|Intro. [Recording date: February 16, 2010.] Garett is a macroeonomist, but uses Twitter, which is micro. Tweets on deep issues using tweets as a form of both entertainment and economics education. Career path and how got to George Mason? Undergraduate degree in history at Brigham Young U., minored in sociology, thought they were good ways to learn how societies worked. Noticed that in both, the most interesting explanations came from economics. Read some of Fogel's work on economics of slavery, Rodney Stark on economics of religion. George Stigler, economist, said, "There's only one social science and we're its practitioners." Decided to try to get a Ph.D. in political science. Took all the fun classes in one year. Learned a lot of great stuff. Ultimately realized econ was the way to go. Took a year off to take appropriate classes, math classes. During the year off, was lowly intern for Orrin Hatch of Utah in Washington, D.C. Tax policy. Making copies, licking envelopes. Advice: Always be willing to do more work, take more to do. Eventually got to the point of being able to draft speeches and op ed. After that, went to UC San Diego in economics--reputation for being very mathematical, very formal. Trying to get away from years of squooshiness, trying to find balance. Went to first academic job after dissertation that job market wasn't that excited about--on how the Federal Reserve controls interest rates on a day-to-day basis. Part was on intraday changes in the Federal Funds rate. Got to think about natural experiments, so common now in microeconomics. Thesis adviser was Jim Hamilton. What if Fed accidentally puts in or takes out a billion dollars too much? Hard for them to tell how much to put in or take out of the economy. Thinking about macro in micro terms. Toiled away in academia for a couple of years. A few weeks after 9/11, phone call from Senator Hatch's office--wanted a Ph.D. economist on staff, found him through Google at Southern Illinois University. Left academia for 15 months; economic policy adviser to Orrin Hatch--tax issues, labor issues. Year of the 2003 tax cuts, when taxes on dividends and capital gains were cut; a lot of the Bush rate cuts were sped up. Then back to academic life. During time in the Senate had decided it was fun but not as much fun as the free thought in academia; so if going back, had better find something to work on that was incredibly exciting. Otherwise, stick around a couple of years and then cash in as a lobbyist. All about the opportunity cost. Went to work on economic growth.
|Working on a book in economic growth--relationship between IQ and economic growth--will do future podcast. For here, experience with Twitter and academic--real world--experience. Two unreal places--academic life and Congress. Twitter, in the abstract first. Russ on Twitter as EconTalker, questions for listeners, announcements of who is coming up, occasionally for short bloggings, but not a lot of "I'm having a pizza right now." Tyler Cowen podcast: older folks tend to look down on Twitter; but it's a form of communication. Just a short form of blogging if you don't do it on your cell phone. Twitter limited to 140 characters, including spaces; a lot of abbreviations are used. Somewhat like Haiku, there is an elegance that arises from the constraints of 140 characters. How does Tweeting relate to your Senate experience and public choice? Common when reading books or blogs to find great little short nuggets, short quotes. Whole books like Bartlett's Familiar Quotations consist of short quotes--guess that half are 140 characters or less. The best parts of books are often in that 140 character range. A lot of economics is distilling things to their essence. Political Science class--this week, we'll read this 1000 page book; we'll come in and talk about it next week. Ultimately you pull out maybe a little more than 140 characters, but not too much more. In academic economics, we often write 30-page articles that can say more--or less--than 1000 page books; a core insight. Twitter encourages focus on the basic idea. Hayek's "The Use of Knowledge in Society"--15 pages--read many times and worth rereading. Most we could ask for from Twitter is a tweet that is so provocative, so distilled that it would be worth rereading it many times. What are some? On Twitter with one "r" in "Garett"--GarettJones. One the other day, Tyler Cowen just linked to: If businesses say the tax cut doesn't help them, that's an argument for the tax cut. That's a puzzle. Tries when twittering to create a puzzle. If the tax cut doesn't help them, that seems to be an argument against them, since after all, the idea of a tax cut is to get the business to respond. Want a big response, big help. How can it be that it's an argument for the tax cut. Would seem to be an argument for the impotence of the tax cut, and therefore a bad argument, a case against it. Businesses love it when you cut their taxes on things they are already doing. That's what they get really excited about. Saw lobbyists coming in while on the Hill; companies do spend a modest amount on lobbying tax issues. A lot of business see taxes as a cost to be managed, not as a policy choice--if you cut taxes we'll respond this way: if you cut taxes on capital, we'll do a lot more investing. A way to get their rents lowered. Not interested in making the country better off; focused on their bottom line. The kind of tax cuts businesses would respond most to are ones where they are kind of indifferent between doing one activity versus another. Example: whether a business locates on the right or the left side of the street. Simple choice; we as voters might have a preference: A city council might decide they want a gas station on the right side of the street rather than the left. Could just turn around; so let's call it the East side versus the West side. Small tax, pennies, dollars, to encourage them to locate on the east side of the city or the intersection. If you want them on the east side, only a very small incentive is necessary to get them to do it. A lot of tax changes that get bandied about are really just paying businesses to tell them to do what they would have done anyway. In some cases, a lot of things tax lobbyists would come in and ask for were genuine simplifications--government would just have a lot of crazy rules, hoops for businesses to jump through.
