tracks. So if you are a current faculty member reading this musing on the train who thinks everything is going well, I wish you good luck in your journey. But if you are a current faculty member who thinks there is something worth considering in this musing, at least in the probabilistic sense that it might have validity, you might want to pull the emergency brake cord (soon).
    [5] and  

    [12] and Of course, it can’t be proved that there was no local student involvement in these pages. At this writing, my own university, UCLA, has such a page which continues to operate although there have been complaints.   

  • 23 Nov 2015 4:27 PM | Daniel J.B. Mitchell (Administrator)

    Whenever someone references the “global economy,” it tends to be a preface to advocating something unpleasant domestically. We need to do something or not do something at home because otherwise we will be rendered uncompetitive in world markets. Last week’s musing was entitled “Currency Matters” and referred to issues of exchange rates. Exchange rates create a vehicle for international commerce to occur by allowing conversion of prices in one country’s currency into that of another’s. Put another way, currency exchange rates are important in determining the degree of global competitiveness.

    However, costs with regard to world competitiveness are of concern mainly for products and services that are bought and sold in international markets. So it was surprising to see the issue of raising the federal minimum wage – currently $7.25/hour – arise in that context. At a recent Republican presidential candidates’ debate, Donald Trump received considerable media attention when he said that he opposed raising the minimum wage because of international competitiveness concerns.[1] Yet, as the table above shows, the vast majority of workers earning at or below the minimum wage are in sectors that are largely outside of international commerce. The effects of the minimum wage domestically can be debated (and often are), but the minimum has little to do with global competition.

    The largest grouping of minimum wage workers on the table is in leisure and hospitality. Relatively few are in manufacturing where wage costs might actually matter for international competition. In short, unless you think there are strong ripple (imitation) effects of a minimum wage increase across industries, it’s hard to connect the minimum wage to global competition. You would have to believe that a hike in wages in fast food would somehow lead, say, auto or aircraft manufacturers (whose wages are well above the minimum) to enact similar pay increases.

    At one time, the U.S. Bureau of Labor Statistics (BLS) had a robust international data program that included wage comparisons with other countries. Despite all of the interest in the global economy, however, the BLS program was discontinued for budgetary reasons and taken over by the private Conference Board.  So we don’t have up-to-date data. The Conference Board chart below provides U.S. vs. foreign data on hourly compensation (wages, payroll taxes, and benefits) in manufacturing in 2010 and 2013.[2] The first thing to note is that compared to other developed countries, the U.S. is not an especially high wage country. The second thing to note is that all of the pay comparisons involve a conversion of foreign wages to U.S. dollars using prevailing exchange rates.

    The exchange rate effect is apparent, particularly for Japan, on the chart. The chart indicates that Japanese manufacturing wages were higher in 2010 than they were in 2013. But the drop doesn’t mean that Japanese employers cut nominal wages measured in yen between those two years. It simply reflects the fact that in 2013, the yen was generally cheaper in U.S. dollar terms than it was in 2010.[3] So Japanese yen-denominated wages in dollar terms declined. In the cases of other countries where it appears the foreign wage rose in substantially, there may simply have been an appreciation of those countries’ currencies.

    The issue of the role of global competition in affecting U.S. wages is actually a complicated one, albeit largely unrelated to the minimum wage. Some theoretical economic models predict that wages across countries would tend to equalize. The chart suggests that there is hardly anything resembling equality, however. But it could nonetheless be the case that the addition of China, India, and other very low-wage economies into world markets is a drag on U.S. wages.

    Perhaps that is the case. But most models assume more or less balanced trade, i.e., value of exports = value of imports. The U.S., however, has gone for decades with imbalanced trade, imports well above exports. That imbalance tends to push employment out of higher-paying international trading sectors and into such lower-wage areas as non-trading retail. Ultimately, the imbalance is a monetary and currency phenomenon and exchange rates have much to do with it. So before focusing on the minimum wage, or – indeed – on wages at all, it would be best to start with changes in exchange rate policy that would produce trade balance.

    [1] Other Republican candidates also opposed an increase in the minimum. But Trump tied his opposition to international competitiveness.  
    [3] During 2010, the yen/US$ ratio fluctuated in the 70-94 range. In 2013, it fluctuated in the 90-105 range.

