Megan McArdle

 

Thank you Megan for the introduction and for allowing me the opportunity to "unveil" myself to your readers.

My name is David Ryan, but for the first decade of the 21st century I did my most important work -- producing films exploring sexuality within the context of committed relationships, and writing about the legal and social issues that surrounded making and distributing those films -- under the name Tony Comstock, a backhanded homage to the great early 20th century American censor and moralist Anthony Comstock.

The culmination of that work was an invitation from James Fallows to stand in his stead as a guest-blogger, with the encouragement from Jim to, "Write about what's important to you."

I did.

In that one week I distilled 15 years of filmmaking and six years of near constant research and writing into some 16,000 words, all carefully copy-edited, formated and published by two very overworked interns.

It was one of the most remarkable intellectual and creative experiences of my life; to tell the story of a project about which I cared passionately in the electronic pages of a magazine I have read and admired for more than 30 years.

But as exciting and satisfying as the week was, it was tinged with both sadness and hope. In addition to using my platform as a chance to "make my case" I also used it to announce that I was giving up on the Comstock Films project and turning my attentions elsewhere. Quoting from my final post, Kludges Adaptations, and Evolution:

When James Fallows e-mailed me to ask if I'd be interested guest-blogging for him, my first reaction was to yell out, "Goddammit. I knew something like this was going to happen!"

That probably seems a strange reaction to such a wonderful opportunity, so let me see if I can explain.

Everything I've written about for the last week I know about because I've lived it.

All the research, all the writing, and all the thinking about how this all goes together has been in service of trying to make my movies.

I've been writing about my movies and the issues that swirl around them for six years, and in a way it's been like an extended version of that encounter with that loan officer 20 years ago.

I became a writer not because that's what comes naturally to me, but because that's what I needed to do to fight for what I want: to be an filmmaker, and to make the films that are important to me.

And now here I am. I've spent a week making my case while guest-blogging for James Fallows at The Atlantic.

Except that a few weeks before Jim asked me to fill in, I had come to the conclusion, for all the reasons outlined in this last week, that I couldn't win. I had come to the conclusion that writing about my work, explaining and framing, was in essence, admitting that I was wrong.

You can't just make movies about love and sex and say that explanations don't matter.

The truth is, the explanations matter more than the movies themselves, and mine weren't good enough.

In fact, two days before Jim asked me, I received email from the managing editor of another magazine. His bosses (yes, even managing editors have bosses) had put the kibosh on his idea to have me as "featured contributer" (don't know what that is but it sounds good, doesn't it!) in an upcoming issue, and he wanted to apologize. (None needed JK, this is bigger than both of us.)

Faced with mounting evidence that my films were born of a time and circumstances that had passed, I resolved that "Brett and Melanie: Boi Meets Girl" would be the last film, and that it was time to move on to something else. So what did I decide to do? I decided to start a sustainable energy eco-tourism project in the community where I live. This project has a educational component for local school children which I hope we'll be able to provide at little or no cost. That's my attempt to skip as much of that "flinty middle stage" of life as possible and get on with the giving back part of my life while my heart still beats strong and true.

I am as excited about this as anything I've done before.

But wizened as I am, I am now able to recognize that as much as this move is a product of my insight and willingness to take risks, it is also simply a response to social trends and technology. I am not a leaf in the wind, but neither am I a colossus standing astride history.

Garett Jones--Economist at George Mason University

Many thanks to Megan for inviting me to guest blog. 

Most of my research is on how intelligence--IQ--matters more for nations that it does for individuals. I've also done work on how monetary policy does or doesn't influence the economy, and on how we really didn't need to give unlimited bailouts to the big banks. 

I'll talk about a few of these topics in coming days, but let's start off by rehashing the battle over whether the 2009 stimulus bill--ARRA, the American Reinvestment and Recovery Act--really worked. I'm not talking about the tax cuts--I'm talking about the spending: green jobs, new government buildings, health clinic staffers. With my coauthor Dan Rothschild (now at AEI) I wrote two papers last year on the stimulus for the Mercatus Center at George Mason that got me thinking quite a lot about this. 

The Keynesian theory of stimulus is elegant: When a recession needlessly throws people out of work, the government can hire them, and then those people take their paychecks and buy stuff made in the private sector. So it's a win-win: The government and the private economy both expand. No cruel tradeoff: the pie is bigger than before, there's a "multiplier effect." I imagine Keynes genuinely loved the thought of saving his beloved market economy. 

So, how often does it work out that way? Well, Valerie Ramey of UC San Diego (FD: one of my dissertation advisers) has looked at the major studies and written some of her own, and in a new article she concludes that in the U.S., "on balance government spending does not appear to stimulate private activity." Yes, it boosts government hiring--and lowers the unemployment rate--so on average you're getting a free lunch there. But Faberge shampoo-style stories you read about in freshman economics texts where "he spends money at her store, and she spends money at another store, and so on, and so on" just doesn't seem to show up in the real world. 

You might think, "Textbooks don't really claim that government spending sets off waves of private-sector spending---that's just a caricature." But I've got a textbook right in front of me--Schiller/Hill/Wall, in its 13^th edition so it must have moved some product--and they talk about a multiplier of 4: One dollar of government spending sets off three dollars of private spending. If that's how the real world works, let's double the Department of Defense. 

Case/Fair/Oster, a popular text coauthored by deservedly famous economists, is more careful--but even once they throw in all of their caveats, they conclude "in reality the size of the multiplier is about 2." Every dollar of government spending sets off an extra dollar of private-sector spending.

The Congressional Budget Office is a bit more conservative than both of those textbooks: They offer high-low ranges for the multiplier, so I'll cavalierly report a midpoint: 1.5. They also note that after post-ARRA "discussions on this topic with its panel of economic advisers" (to be a fly on the wall at that meeting) they dropped their lower-bound multiplier estimate down to only 0.5: So they think there's a reasonable chance that a dollar of government spending shrinks the private sector by fifty cents.