|Standpoint of the classroom: infra-marginal changes versus marginal changes. Inframarginal: stuff I'm already doing, so it will take a massive change in price or taxes to get me to do something different. Marginal meaning it's going to affect my behavior. A lot of people get confused because they have trouble keeping these things straight; people say: If we make it less lucrative to be a doctor, that's not going to change the number of people who becomes doctors because "no one goes into medicine to get rich--they do it to help people." For an economist, hard not to laugh. People go into medicine for lots of reasons--presumably because they like to help people, find it satisfying; presumably because it pays very well. There are many, many people who, if their wages were cut in half might still want to be in medicine. But there are millions more who would become lawyers, who are just willing to get their medical degree; so if you make it less lucrative, they are going to go do something else. It's not to say that people are motivated to become doctors solely for the money--it's just that money matters. To finish the tweet: flat supply and demand curves; what do relatively flat or elastic curves mean? A perfectly flat supply curve means that businesses are going to supply the amount of output at one particular price. If the price rose slightly, there would be an infinite amount supplied; if the price were cut slightly, there would be none supplied. Might be the equivalent of whether you open your gas station on the East side versus the West side. If just a little bit steep, not quite perfectly flat, then if the price rises just a little bit, you will get a huge quantity response. People will supply a lot more of that product. For example, might happen if you paid people more to be a specialist in medicine, ear, nose, and throat specialist. Pay a little more, a lot of people go into that specialty. What that means is that if the supply curve is relatively flat, there is not that much of what we call producer's surplus out there in the market. Not that much extra value being created that gets the producer excited. Producer surplus is basically the difference between what you'd have to pay a person to be willing to produce that unit of output, versus what they actually get paid. It's a little bit like profit. A relatively flat supply curve means it doesn't take a lot of extra money to draw me or my suppliers into the industry. The costs of me doing it, what I'm giving up by expanding or going into this industry, are relatively similar to what I'm already doing. We say in that case that there's very little economic profit; or that there is very little producer surplus in those industries where my next best alternative is almost as good. If something doesn't work out, I can just go ahead and do that other thing. In a setting like that, there isn't going to be a lot of extra value created if the price goes up a little bit. The producers are going to switch over from one market into another market, but it's not going to be the kind of thing they are going to get excited about enough to lobby about. The consumer might benefit tremendously, though, because the shape of the demand curve has nothing to do with the shape of the supply curve. If consumers are very eager to get this new product, relative to the old one, even if it doesn't cost a lot for the market to supply it they are going to get a huge bargain. So much of the production and innovation that goes on is by companies already in a line of work, deciding to just tweak slightly what they are doing in order to create a lot more value for people. The iPad is a great example of this. Everybody made fun of it the day after it came out--they said it's just a huge iPhone. But when you think about it, a huge iPhone might be great. So from Apple's point of view a small change. We'll see how that will work out. We don't know, and they don't either. Idea would be that if the business is saying this isn't going to help us, it could be a very good thing to encourage or discourage this activity because the consumer could benefit a lot. The fact that a business is asking for one tax cut or another shouldn't really get that much play in our political process. We need to think through the consequences. Sometimes what's good for General Motors (GM) is good for the country. Usually not. Especially right now--old quote, someone being appointed to a position in a Presidential administration who had helped run GM, about 50-60 years ago; different world now.