  • 16 Nov 2015 9:06 AM | Daniel J.B. Mitchell (Administrator)

    From time to time, I am asked what I think about the “TPP,” the recently-concluded Trans-Pacific Partnership deal that President Obama hopes to sell to Congress. Let’s note first that the deal is a lengthy agreement that virtually no one, certainly no one in Congress, is likely to read in its entirety in any detail. The Canadian Financial Post recently provided a link to the entire text, but it appeared to be something of a we-dare-you-to-try-and-read-it stunt.1 TPP, like the Keystone Pipeline (recently rejected by the President), has become a symbol and not something opponents and proponents carefully subject to some sort of dispassionate cost/benefit analysis.

    There is, however, an empirical test that will soon be available for judging one piece of the TPP debate, the piece dealing with currency valuation. In the view of this author, much of the problem of the modern international trade regime for the U.S. is not protectionism (trade barriers) but mercantilism. Mercantilism in its contemporary form is the following of economic policies that lead to the accumulation of large dollar reserves through the running of perpetual export surpluses. Essentially, these policies seek to create an artificial exchange rate advantage in the U.S. market for net exports of the country undertaking contemporary mercantilism. So how does TPP address the currency issue? A summary from The Hill:

    Three years ago, (Fred) Bergsten (and) Joseph Gagnon… wrote (an) oft-noted currency research report that became the bedrock of the congressional argument that deliberate exchange rate intervention was the reason for trade deficits and had cost the United States between 1 million to 5 million jobs — a rallying cry for trade detractors. Their plan quickly gained traction on Capitol Hill, attracting the support of a bipartisan majority of lawmakers and even business and labor groups, resulting in the currency issue becoming a key negotiating objective in trade promotion, or “fast-track” authority.

    But President Obama argued that adding currency rules into the TPP would be too complicated and could torpedo a final deal.

    Bergsten and (Jeffrey) Schott noted that TPP negotiators opted for what they consider an early warning system that requires enhanced reporting and frequent monitoring and consultations instead of the “hard deterrence” approach preferred by some lawmakers in Congress who wanted a system that could impose trade sanctions on violators. “In addition, the requirements for more transparency and public disclosure of data on exchange rate policies, including currency intervention, should make the ‘naming and shaming’ of manipulators more effective," they wrote.[2]

    Now “naming and shaming” may not seem to you to be a particularly effective policy instrument. A country that is named may not be shamed and it may simply deny that what it is doing is aimed at creating an artificial currency advantage. But perhaps naming and shaming could work. In any event, there will be a handy empirical test available soon to see how effective naming and shaming actually is. 

    Currency exchange markets are like markets for other financial assets. If market participants expect the value of an asset to fall in the future, they are likely to bring down that value today. Why hold an asset today that you expect to fall in value in the future? So if currency market participants think that the TPP mechanism will in the future reverse policies that cause under-valuation of foreign currencies relative to the U.S. dollar, presumably the dollar should fall in value relative to those currencies now that the naming and shaming regime is public knowledge.

    Above is a chart of two indexes of the U.S. dollar’s value relative to other currencies in recent history.[3]

    Its time series run just up to the period in which the new TPP naming and shaming regime became known. Going forward beyond the final date of the chart, with the new policy now known, we should have an indication of the impact of that policy.  If the dollar declines significantly relative to such currencies as the Yuan (which was recently explicitly devalued by China relative to the dollar), the Yen, and the Euro, that decline can be taken as an indication that the new regime is having the desired effect of discouraging policies abroad that lead to over-valuation of the dollar. If the dollar’s value doesn’t decline (a lot and soon), you can take that lack of decline as an indication that currency market specialists think the new regime will have little impact.

    The chart could also provide another empirical test. If the dollar doesn’t decline (a lot and soon), and if Congress endorses TPP anyway, you can assume that despite the public rhetoric on the subject, the complaints about currency valuation were not actually major Congressional concerns.

    [1] and (The link in the Financial Post was provided by a New Zealand government agency.)

    [2] (Bergsten, Gagnon, and Schott are all connected with the Peterson Institute for International Economics.)

    [3] The chart is from the FRED database of the St. Louis Federal Reserve Bank.
    The final date shown is November 4, 2015. The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners. The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares. The major currencies index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of currencies in the broad index that circulate widely outside the country of issue. The weights are derived from those in the broad index. Seven of the twenty-six currencies in the broad index—the euro, Canadian dollar, Japanese yen, British pound, Swiss franc, Australian dollar, and Swedish krona—trade widely in currency markets outside their respective home areas, and these currencies (along with the U.S. dollar) are referred to as ‘‘major’’ currencies. Source:

  • 09 Nov 2015 8:54 AM | Daniel J.B. Mitchell (Administrator)

    We are again at a point where there is speculation about whether the Federal Reserve will raise interest rates. This time, the speculation is for December. As usual, the news media and – to some extent – the stock market, carefully parse every word of Fed chair Janet Yellen.[1] And, of course, she carefully chooses her words to be ambiguous. (Some would say she chooses her words to be clear that no decision has been made.)