How could that possibly be? How could extra government spending shrink the private sector?  Well, in the simplest Keynesian model, it can't. You have to add some bells and whistles--let's call that "reality"--to get a multiplier less than one. 

Here's one path to a tiny multiplier: Let's suppose the government is trying to find the right person for the job.  Now, what if that person already has one....

I'll talk about that, and about much else, later this week.  Glad to be aboard. 

Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

Climate Change has evolved into a political wedge issue in the United States. Part of the unfortunate fallout of this is that fossil fuels and renewables are viewed as competing tribal camps. One is either in the "drill-baby-drill" camp or in the solar power and plug-in hybrid camp.

An honest accounting, however, shows that these two energy paradigms are strongly complementary. Fossil fuels in general and oil and gas in particular provide ready sources of energy to support strong global growth.

A wealthy planet provides a large marketplace in which to recoup R&D costs from solar and battery research. And, completing the circle, more rapid solar development cuts down on long term emissions and the most troubling effects of climate change.

Some analysis suggests that photovoltaic generation of electricity could reach grid parity in 75 percent of the world's markets by 2020. As an economist, my tendency is to think physical scientists are underestimating the speed at which PV could overtake fossil fuels in the production of electricity.

As costs for the underlying technology fall, the incentive to lower the associated installation and infrastructure costs accelerates rapidly. A rapidly falling cost curve also provides enormous incentives for producers to rapidly establish dominance in the distribution channel.

If you know that there will be few if any barriers to entry in producing electric power then you want to build out a distribution system so advanced that no one can hope to match your lower costs of delivering power.

This arms race is likely to produce very rapid solar adoption. This effect will be magnified by the very low real interest rates that are likely to persist into the future. In a sense, the investment world is looking for a new bubble and solar power has all the right characteristics.

Seeing this vast potential in solar power, however, makes it all the more costly for us to delay or retard extraction of fossil fuels today. Cheap electricity puts downward pressure on the price of all fossil fuels, including to some extent oil. Battery technology may never replace gasoline, but repurposing natural gas from electricity and heat generation will increase its use as a long haul transportation fuel.

When prices fall far enough it will no longer be profitable to extract fossil fuels. The remaining carbon will simply be left in the ground.

In short, the more we invest in solar and the more rapidly the technology develops, the more we can afford to exploit our fossil fuel resources today.

Yesterday I discussed why corporate social responsibility can be efficient. Today I wanted to discuss some likely objections to this and some problems that are likely to arise. 

An important risk is when corporations pursue things which are seen as public goods or socially responsible but have serious tradeoffs that may result in negative welfare overall. For instance, many consumers seem to like knowing that their goods are made by workers with good jobs and decent pay. So firms may overpay workers or restrict working conditions relative to what negotiations between the firm and the workers would produce. When wages are raised without increases in productivity then the firm will generally end up employing fewer workers, and thus those workers who would otherwise have been hired end up worse off. Another problem is that firms may comply with consumer desires to not buy things made from low paid workers by simply using robots or by hiring workers with higher productivity and thus better job alternatives. 

You might think that consumers can counteract the disemployment effect by also demanding that firms don't employ less workers than they otherwise would, but this is almost impossible to monitor. Absent a way to credibly demonstrate this, firms pressured into raising wages are more likely to profit maximize and thus employ fewer workers. 

It is important to note that if higher wages are satisfying the desires of consumers, then this is efficient even if it causes disemployment of some workers. The problem is when consumers who want the higher wages are unaware of the tradeoffs faced and don't actually prefer raising wages for some and unemploying others. They instead imagine a free lunch, and that is what they believe they are paying for. If this informational problem exists, then it is not efficient. In fact, I don't believe consumers understand these tradeoffs very well, and I would cite the response to Apple and Foxconn as evidence this is the case. 

Yesterday I mentioned a similar problem discussed in Tyler Cowen's new book. Locavores see themselves as paying a premium and doing good, but are sometimes actually purchasing goods which are more harmful for the environment. This is why the price system is so valuable, because it can communicate clearly what the relative costs are, while consumers trying to guess at this can be extremely complicated and can easily lead to mistakes. 

The difficulty in figuring out which goods pollute the least is why it can be better for the government to incorporate some externalities into the price system by explicitly taxing them. When it is unclear how these externalities will ripple through markets the problem can be better solved through transparent taxes than to let consumers and corporate social responsibility do the work. 

So what should we as consumers, shareholders, and workers think about corporate social responsibility? Unfortunately, despite all the words I've spent on this I don't think I can do any better than a simple lesson: think hard about the tradeoffs.   

Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

PIMCO CEO Mohamed A. El-Erian gave a speech at the St Louis Fed in which he argued that the Federal Reserve and the ECB were trying to solve the world's problems alone, but they can't and need help from others.

What I take as his key points:

While central banks can -- and have -- stabilized things, there is little they can do on their own to engineer the fundamental realignments that must accommodate seven specific dynamics in advanced economies (something that we will come back to later in discussing the way forward):

• Accommodating the "safe" debt de-leveraging of the private sector by enabling high sustained growth
• Safely de-risking the financial sector
• Clearing or replacing clogged credit pipes
• Achieving a sustainable trajectory for public finances
• Improving the functioning of the labor market
• Compensating for inadequate past investments in human resources, productive capacity and infrastructure
• Adjusting to the ongoing developmental breakout phase in several systemically important emerging countries (including Brazil, China, India, and Indonesia).

To be effective, central banks in advanced economies needed -- and need -- help from other policymaking entities to deal with the twin unfortunate realities of too much debt and too little growth. They must be assisted with the engagement of the healthy balance sheets around the world, and fortunately there are quite a few of them in both the public and private sectors. And this must be done in an internationally coordinated fashion in order to accommodate the new global realities.

El-Erian is attempting to tease apart what monetary policy can and cannot do, yet paradoxically he falls prey to the commonplace conflation of macroeconomic and microeconomic goals.

Put simply, the goal of macro policy is to balance maximum employment against stable prices. This, however, is easily confused with goals relating to growth, prosperity and health of public and private balance sheets.