|Another example: Pointed out on twitter the other day that the way to control spending is to create more earmarks. Strange idea; put "[sic]" as a reminder that it was not a typo. Everybody's against earmarks, though they are not popular. It's not my earmark, so it's a terrible thing; we've got to get rid of earmarks. The impolite way to say it is "pork"--driving us into debt. What could possibly be good about earmarks? They are one way for party leaders to control individual members. American politicians are really entrepreneurs. Every person is building his own brand. Not like in the British system, if you are in the Labour Party you have to do what the Labour Party says. Why is that, by the way? Not entirely sure. Much more party loyalty in the United Kingdom than in the United States. Well, what's so great about party brands? Parties last a long time. Parties are a brand. In the private sector, why do employees pay attention to the company brand reputation? Because there is this corporation saying let's pay attention to Toyota's reputation. Creating some bad cars, some trouble; Toyota cares about that name value. Executives at Toyota have an incentive to take care of the brand. Employee gets paid the same no matter what, does same job no matter what; doesn't care about the brand. That creates an incentive those who have a bigger stake in the brand to monitor, to encourage caring about the brand. IBM, Microsoft, even Ford have good brand value. Parties are one part of American politics that last for a long time--Republican party brand, Democrat party brand have some value. Go up and down--polls. Party brand on average may have a longer focus on the future than individual politicians would. Individual politicians might say they will be in office for 4, 6, 8 years, then cash in as a lobbyist or go back and run for Governor. The party brand might be focused on the long run. Donald Whitman's The Myth of Democratic Failure--there are market failures in political markets, but brands are one way to overcome that. Earmarks are one way to keep the underlings in line. It's a way of rewarding your friends and punishing your enemies. People at the top have some control over earmarks. The Majority Leader and Speaker of the House can tell someone they need your vote for something, and when the member says, what's in it for me? A new post office, a new interchange, a new four lane bridge instead of two lane bridge; and they get to brag about that back home. In the United States, both parties get to exercise their earmarks. Surprising how it's a bipartisan game. In the last Presidential election, John McCain came out boldly for getting rid of earmarks. Remember it as being a remarkably small amount of money--tens of billions, not even a hundred billion. Something like $20 billion. A drop in the bucket in the U.S. budget. Suggesting it is an incentive system within Congress to get stuff done that otherwise would not get done; we'd like to think that maybe would be better than the alternative because maybe some longer term incentives would be in play. At some point, this or the next decade, Congress is going to wrestle with entitlement spending. The options are pretty clear--will be some combination of raising taxes, cutting spending, or defaulting on the debt. Default might mean some inflation or just being a slow payer. When the time comes it's going to be parties that cut the deal. Both parties would like to brag about that to the voters, saying they didn't cut your benefit; but the parties both know it has to be done. Later rather than sooner. Having the ability to discipline members--which are such an inexpensive way to buy the votes of politicians--will work better than trying to appeal to their patriotism, for instance. The alternative: extra entitlement spending. Given choice between giving a Congressman a $2 million post office in his district versus a $2 billion dollar increase for his district in Medicare spending--say, because he's got an older population--it's cheaper with earmarks.
