Macro Roundup

James Pethokoukis, "Peter Thiel and the populist right’s embrace of broken capitalism theory," American Enterprise Institute, July 15, 2019, https://www.aei.org/economics/peter-thiel-and-the-populist-rights-embrace-of-broken-capitalism-theory/

Peter Thiel and the populist right’s embrace of broken capitalism theory

When, in a speech Sunday, Peter Thiel wasn’t lamenting Silicon Valley’s failure to produce a working warp engine or musing about “seemingly treasonous” actions by Google executives, he was suggesting a familiar economic argument. Well, familiar on the left ⁠— at least until the populist surge on the right. It’s an argument easily summed up by this chart from economist Robert Lawrence, one included in a recent paper by my AEI colleague Michael Strain, “The Link Between Wages and Productivity Is Strong”:

Yet a few reasonable changes to the chart presents a radically altered picture how the US economy has performed over the past half century. (Among the changes, Lawrence looks at the wages of all workers, factors in compensation rather than just wages, calculates real wages using a business price rather than consumer price deflator, and net output ⁠— which removes capital depreciation ⁠— rather than gross output.)

In the chart above, productivity growth and compensation growth were coincident between 1970 and 2001. The chart depicts a divergence since 2001, especially since the Great Recession, but not a dramatic one. … The takeaway from this chart is clear: When properly measured, with variable definitions based on the most appropriate understanding of the relevant underlying economic concepts, trends in compensation and productivity have been very similar over the past several decades.

Moreover, these findings present a similar picture as those in a recent working paper ⁠— “Productivity and Pay: Is the link broken?” ⁠— by economists Anna Stansbury and Lawrence Summers:

We find substantial evidence of linkage between productivity and compensation: over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth and with 0.4 to 0.7 percentage points higher production/nonsupervisory compensation growth. These results suggest that other factors orthogonal to productivity have been acting to suppress typical compensation even as productivity growth has been acting to raise it.

A related argument is that wages have gone nowhere for 40 years. But this is an equally suspect claim. Suspect, but politically convenient for populists for whom telling a story of total economic failure is a key attack vector on “elites.”

Mark Perry, "Chart of the day... or century?," American Enterprise Institute, July 12, 2019, https://www.aei.org/carpe-diem/chart-of-the-day-or-century-2/?mkt_tok=eyJpIjoiWkdZMll6RXpPRE13T1RRMiIsInQiOiJuZmZiV040eURcL09NYXZCY1ZrYldmXC9meHZJZ295aXNMRzBLY2UyOTFvTWVPcm5aOGFtTlloeXRtYnZcL0dkanM3Z244Y1E1enJ0QXYreHlQMmI4UUlmZDVUcEN0MWF2QTVDdlZVNmpJNmlMRCtqR09xS2NVaWxNbW5vZ0plY1R0biJ9

Chart of the day... or century?

As I wrote last summer on CD, I’ve probably created and posted more than 3,000 graphics on CD, Twitter, and Facebook including charts/graphs, tables, figures, maps and Venn diagrams over the last 12 years. Of all of those graphics, I don’t think any single one has ever gotten more attention, links, re-Tweets, re-posts, and mentions than the one above (and previous versions), which has been referred to as “the Chart of the Century.” Here are some examples of those mentions from last year for the version of the chart with price data through December 2017.

Barry Ritholz has featured various versions of the chart three times on his Big Picture Blog here, here and here.

Bloomberg published an article last July titled “Chart of Century Gives Powell Gloomy Glimpse of Trade-War World,” with this opening:

A multi-colored graphic that’s made the rounds at the Federal Reserve hints at what Chairman Jerome Powell could face if President Donald Trump succeeds in throwing globalization into reverse: Higher prices for many goods and potentially faster inflation.

Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeables — hospital stays and college tuition, to name two — have surged.

That report was followed in July with a CBS MoneyWatch article “Inflation risks, trade war costs, make Fed’s job much harder.”

A chart that has been making the rounds at the Fed from economist Mark Perry shows how falling prices for trade-sensitive things like TV sets and toys have helped offset rising costs for things like medical services, housing and education.

More recently, Clemson University economist Bruce Yandle featured the chart in a March 2019 Washington Examiner op-ed titled “Rising prices, global competition, and the chart of the century“:

American Enterprise Institute economist Mark J. Perry is highly and justifiably respected for his ability to convey complicated economic relationships by way of rather simple charts and graphs. The most famous example of this, shown here, is called by some the “chart of the century.” The high praise comes about because the chart is loaded with information regarding the types of challenges faced by the Fed and other Washington policymakers. Perry’s most recent version reports price increases from 1998 through 2018 for 14 categories of goods and services along with the average wage and overall Consumer Price Index.

Based on yesterday’s BLS report for CPI price data through June, I’ve updated the chart above with price changes through June 2019. During the most recent 21.5-year period from January 1998 to June 2019, the CPI for All Items increased by exactly 57.6% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly earnings (wages). Seven of those goods and services have increased more than average inflation, led by hospital services (+210%), college tuition (+188%), and college textbooks (+183%). Average wages have also increased more than average inflation since January 1998, by 83%, indicating an increase in real wages over the last several decades.

The other seven price series have declined since January 1998, led by TVs (-97%), toys (-75%), software (-69%) and cell phone service (-53%). The CPI series for new cars, household furnishings (furniture, appliances, window coverings, lamps, dishes, etc.) and clothing have remained relatively flat for the last 21.5 years while average prices have increased by 57% and wages increased 83%. Various observations that have been made about the huge divergence in price patterns over the last several decades include:

a. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:

Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.

b. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).

c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc.