Because, population and productivity have grown consistently in the capitalist world for the last 300 years or so, the only time that we have experienced strongly negative economic growth -- general declines in prosperity and widespread deterioration in balance sheets -- is during recessions and wars.

Central Banks don't have direct control of wars but they do control recessions. Thus its natural to think that the goal of central banking is to produce growth, prosperity and financial health.

However, on a basic level its not. If the economy is running at maximum employment and the prices are moving in a steady and predictable fashion then the central bank has done its job. What happens to growth is ultimately not the Fed's concern.

Consequently, when folks like myself point out the ongoing abject policy failure of the Federal Reserve and the absolute nightmare that is the ECB, our complaint is not about growth, it is about employment.

Let me be more concrete.

The American public education system is by many accounts a train wreck. We consistently fail to motivate and educate the poorest third of our children. Poignantly, we even seem to be failing poor children who score highly on aptitude tests when they are very young.

Without developing skills in math and science it is highly unlikely that these children will be able to reach their potential as contributors to the American economy and consequently they are likely to earn very low wages and be poor as adults.

This is a deep problem.

However, it is not a problem that suggests the United States will face high unemployment or unstable prices. A macro-economically healthy economy will create low wage jobs for our low skilled workers. Overall GDP will be lower. More or our citizens will live in poverty. The pace of human knowledge expansion will slow. However, the macro-economy will be steady and the Fed will have done its job.

What tells us that the Fed is failing is that there are not enough low wage jobs to employ all of our low skilled workers. Moreover, this is happening at exactly the same time that price growth is slower than its long run trend.

The challenge of Central Banking is the goals high balance job creation and low inflation. When job creation is slow and inflation is lower than our long run goals the Central Bank is failing.

This is not the fault of fiscal policy. This is not the fault of microeconomic problems like poor education or a crumbling infrastructure. This is not the fault of a private sector that is unwilling to do its part.

This is the fault of a Federal Reserve hamstrung by a gutless unwillingness to do its job. Though I would rate the performance of the ECB as vastly worse, at least it has the excuse that it is only official task is holding inflation steady. This, like the Eurozone itself, was a dreadful policy decision, but it is the world we live in.

The Federal Reserve on the other hand has a dual mandate which it is consistently and flagrantly ignoring. Offering sympathetic sounding bromides about the need for policy makers to work together may make Federal Reserve officials feel better about themselves but it disguises the deeper truth that the failure of the US economy to reach full employment is their failure.

The erosion of skills, the decline in capital formation and the destruction of lives that stem from high unemployment is the doing of one policy institution.

The Federal Reserve knows exactly what it needs to do to remedy this situation: commit to zero interest rates until nominal spending in the US economy is within 2% of its 1990- 2007 trend line.

That the Federal Reserve refuses to do this is a choice that it alone must answer for.

My baseline scenario for the U.S. included a rapid increase in the number of multifamily housing units and a general return to renting.

However, a few factors are combining to make me think that an alternate scenario, one in which the single-family housing bubble returns, is increasingly likely.

First, multifamily starts simply aren't increasing as fast I thought they would. This means that rent pressure will be even more severe, and quite plainly there simply won't be enough apartments to absorb all of the newly forming families.

Second, no permanent solution to the global savings glut has been offered, and with austerity across Europe and deficit cutting on the agenda for the United States, the fundamental problems will only increase.

Third, Fannie Mae and Freddie Mac are considering bulk sales of foreclosed properties that will potentially slow the stream of distressed properties onto the market.

All of these factors combined mean that single-family home prices may stabilize in the near future. However, given the dynamics in the credit markets, stable prices do not seem like an equilibrium. Once prices stabilize the incentive to begin massively expanding credit to potential borrowers will be enormous and is likely to reignite.

I would tend to think it's unlikely that we will get the kind of price appreciation we saw the first time around. However, it is not impossible, and it's certainly possible to get a strong uptick in construction.

Also, I'd like to point out now that while a return of the housing bubble would prompt concerns that regulation has not gone far enough to curb abusive lending practices, it is not clear to me that any regulation would successfully stop this process. 

Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

Various forms of federal loan guarantees have come under attack, from clear industrial policy-like loans related to solar power to more mainstream corporate welfare in the form of the Import-Export Bank to vanilla social policy like student loans.

We may or may not question the wisdom of the federal government attempting to shape the future of US energy, rigging the game in favor of US manufactures, or pushing marginal college students to load up on debt. However, if we are going to do these things, it's important to recognize that loan guarantees are among the cheapest ways to do them.

Why?

Well, for one the United States has an incredibly low cost of credit. Lower in fact than any private organization on earth. If there were some way to handle the inevitable political corruption, it would make sense for the US government to act as a giant bank. Indeed, by using ever-rising debt to support unusually low tax rates, the US government does to a degree act as a bank.

By offering its good name to guarantee other lending ventures the government forgoes the revenues of a bank but provides much of the same service. It allows projects to be entered into which the principals could not afford alone.

This does expose taxpayers to risk. However, because of very unique features of the US government, it's especially low risk. For most lending institutions, the hardest risks to cover are high-beta risks. These are risks which swing wildly with the economy.

For example, I might loan money to a natural gas generator manufacturer and to a solar power manufacturer. One of these two technologies is likely to dominate but I am not sure which one. However, because I have loaned to both I have protected myself somewhat.

Yet, if the entire economy tanks and no power companies can raise money to add generation capacity of any kind, then I am screwed on both fronts. I can limit my exposure to the specific sector risks, but I can't limit my exposure to the entire economy.

The Federal Government is a bit different. The cost of borrowing money for the Federal government tanks exactly when the economy tanks. It is a negative beta borrower. That implies that precisely when things are at their worst, government credit is at its best.

So rather than facing terrible losses and the possibility of bankruptcy, as would a normal lending institution, the Federal Government has an easier time than ever.