    There continues to be a focus on the state of the labor market. Is the la market reaching a level of tightness where wages will be bid up and thus push up prices? The most recent data release on unemployment and payroll employment suggests a strong labor market. Unemployment is down to 5%. That level is still somewhat higher than at the prior pre-Great Recession peak when the rate was as low as 4.4%. Added monthly payroll jobs reported in the latest release show a strong number after some (supposed) prior softness. (I say “supposed” because we are talking about seasonally-adjusted monthly data subject to revisions.)

    Let me throw some other numbers into the decision pot. The chart below shows outstanding claims for unemployment insurance (UI) divided by new weekly claims. That ratio is suggestive of how long benefit claimants are receiving payments.[2] Not surprisingly, the ratio shot up during the Great Recession when jobs were hard to find. But it is now lower than it was at the pre-Great Recession peak. So by that measure, you might say that the labor market is tighter now than then.

    On the other hand, if you look at help-wanted advertising – a series maintained by the Conference Board measuring the number of online ads – you get a somewhat different picture. The chart below shows the ratio of continuing ads to new monthly ads. So the ratio is related to how long an ad stays in place. We might expect available new jobs to be snapped up relative fast when the labor market is soft (as in a recession and its aftermath) but more slowly when the labor market is tight. (Ads should stay around longer during tight markets as suitable workers are hard to find.) Because the data are quite noisy, we present the raw data (the dashed line) and a three-month moving average (the solid line). The numbers suggest that we are not yet quite back to the prior peak of labor market tightness.

    We could go on this way pointing to indicators that give conflicting signals of the degree of labor market tightness. And one suspects the Fed’s decision makers will be looking at such data. But there is a problem with a focus on the state of the labor market.

    What the Fed is interested in is avoiding excessive PRICE inflation. Up to now, there hasn’t been much price inflation. So the Fed is really looking ahead and trying to find indicators that might forecast accelerating inflation.  At best, labor market indicators tell you something about the outlook for WAGE inflation, not price. At one time, when unions were strong – say in the period from the end of World War II through the 1970s – one might plausibly tell a tale of tight labor markets empowering unions to push up wages through collective bargaining. But unions are no longer a factor for the vast majority of private-sector workers who are nonunion. So at most you can tell a tale of employers competitively bidding against each other for scarce labor. And then you might argue that if labor costs rise, prices would go up as firms try to maintain their markups.

    There is a problem, however, with that approach. As a recent study from the San Francisco Fed indicates, there is scant current evidence that knowing something about wages helps you forecast prices when you have other measures that directly are pricing indicators.3 That is, if you have a forecasting model for price inflation, throwing in wages doesn’t add information. You can forecast just as well omitting wage data. If that is the case, looking at the state of the labor market to give you information on likely wage behavior may not be a useful approach for the Fed even if, at some point in the past, it was. 

    There is no doubt that wage and price data are highly correlated. And there is no doubt that labor market measures of macro-level economic activity are highly correlated with product market measures. (Ups and downs of employment are correlated with ups and downs of real GDP.) It may well have been the case in the past that labor market information and wage information added to the ability to forecast inflation as part of a larger forecasting model. But institutions and economic processes change over time. 

    In short, the fact that the unemployment rate is down and that last month’s payroll job gains were strong may well influence what decision the Fed makes in December on interest rates. But if so, the decision will be based in part on prior assumptions about a labor-market-to-wage-to-price linkage. What has been normal in the past, however, may not be relevant in the present and future. 

    There has been much talk in the post-Great Recession period of a “new normal” in various economic contexts. But what is meant by that phrase is that the current circumstance is really a new abnormal when compared with the past. Yes, in the past, interest rates have not been held so low by the Fed at this point in the business cycle. But maybe, given the way the economy works now, that’s what it takes to sustain the current rate of (non-inflationary) economic advance. We do know that up to now, price inflation has not been a problem. Even though unemployment fell last month and there were strong job gains, is that really a signal that interest rates should rise?


    [2] In a steady state with, say, 100 claimants at any point in time and 20 new claim
    ants each week, the ratio is 5. If each claimant on average stays 5 weeks, the number of claimants at any point in time remains 100. Each week 20 new claimants come into the system and 20 old claimants depart. Of course, the number of claimants at any point in time is not constant in practice, nor is the number of new weekly claimants.



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