New:

d. The price series that has shown the greatest change recently is the CPI for Educational Books (mostly college textbooks). Textbook prices rose an average of nearly 6% annually between January 1998 and December 2016, nearly three times average inflation during that period of just above 2% annually. But starting in early 2017, the CPI for Educational Books has been flat, and actually fell by 2.15% over the last 12 months through June following an annual decrease of -4.0% the previous month - the two largest annual percentage declines in the history of the series going back to 1967.

We can expect future declines in the prices of college textbooks, as the traditional textbook market faces increasingly tough competition from alternative options including hundreds of “open textbooks” that have been funded, published, and licensed to be freely used, adapted, and distributed. The University of Minnesota’s Center for Open Education maintains an “Open Textbook Library” website that lists hundreds of textbooks in nearly 20 academic subjects that are available for free online or as a PDF file, or as a print copy at a low-cost ($33.50 for print copies from OpenStax). Just in the field of economics, there are more than 20 free open textbooks for Economics courses including Principles of Microeconomics, Principles of Macroeconomics, International Economics, Money and Banking, Economic Analysis and Principles of Political Economy.

Bottom Line: Based on the evidence in the chart above showing stagnating and falling textbook prices following half a century of rising prices, Hurricane Joseph appears to be hitting the college textbook market with a very large, tsunami of creative destruction called “The Open Textbook Effect.”

MP: I’ll continue to update the price chart every six months, look for the next version in January 2020 with data through December 2019.

"....In America ip now accounts for about one-third of non-residential investment, up from a fifth in the 1980s (see chart 4)...In the past year American technology firms in the s&p 500 made investments of $318bn, including research and development spending. That was roughly one-third of investment by firms in the index. Just ten of them were responsible for investments of almost $220bn; five years ago the figure was half that...."

"....A recent paper by Adrien Auclert of Stanford University sets out a framework for judging who wins and who loses from changes in monetary policy. Three channels must be considered. One concerns the impact of lower rates on the macroeconomy—the effect trumpeted by central banks. Another concerns the higher inflation that lower rates might cause. That hurts creditors and benefits debtors, who see the real value of their obligations shrink. The third channel concerns asset prices. It is wrong to claim that asset-holders generally benefit when rates fall, says Mr Auclert. What matters is the full picture of an individual’s assets and liabilities. The latter he defines to include future consumption plans (such as whether the homeowner wants to stay in his house, or whether the retired person seeks to maintain a steady standard of living). Only by looking at an individual’s balance-sheet in full can you judge whether he wins or loses from low rates—or whether, in the jargon, he has “unhedged interest-rate exposure”. The crucial question is whether someone’s assets and liabilities mature at different points in time. People with short-dated assets but long-dated liabilities—for example a saver with lots of cash in the bank to fund a purchase ten years hence—do badly when rates fall. They are the euthanised “rentiers”, who must save more to fund spending later (a rare example of lower rates depressing consumption). But those who wish to spend today and hold long-dated assets, such as long-term government bonds, do well. What does this framework imply for rich and poor? Mr Auclert presents some evidence that Americans who are older, or whose incomes are higher, tend to be on the losing end of asset-price effects when rates fall. But he says it is hard to measure the effect precisely. A recent working paper by Panagiota Tzamourani of the Bundesbank finds that within the euro area, average unhedged interest exposure varies a lot between countries, seemingly in line with the prevalence of floating-rate mortgages. But Ms Tzamourani also finds that younger households and those with low net wealth benefit from lower rates almost everywhere...."
Economist Staff, "Should egalitarians fear low interest rates?,"The Economist, July 11, 2019, https://www.economist.com/finance-and-economics/2019/07/11/should-egalitarians-fear-low-interest-rates

“…High school-aged girls who tested on par with their male peers in math chose not to crunch numbers for a living because of their “verbal advantage,” according to a study published Monday in the journal PNAS. For the study, researchers at the Paris School of Economics reviewed data from 300,000 15-year-old students from 64 countries worldwide. They found that girls’ higher reading and verbal test scores may account for up to 80% why math-related jobs are dominated by men globally, researcher said. It’s likely that social and cultural norms — in which women are expected to be more expressive and better communicators — drive young girls to excel at verbal subjects at school, study author Thomas Breda says…”

Natalie O’Neill, “Why teen girls who are as good at math as male peers pick humanities jobs,”New York Post, July 16, 2019, https://nypost.com/2019/07/16/why-teen-girls-who-are-as-good-at-math-as-male-peers-pick-humanities-jobs/

Why teen girls who are as good at math as male peers pick humanities jobs

Women have the write stuff for both math and communication jobs, according to A study.

Teenage girls are just as good with numbers as boys — but their even-stronger verbal skills often inspire them to pick humanities-centric jobs instead, according to a study published Monday in the journal PNAS.

High school-aged girls who tested on par with their male peers in math chose not to crunch numbers for a living because of their “verbal advantage,” according to a study published Monday in the journal PNAS.

For the study, researchers at the Paris School of Economics reviewed data from 300,000 15-year-old students from 64 countries worldwide. They found that girls’ higher reading and verbal test scores may account for up to 80% why math-related jobs are dominated by men globally, researcher said.

It’s likely that social and cultural norms — in which women are expected to be more expressive and better communicators — drive young girls to excel at verbal subjects at school, study author Thomas Breda says.

On average, male students scored only slightly higher in math than their female peers, according to the study. Girls scored better in the subject of reading.

“The reality is that people aren’t just their gender,” Juniper Simonis, a quantitative ecologist who was not involved in the study, told PBS.org