Again none of this is to say that we should encourage government involvement in any particular market. Even if the financial costs are low, the temptation to specifically pick winners will be great. Yet, if the government is going to have these types of policies, then loan guarantees are among the cheapest ways to do it.

Green products, companies paying workers to volunteer, corporate donations to charitable causes, fair trade coffee: you can't turn on the TV or walk down a grocery aisle without seeing examples of  what economists call "corporate social responsibility." But what should we make of supposedly profit maximizing enterprises who seem to contribute to the public good?  Far too often, those defending or advocating for corporate social responsibility are interested in diminishing the status of capitalism, profit seeking, self-interest, and/or neoclassical economics. But I think one can embrace corporate social responsibility without this baggage.

In his classic essay "The Social Responsibility of Corporations", Milton Friedman took the opposite position and argued that sole responsibility of corporations is to strictly profit maximize, and that their contribution to society arises out of that. And to be sure, the biggest benefit to society that businesses generate does arise from their pursuit of profits. Paul Krugman, famously writing in praise of sweatshops, agreed that the profit motive has done tremendous good for the third world:

"It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better."

"Companies that combine the profit motive with environmental and other concerns can thrive in a competitive environment only if they are able to attract employees and customers that also value these other corporate goals."

Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

Last year when the European crisis was heating up, I floated the idea that the if the European Central Bank were able to contain the bank meltdown, its insane monetary policy would actually be fairly simulative for the US.

Now, it looks like that scenario may be playing out. As George Wannabee points out, Germany is increasingly turning Japanese:

Much has been written about the US Economy going Japanese and there are indeed some worrying signs. And for all the Bernanke bashing, that is one thing he really understands and will fight aggressively.

Unfortunately, Euro zone policymakers and the Germans' inflation phobias are making all they can for Europe to get into an entrenched deflationary spiral.

The critical issue - as Wannabee points out near the end of the post - is that this scenario will drive up the value of the euro. If the euro zone gets caught in a deflationary spiral, real European interest rates will rise and the euro will tend to appreciate.

Under this scenario, Eurozone exports become increasingly less competitive against American exports. At the same time, the struggling European economy will likely reduce it oil imports.

This creates dual positive pressure for the United States which would see cheaper energy at the same time as more robust demand for manufactured goods. 

Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior

Last Summer, as the incoming data grew darker, many economic commentators predicted recession. Even the notoriously accurate Economic Cycle Research Institute called a second recession a done deal. At the time I was strongly skeptical.

The fundamentals as I saw them didn't call for that. American's total housing stock was too small for the size of the population. We still had a fairly large number of suburban single family homes, though after years of record low building, not as many as people thought. Meanwhile, our stock of apartments, duplexes and mobile homes was desperately low.

During the single family housing boom, production in these segments actually dropped off, and during the collapse they died. Yet, traditionally they have housed 40% of US families. With so many people moving out of single family homes, these structures - I thought - would be in high demand.

At the same time the stock of cars and trucks in the United States was actually shrinking. We were building fewer cars and trucks each year than we were scrapping. Moreover, the cars and trucks that we had were getting increasingly old, implying that maintenance costs were rising and the scrappage rate was set to increase.

This was happening while the US population was growing. Unless we were entering a completely new world were their were ever fewer cars and houses per person we had to see a turnaround soon.

We saw a similar effect in local government employment. The number of teachers, firefighters and police officers was shrinking. Again, unless the way American communities are run had taken a permanent change this was going to turn around as well.

Those forces combined with the baseline strength of the American economy - I thought - were likely enough to push the economy into self-sustained growth.

Since that time we have seen a pick-up in auto sales, which may be coming faster than I would have expected. We have also seen an increase in multifamily housing construction, which is coming a little slower than expected. And we have seen a bottoming out in local government layoffs, about on schedule.

Is this then the recovery we have been waiting for?

My sense is: not quite yet.

When the recovery hits we should sense a jolt in the economy. We should expect manufacturers to be rushing ahead to increase deliveries faster than expected. We would expect building projects to take on a sense of urgency rather than trepidation. We don't quite feel that yet.

I had expected that jolt or kick to come sometime around now, in March or April. Chances are it will be late.

Nonetheless, the fundamentals have not changed and the forces driving the economy are still primed for a surge forward. This is not yet the full force recovery, but it should be here soon.

Adam Ozimek -- blogger at Modeled Behavior and associate at Econsult Corporation

In reading the sometimes polarized debate in the economics blogosphere, the discipline often appears to suffer from an excess of disagreement and uncertainty. But this is more about the incentives economists face when writing and speaking in the public sphere than the actual state of knowledge in the field. In reality economists agree about a lot of things, and in many cases they do so with a high degree of certainty.

This fact is on display frequently at the IGM Economic Experts Panel from the University of Chicago. This is a panel of 41 of the worlds top economists who are offered statements about economic policy to which they can indicate whether they agree, disagree, or are uncertain. In addition they rate the certainty of their answer on a scale of 1 to 10, which allows the answers to be weighted. Over the past few months there have been several issues where this ideologically diverse group of economists have shown resounding unanimity. Some of these may surprise people, as it's fairly obvious that public opinion would not side with economists with the same amount of unanimity. So here are a few things economists strongly agree on.

The benefits of free trade and NAFTA far outweigh the costs

None of the economists surveyed disagreed that the gains to freer trade are much larger than any costs. And only two economists even said that the answer is uncertain. In a space for additional comments, MIT's Richard Schmalensee declared "If that's not right, almost all of economics is wrong".

Economists have emphasized the benefits of free trade for a long time, reflecting the field's belief in the importance of specialization, comparative advantage, and gains from trade. Indeed, these results are similar to other surveys that show economists strongly supporting free trade.

So why do pundits and voters lag economists in supporting free trade? In his excellent book The Myth of the Rational Voter, Bryan Caplan provides evidence that people suffer from a handful of systematic biases that influence their beliefs, and three of these can help explain why voters are skeptical of trade: anti-market bias, anti-foreign bias, and pessimism bias.