|Digress: Rep. John Murtha passed away, recently. Washington Post obituary called him the King of Pork, master at getting stuff for his district. Don Boudreaux wrote a letter to the editor--don't know if it got published; email Russ if you want to get on his mailing list--similar to Twitter, has to be short--It's interesting if you are a Congressman and you manage to get millions of dollars for your constituents, you are considered a hero. You get re-elected and you brag about it. But if you went around the country breaking into homes and banks, took the money and gave it to your friends, you'd be called a thief. What's the difference? Russ: don't think there's a big difference; not a big fan of earmarks, at least not in the short term. But is it imaginable that part of our challenge as a body politic in the United States today stems from the fact that what was once considered honorable is now considered dishonorable and vice versa. Maybe there was a time in America when to bring home pork for your constituents was considered somewhat inappropriate. The mechanisms may not have been there. It's a cultural change. There are a handful of people in Congress who would say it is wrong. The more stuff you don't do because it's wrong, the better off you are. You don't want to rely on legislation as a way to stop. Consider it a form of redistribution from one part of the country to the other. Some are better at gaming the system because they have been at it a longer time or they know the rules better; are able to use that influence and knowledge and channel their influence to a small group of people known as their constituents. Why wouldn't you be ashamed of that? Surely there was a time where people might have been ashamed; now they are good politicians. Senator Nelson in Nebraska was embarrassed that he cut a deal for his constituents to get a deal on health care; Senator Landrieu of Louisiana had some embarrassment. But they've decided to live with it. Thoughts on those issues? Was in the Senate at the time when pork was king. Same size as normal pork projects. Many small, little tax breaks, can imagine they are designed to benefit small groups. Often in the range of tens of millions of dollars. Occasionally a billion dollars. Sense that this has gone on for a long time. Building canals in the 19th century; where railroads went was probably pretty politicized. It seems that it is a signal voters look to as a sign that their politician has some skill. If writing down a model of political economy, would model it that way. Voters can see a new bridge with a sign that says "Your tax dollars at work." Of course, it's other people's tax dollars; should say: "Your distant neighbor's tax dollars at work." In the Troubled Asset Relief Program (TARP) bill, which was a $700 billion bill, which failed the first time--the second time it passed. We were told we were on the edge of a cliff, apocalypse. Hidden away in that very long bill was a paragraph or two of green energy. Who is not in favor of green energy? Turned out it was a subsidy for cars that were using some form of electric power; and it just turned out that it only applied to one car--the Chevy Volt. The way they did that was to make it apply to a certain type of electric battery. More than one company working on electric batteries, but the Volt had its own unique battery, so that's what the subsidy was for. On Capital Hill, call that a "rifle shot." Targeted. Usually rifle shots are considered shameful. Some range to it, roughly $5000 per car, huge. That rifle shot was done quietly. Even though you can brag about it to your constituents, it's considered somewhat gauche to do it out in the open. Like steroids--kind of tolerated in the culture of baseball, before they were banned. Considered okay, but not exactly. They all hid it; wanted people to think their skills were natural. Earmarking and pork is something like that steroid debate. Try to do it quietly.
|Productivity. A few tweets over last few months that mention organizational capital. Arnold Kling at EconLog has a theme on this. What is it? Organizational capital is basically the ideas and habits of work that people build at work. We know what physical capital is--the machines. Businesses also build cultures, R&D labs and trained people. A lot of what we are doing at work is building patterns, processes. When Arnold worked at Freddie Mac, he didn't spend his time processing loan applications. People spent their time building computer programs that would take care of the stuff automatically. At Citibank--another semi-private, quasi-private, faux-private enterprise in the United States. These folks build patterns--write or approve computer programs about which checks clear, loan approval. Engineers at an auto company--it doesn't take that many people to build a car; it takes a lot of people to design a car in advance. How much money will go into safety, how thick should be the sheet metal? The job of a corporation is to get the process moving. Thought of Russ in San Francisco over the weekend--video about a local fortune cookie factory which manages to crank out 10,000 fortune cookies a day with exactly two workers. Russ's The Price of Everything--how few people it takes to run an egg processing facility. Whole idea of people-free production--sounds like you are playing when you say there are not many people involved in making a car. After all, they are involved in design--so they are making the car. Yet it makes a difference. Car factory--should go. Can sometimes see some of the magic in an ad. In a Ford plant in Kansas City in the mid-1990s. If you stand in the right part of the factory, every 30 seconds a brand new car rolls off the line. For fans of "I, Pencil," think of the people who designed the robots. Extraordinary thing the way we have embodied knowledge within capital. There are factories that have no people. Don't have to have lights or heat; save more money. Wasn't true 50-100 years ago. Why relevant? Relevant for explaining the recession and the recovery. For this recession right now, we have seen that the productivity of workers is going up during recessions. For people on the streets, that makes sense--that's when the boss comes and says he's going to make you work harder. Certainly some of that going on. Even Marx made this point about the reserve army of the unemployed--the boss can always point to the unemployed on the streets so you better work harder. Puzzle is that it wasn't always this way. Before last few recessions it wasn't this way. There is a whole theory built around the idea that productivity tends to go up during booms and down during recessions--real business cycle theory--Ed Prescott and Finn Kydland got the Nobel Prize for inventing this model. Pro-cyclical productivity. They noticed the fact--which economists didn't really dispute--that productivity was higher during booms and lower during recessions. In the past. They came up with this model in the 1980s. They said: let's see if we can explain that by assuming or believing it's the productivity that is following its own path. There are times when productivity is high--say when we are having a lot of innovations or when government regulation is supportive--and maybe bad times when there is the opposite. Or maybe animal spirits; or maybe when oil prices are low it's really cheap to bring in inputs from overseas. What Kydland and Prescott did was show they could explain everything else that goes on the business cycle starting with that. Economy grows faster, more investment, unemployment goes down, etc. Boiling it down to an aphorism: You make hay when the sun shines. The reason you don't make hay when the sun doesn't shine is because it will be damp and mildewy, and the hay will rot. Better wait. Work more when productivity is high and less when it is low. Self-reinforcing. Were able to explain why wages and investment are high during booms and why productivity was procyclical. The problem was--the model was true until it wasn't. The last three recessions we've had the opposite happen. 1991, 2001, and the current one. We've returned to the land of common sense, where it looks like bosses make people work harder. Decades of commons sense being false; all of a sudden common sense is true. Unlikely that bosses have suddenly decided to be greedy and previously deciding to lay off workers--we don't want to work them too hard--in the old days.