Paul Krugman provides three reasons why intellectuals in particular resist the theory of comparative advantage that underpins free trade: 1) opposition to free trade is intellectually fashionable, 2) comparative advantage is hard to understand, and 3) they are averse to a fundamentally mathematical understanding of the world.

As is reflected in the comments by some of the panelists trade will create winners and losers, which may also explain some opposition to trade. But economists on the left and the right still struggle the understand the level of opposition to trade, and the rejection of the overall gains. Whatever their reasons for resisting, people should follow economists lead and embrace the fact that the gains from freer trade outweigh the costs.

Government policies don't explain high gas prices

Individual's beliefs about the extent to which the U.S. government should be blamed for high gas prices seems to have a strangely strong correlation with whether they like whoever happens to be in charge at the time. Economists on the other hand strongly reject the idea that the government has much affect on these prices. None of the surveyed economists disagreed with the following statement:

"Changes in U.S. gasoline prices over the past 10 years have predominantly been due to market factors rather than U.S. federal economic or energy policies."

So why do people blame politicians when gas prices rise? Supply and demand, of course. Ideological pundits and politicians are happy to supply arguments blaming incumbent politicians, and ideological individuals are eager to believe them. People should set their ideologies aside and accept the sometimes inconvenient fact that market forces, not politicians, have been the primary driver of gas prices over the past 10 years.

The Stimulus and Bailouts Lowered the Unemployment Rate

Economists may differ on whether the American Recovery and Reinvestment Act was worth the cost overall, but they are in solid agreement that as of the end of 2010 it lowered the unemployment rate. Very few disagreed with or were uncertain about this. In contrast, a significant number questioned whether the recovery act was worth the cost. Importantly, in the space for comments, Stanford's Pete Klenow emphasized what Scott Sumner and others would say is the central issue: "how much was it offset by less aggressive (than otherwise) unconventional monetary policy?" But even stimulus skeptics should keep their criticisms in perspective: economists strongly reject the idea that stimulus is to blame for our economic woes.

In addition, economists strongly agree that the bank bailouts also lowered the unemployment rate. Of course as Austen Goolsbee commented: "the fact it was necessary doesn't mean we should be happy about it."

The Gold Standard is a Terrible Idea

This is an issue that has returned to a certain prominence in the last few years. But despite it's popularity among some on the right -- and Ron Paul fans in particular -- economists overwhelmingly agree that the gold standard is a bad idea. In this sample of leading economists, 100% of disagreed with the claim that returning to a gold standard would improve price-stability or employment outcomes. Nobody even answered uncertain, because this question really isn't up for debate anymore.

Some Other Things Economists Agree On

Rent control is bad, congestion pricing is good, eliminating tax deductions and lowering rates is efficient, and the tax deductibility of healthcare creates consequential distortions.

So economists can agree, and with a high degree of certainty. You just have to ask the right questions.

More »

Karl Smith -- Assistant Professor of Public Economics at UNC-CH and Blogger at Modeled Behavior

In my first installment I tried to make the point that the range of investment opportunities is limited. If the whole world tries to save at once we very quickly run into investments that have very low returns or alternatively are very risky.

Nonetheless, readers might understandably object that even a very low rate of return is better than becoming ever deeper in debt as America has of late.

That depends. The type of debt really matters.

Everyone is familiar with paper currency, the dollar bills you may carry in your pocket. They are useful for buying things, but they are also inconvenient. Carrying around a lot of cash is dangerous for starters. To solve this problem we have bank accounts. The bank holds on to our cash and in return we can write checks and use a debit cards.

Large international companies and financial institutions face a similar problem. Only for them even bank accounts will not due. Banks having to deal with such large accounts by institutions transacting around the world in all different currencies could not pay return for the equivalent of a savings account and would have huge fees for the equivalent of a checking account.

Instead, these institutions participant in the shadow banking system. They hold bonds or other financial assets which they can easily turn into cash in the repurchase or repo market. In the repo market one institution will agree to buy a bond from another institution and then sometime later, often 3 days, the original institution will buy the bond back.

This essentially serves as a loan from one institution to another. However, in a larger sense it can be thought of as making a cash withdrawal from the shadow banking system. In that way, the bonds held by these companies serve as their bank accounts. As long as the repo market is functioning they can always make withdrawals based on the bonds they have.

Where do these bonds come from?

Some are government bonds issued to fund national deficits. However, many of the bonds - at least before the crisis - were created from private loans taken out by individuals and businesses. Included in these are infamous mortgage backed securities.

As global finance and international trade grew larger and larger institutions needed ever larger shadow bank accounts. This requires ever larger quantities of bonds. Unfortunately, most of the world was saving not borrowing, and even the US had dramatically reduced its debt-to-GDP ratio.

This international demand for bonds not only drove interest rates way down but promised huge profits for anyone who could find a new source of safe bonds. In order to be useful as collateral bonds have to have little risk.

In response investment banks developed mathematical techniques to combine risky mortgage loans in such a way as to produce bonds that appeared safe. The extent to which this process involved fraud, hubris or simple error is still debated, but the outcome was not.

The issuance of these bonds fed a world-wide housing boom. That boom peaked around 2006 and as it faded the once safe bonds were no longer safe at all. The shadow banking system experienced a run. The repo market shut down. Major financial firms collapsed and the world economy hurtled into the Great Recession.

The issuance of that type of debt went badly.

The problem, however, is that the underlying thirst for debt has not be quenched. This implies that new credit bubbles are waiting to happen. Currently, that demand for debt is partially though not completely met by soaring US and UK budget deficits.

Yet, politicians in both nations are busying themselves attempting to drive down the respective deficits. As this happens the demand for new sources of debt will only increase and the propensity for bubbles will only grow larger.

This a part of a twin problem. The aging of the world population means that there are ever more savers and relative to young people to invest in. At the same time the global financial system depends on large quantities of safe assets.

Either the safe assets go to the financial system and the savers move into risky investments like the dot-com bubble or the savers stick with existing safe assets and the global financial system scrabbles to manufacture new safe assets out of risky loans.

We sometimes think that the large projected budget deficits and lack of savings on the part of middle aged Americans represent a failure to accumulate enough assets to pay for our own retirement and hence an increased burden for our children.

However, they are simply one manifestation of a much deeper issue: with slowing population growth the world is running short of things to own. 

Karl Smith - Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior 

Quickly tying together a bunch of threads: My general take is that neither GDP nor the Employment-Population Ratio is a stat we should care about for its own sake. By that same token, in-and-of-itself, I don't consider declines in unemployment from people leaving the workforce to better or worse than declines from people becoming unemployed.

There are lots of reasons, but fundamentally because these are a function of choices people make about their lives.

When lots of people chose to work, GDP will increase, the population-employment ratio will rise, and declines in unemployment will be dominated by folks becoming employed. When lots of people choose to retire, stay in school longer or stay home to raise a family the trends will reverse.

However, its not immediately clear that working is a better life choice than the other three options. Indeed, we generally consider the other three to be luxuries afforded by a wealthy society.

What matters is whether or not the labor market is functioning smoothly. If someone chooses to look for employment will they have hard time. If the answer to this question is no, and yet still few people look, then we have to conclude that from a macro-perspective things are going fine.

There may be micro level problems with inadequate skills, or oppressive gender roles or any other host of things. However, the macro-economy is doing its job.

With that in mind, I do want to point out a trend that could explain structural weakness in the economy from the production side.

Here is a look at employment in what we might think of as shopping center retail: clothing stores, department stores, general merchandise, books, music, etc compared to real retail sales

Despite the seeming acceleration in sales, this part of employment is rolling over.

Now look at the Employment Population Ratio and Unemployment rates for workers 16-19. Here I have re-normed unemployment so that I am graphing (60 = the unemployment rate) to match the early 90s. The implication is that if unemployment were zero then 60% of teenagers would be employed.

We see a large and growing gap between unemployment and the employment-population ratio. There are numerous micro explanations here.

One possibility, however, is that the relatively weak growth in shopping center employment relative to retail sales since 2000 and especially recently is driving down overall teen employment levels.

However, because teenagers are especially suited to shopping center employment they are dropping out of the labor force in response. That is, the End of Retail is causing a permanent shift in teenage employment because there are no substitutes for retail jobs.

This is a true structural downturn because it means that the production function is changing such that the productivity of teenage labor cannot meet the reservation wage.

When that happens a factor of production simply goes out of use. It also implies that for a time the economic gains from productivity enhancements will be muted. E-commerce means more efficient shopping but because we are not repurposing teenage labor but losing it completely, the measured gains are less than they otherwise would be.

On the other hand the non-measured gains to increased free time and -- one can dream -- increased school work are larger than we would have expected.

Adam Ozimek -- blogger at Modeled Behavior and associate at Econsult Corporation

There have been a lot of complaints and outrage lately over the beef product known as "pink slime." Officially called Lean Finely Textured Beef (LFTB), these are beef additives made from processed trimmings of beef leftover from other cuts. It's worth considering some of the economic issues involved in pink slime.

Many seem to have the impression from the complaints that there is something unsafe or unhealthy LFTB. For instance, the following comes from the Change.org petition asking the USDA to ban pink slime from schools:

Two former government microbiologists claim that, for political reasons, pink slime was approved for human consumption by USDA over serious safety concerns...

Even apart from safety concerns, it is simply wrong to feed our children connective tissues and beef scraps that were, in the past, destined for use in pet food and rendering and were not considered fit for human consumption. 

Despite these complaints about safety and whether the meat is "fit for consumption," if you read the pink slime critics who are knowledgeable of such things, you'll see that these claims are false. For instance, Marion Nestle reports that it "is not really slimy and it is reasonably safe and nutritious". If safety and nutrition aren't a problem, then why shouldn't we eat it? Economist Robin Hanson has a saying that helps explain phenomenon like this. The short version is "politics isn't about policy", but it's really a general theory of human belief and behavior he summarizes using the following list:

• Food isn't about Nutrition
• Clothes aren't about Comfort
• Bedrooms aren't about Sleep 
• Marriage isn't about Romance 
• Talk isn't about Info 
• Laughter isn't about Jokes 
• Charity isn't about Helping 
• Church isn't about God 
• Art isn't about Insight 
• Medicine isn't about Health 
• Consulting isn't about Advice 
• School isn't about Learning 
• Research isn't about Progress 
• Politics isn't about Policy 

Instead, most of these things are about signaling something else about ourselves. If people's desire to regulate pink slime isn't about health, safety, or even taste, then what is it about? Robin would probably suggest that it is about signaling. Pink slime is seen as low status, and even though consuming it is not bad for our selves or our children, we would ban it to show that we care. This Hansonion hypothesis is borne out pretty clearly by a lot of pink slime complaints. Nestle herself makes it about as clear as possible that signaling is why she is critical of pink slime:

Even if LFTB is safe, nutritious, and tastes like hamburger, it may not be culturally acceptable. Do we want LFTB in our food? Or do we and our children deserve better? Serving healthy and delicious food is a way to show respect for our culture, food, children, and schools, and to invest in the future of our nation.

Our children deserve "better", but better in what way? Apparently not safety, nutrition, or taste. Many people aren't opposing pink slime because it's bad for us, but because doing so shows that we care.

The problems with the anti-pink slime campaign extend beyond this though. Pink slime is what economists would call a joint product with other cuts of beef. A joint product is when there is some shared costs for multiple products that can't be attributed to any of the products individually.

In this case the joint products are the various beef cuts of beef and pink slime, and the shared costs include things like the price of raising the cow. In these cases profit maximization means considering the total marginal revenue of each unit, which in this case is each cow. A decrease in the demand for the pink slime will drive down the marginal revenue of a cow, which will lower the profit maximizing number of cows produced.