|So what could have changed? Goes to this idea of organizational capital. In layoffs, they might be laying off people involved in design. There is a lot of uncertainty about what is going to profitable or even legal in the future. Financial services industry. Now is not a good time to invest in new production processes. Keep around the people working on the line at Ford. That number will be relatively unresponsive to swings, is the claim. McDonald's probably be keeping the same number of people at the restaurants making hamburgers, but probably have fewer people at Hamburger University. Measured productivity. In everyday language we think productivity means how skilled are you. If I've gotten more productive, that means I can make more in a particular amount of time. But that isn't exactly what it is. it's An aggregate number gathered by looking at a measure of labor--number of workers, hours worked. If number of workers, the denominator can go down a lot without productivity going down a lot during a recession. Most of us sitting in cubicles making sure people get paid, taxes get done, writing computer programs. Can't do that in construction. If you are building half as many houses as before, you can't do that. In the past recession, large percentage of construction workers laid off. Tweet on this particular one: it's an old one.
|Anything else, fun, for tweets? Supply siders pretty popular in some circles: people respond to tax changes. Models may be too optimistic, predicting that people respond a lot to tax changes. One prediction, if you were an honest-to-goodness supply-sider, would predict that 2010 would be a boom year, at least for America's rich, because taxes are going to be going through the roof in 2011 for people making over $100,000 or $200,000 a year. 2010 compared to 2011. Can look at this after the fact. People should make hay while the sun shines. Think they are going to be wrong. Chastening moment. Tax rates are important, but maybe not so important for labor supply. Empirical question. For podcast, talked about looking at whether there is a correlation between tax cuts and government spending. Milton Friedman said he never saw a tax cut he didn't like: the less money the government has to play with the less damage they'll do. Often goes by the name of Starve the Beast. Theory of politics--not economics--that there was a politically acceptable deficit they can run. They'll spend all the money they take in in taxes plus that deficit; that's total government spending. Tax cuts pull down the level of government spending. Distinction between tax rates and tax revenue. Assuming that cuts in tax rates lead to less tax revenue--usually the case, holding everything else constant, that we are not in the downward part of the Laffer curve. We've had decades of experience with this; you can look at the data yourself. A few have looked at it more formally--Christina Romer, before she took office as head of the Council of Economic Advisers, with David Romer, looked at it herself using one statistical method. Niskanen at Cato Institute used another method. Both came to roughly same conclusion--that tax cuts today may cause tax revenues to increase in the future. William Gale at Brookings: politicians have two ways of looking at the world--Puritan Mode or Partier Mode. Puritan mode: parties restrain each other, on a diet. Partier Mode: just let go. Seems to match the U.S. data. Time to revisit idea that tax cuts control government spending. May be encouraging Congress to party more. We haven't made much impact on the size of government. How to move in opposite direction? People are a little more worried than they used to be. Baby boomers moving toward retirement. We just saw a trillion dollars go out the window without politicians making too big of a deal about it. Get you thinking. We were supposed to be putting our fiscal house in order in the last ten years getting ready for the baby boomers.