However, that is not the end of the story, because pink slime is also a substitute for other parts of the cow, namely ground beef. Schools that are replacing pink slime seem to be doing so with ground beef rather than, say, vegetables. This means that a lot of the decline in the demand for pink slime will be offset by an increase in demand for normal ground beef, which will mean more cows will be slaughtered.

So will the number of cows produced and slaughtered increase or decrease? In the end, the cattle industry reports that this filler saves about 10 to 12 pounds of edible meat from every cow, and this is the equivalent of 1.5 million heads of cattle. Despite the lower revenues from each cow discussed above, the demand shift effect will likely outweigh the lower profit effect so that the net impact will be a significant increase in the number of cattle that will be raised and slaughtered every year.

You are probably wondering why we should even care how many cows are produced? After all, if a cow ever got the chance, he'd eat you and everyone you care about. But in his forthcoming book, An Economist Gets Lunch, Tyler Cowen argues that less cows are a good thing given the polluting methane that they produce (cow farts). So we should worry about the negative environmental externalities that this increased production of cows lead to. In addition, Nestle reports that half of weight of the 34 million cattle slaughtered each year goes to human consumption, and some of what doesn't get eaten goes into landfills or gets burned up, which could also create environmental costs.

While the environmental impacts of getting rid of pink slime aren't certain, intuitively we should not find it too surprising if it turns out getting less food out of each cow is bad for the environment. With no health or nutrition gains to be had, I don't see how the pink slime critics claim the moral high ground here. This is another example of society engaging in potentially costly signaling just to show each other that we care.

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Karl Smith - Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior 

Americans live beyond their means. This is the conventional wisdom among American elites from Washington to Wall Street to Harvard Yard.  Our government budget deficit is out of control. Consumer debt is rising and we are living through the aftershock of a rapacious run-up in mortgage debt. When will we ever learn?

This conventional wisdom, however, is missing one seemingly obvious but systemically overlooked stumbling block: If Americans start saving, who will borrow?

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We normally think of savings in what economists would call Partial Equilibrium analysis. That is we only look at the piece of the economic puzzle we are directly connected to, rather than thinking about the entire economy as a whole. We think that we save, we put money in the bank or in an investment account and then later we get our money back, with interest. 

Yet, where does that money go?  Does it just sit in the vault? Is there, as economists joke, some giant money bin on Wall Street that collects everyone's savings?

No. In every case the money is transferred to someone else. The bank uses your deposits to make loans. When you invest in the stock market you or your mutual fund is buying out some existing investor. Your money is effectively transferred to the new borrower in the case of the bank or the old investor in the case of the stock market.

Yet, suppose everyone tries to save or invest in the market at once. What happens?

The simply story that we tell is that as more people save, interest rates will fall. In fact, interest rates are largely set by Federal Reserve policy. As more people try to save, the economy will cool down, since people are spending less. The Federal Reserve will respond to this by lowering interest rates.

Low interest rates should then, in theory, spur investment. However, the majority of actual investment in the United States -- and the rest of the world for that matter -- is in physical structures. That is, the majority of investment is in construction. Of these housing is the largest component.  So, as interest rates fall investment in housing and other structures rises.

Yet, as we saw over the 2000s there is a limit to how far this can go. Construction investment in general and housing investment in particular can easily outstrip the point where new investment yields positive rates of return.

In the market case, if everyone tries to invest at once, that is if there are many buyers and no sellers then the price of the stocks goes ever higher.  Indeed, there is no theoretical limit on how high stock prices can go. If literally everyone wanted to invest and no one wanted to cash out then the price would sail towards infinity.

That won't happen because as prices go higher some folks will want to get out.  They will start selling and the market will land on a price where the number of buyers and sellers match. However, as we say in the 1990s that price can be extremely high.

The key question is, how does this help our nation as a whole save for retirement? Since stock prices are determined by the meeting of buyers and sellers there must be some future buyer who will pay as much as you did, or else you face a capital loss. Is it all a Ponzi scheme?

No, but understanding why not shows us the limits to saving through the market.

It's not a Ponzi scheme because there exists a special class of seller, those who can issue new shares.  Sometimes a currently traded company will issue new shares as a way of raising money for new investments. More importantly, however, young firms will issue shares as part of an IPO.

The higher stock prices are, the better deal young firms can get in an IPO. And, the better deal young firms get in an IPO the more likely Venture Capitalists are to take a chance on start-ups.

So, high stock prices encourage start-ups. These start-ups will in theory add to economic production and increase the size of the total pie. It's the return from there being a larger pie which then supports the mass of investors who went into the stock market.

As we saw in the 1990s, however, there is a fundamental limit to how many good start-ups can be created. When stock prices go ever higher it has the predictable effect of encouraging more start-ups but we very quickly run into the problem that many of those start-ups either have bad business propositions, or mutually exclusive ones. In some cases the problem is that there can only be a handful of mega-firms like Google, but 100s of companies are betting on making it in search. This means most of that investment has to have a negative return.

Running up stock prices is a way to grow investment and support retirees, but it's limited.

If we have seen ourselves both run out of new companies to invest in as stock prices rise, and run out of construction to invest in as interest rates fall the question remains: If Americans start saving then who will borrow?

In the next part we'll deal with savings, liquidity and the inevitability of bubbles.

Karl Smith - Assistant Professor of Public Economics at UNC-CH and Blogger at Modeled Behavior

Tyler Cowen has a nice essay up at The American Interest on an Export-Oriented America. He offers us three reasons to be optimistic about the US export future: artificial intelligence, shale oil and gas, and a rising Asian Middle Class.

I think he more or less nails the last two, what I refer as the Exxon and Apple economies, respectively.

In a somewhat provocatively note in an post on climate change, fossil fuel extraction and processing is likely to be a god-send for the American working class. It may seem strange at first, but part of what makes the outlook so bright for workers is that the shale oil in particular is difficult to extract and the wells burnout in some areas in less than 60 days. This requires an intense process of re-drilling and re-fracturing.

This process means smaller windfall profits for the owners of the land and more work for oil extractors. Traditionally in economics we consider this a loss, as labor employed by the oil extractors cannot be employed elsewhere. Yet, this is increasingly becoming something of a gain, as the social problem of finding constructive and dignified work for low-educated men becomes more severe. 

As economists we are trained to say that we work to live, we do not live to work. Yet, as we watch the corrosive effects of long-term unemployment on our social fabric build we may have to revisit that viewpoint. If we are not quite ready to cheer make work jobs, we might nonetheless be thankful for an opportunity like the new fossil fuel economy.

The creative class in America will likewise be buoyed by a world in which creativity is in ever greater demand. The source of America's well-spring of creativity and dominance in music, movies, television, social media has been long discussed and never fully understood. Yet, unless something dramatic changes, we should expect those trends to continue.

In a world with ever more middle class consumers is a world in which the returns to innovation accelerate, the killer electronic devices of the 2020s will have a potential market measured in the billions when they launch.

These two trends are clear. What's less clear is how soon intelligence will fundamentally change the manufacturing landscape. Cowen writes:

It's not just that Silicon Valley and the Pentagon and our universities give the United States a big edge with smart machines. The subtler point is this: The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States.

A point which Tyler Cowen and I have never fulled hashed out is the extent to which productivity gains are endogenous.  It's true enough that we can create machines that will run virtually the entire manufacturing process for us. That's not the issue. The issue is whether it's cost effective to do so. When labor is cheap, investing in the latest machines doesn't pay.

What Tyler has to be arguing is that the machines will get so cheap that fully automated production will be even cheaper than subsistence wages, for there are many areas where subsistence wages are still paid. I don't think we are about to hit that point any time soon.

Nonetheless, given the factors currently building the United States as an export powerhouse is no longer wishful thinking. It is my baseline scenario.

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Adam Ozimek -- blogger at Modeled Behavior and associate at Econsult Corporation

As a child I used to read my grandfather's Popular Science and Popular Mechanics magazines. The constant promise and inevitable disappointment of amazing technologies that mostly never materialized (a problem likely exacerbated by my focus on the amazing and outlandish ones) made me skeptical of futurist predictions. It is somewhat strange then, that I now commonly find myself a proponent of futurist visions equally as grand as those that once made me a cynic. But I'm not alone in seeing the near future as a quickly changing technological landscape. In their recent book Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, MIT's Erik Brynjolfsson and Andrew McAfee* offer a similarly sweeping view of how technology is, and will be, shaping our future

They present two convincing cases of technology changing quicker than we would have thought. First is the driverless car. This is something that Popular Science has been promising since the 1940s, and I remember reading about 20 years ago. But despite the optimistic predictions of yesterdays futurists, a car without a driver was always a farther off than it seemed. As recent as 2004, in fact, economists Frank Levy and Richard Murnane argued that the kind of pattern recognition that driverless cars required was impossible:

The... truck driver is processing a constant stream of [visual, aural, and tactile] information from his environment. ... To program this behavior we could begin with a video camera and other sensors to capture the sensory input. But executing a left turn against oncoming traffic involves so many factors that it is hard to imagine discovering the set of rules that can replicate a driver's behavior. ...

In that same year DARPA held their first Grand Challenge, which asked competing teams to build a driverless car that can make it across 150 miles of dessert. Confirming Levy and Murnane's pessimism, the longest any car made it was 8 miles, and this took several hours.

Yet despite how difficult this challenge seemed just a few years ago, Google has made astounding headway in building a functioning driverless car. As the video below shows the current capabilities are already very impressive. So much so that the state of Nevada recently became the first state to pass regulations allowing autonomous cars.

Skeptics cite our deep aversion to handing over control to a computer as an impediment to the driverless car. But it need not be the case that the first time you hand control to a robot it will have you barreling down the interstate at 70 miles-per-hour. Autonomous driving might first be used for slow moving, stop-and-go traffic. You can see a precursor to this in cars that are already parking themselves. We can ease our way into comfort with it. We should have little doubt: driverless cars are in our future.

Brynjolfsson and McAfee also cite IBM's Jeopardy! winning supercomputer Watson as further technological proof that we are on the cusp of changing our world. Watson shows more of the impressive pattern recognition seen in driverless cars, but also demonstrates complex language skills that were once thought beyond the province of computers. Supercomputers like Watson will drastically change medicine and other knowledge fields, and in fact IBM and Memorial Sloan-Kettering Cancer Center are already working on teaching Watson to aid in diagnosis and suggesting treatments for cancer.

Others are joining in on the chorus and heralding the new age of Artificial Intelligence. In a new piece in The American Interest, Tyler Cowen argues that AI is one of the three reasons the United States is becoming an exporting powerhouse:

.... artificial intelligence and computing power are the future, or even the present, for much of manufacturing. It's not just the robots; look at the hundreds of computers and software-driven devices embedded in a new car. Factory floors these days are nearly empty of people because software-driven machines are doing most of the work...

...The next steps in the artificial intelligence revolution, as manifested most publicly through systems like Deep Blue, Watson and Siri, will revolutionize production in one sector after another. Computing power solves more problems each year, including manufacturing problems.

If we accept that this increase in technological growth is occurring, it begs the question of "why now?" The authors argue that this is happening now because of Moore's Law, and variations of it, which predicts that specific technologies will double in performance at regular intervals. Exponential growth like this means that we will experience a period of what looks like slow linear growth followed by a fast acceleration of growth that "confounds expectations and intuitions." They believe we are entering the period of fast acceleration.

If Brynjolfsson and McAfee are right, we should all be futurists now. Technologies that recently seemed implausible will soon become reality. A long time skeptic, I find myself thinking more and more like this today. It certainly seems like a weekly basis that a Youtube video emerges of a technology that "confounds expectations an intuitions". From the creepily humanoid robotics of Petman, to somehow menacing cooperation of a swarm of nano quadrotors, things seem a little more futuristic lately.

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*An earlier version of this article incorrectly referred to Andrew McAfee as Eric McAfee.

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