Now I’m Not Feeling So Alone

Menzie Chinn says he doesn’t understand it but I sure do. James Bullard, governor of the St. Louis Federal Reserve, suggests (PDF) that in the aftermath of a bubble “output gap” may not be particularly useful in figuring out what happened or the way forward:

The recent recession has given rise to the idea that there is a very large “output gap” in the U.S. The story is that this large output gap is “keeping inflation at bay” and is fodder for keeping nominal interest rates near zero into an indefinite future. If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates. This could be a looming disaster for the United States. I want to now turn to argue that the large output gap view may be conceptually inappropriate in the current situation. We may do better to replace it with the notion of a permanent, one-time shock to wealth.

Or, said more simply, we just aren’t as rich as we thought we were. The basic idea is that extrapolating from the 4th quarter of 2007 to the present assuming some fixed rate of growth is wrong. When the value of the bubble commodity collapses that value doesn’t go anywhere. It’s just gone. And not just the value of the bubble commodity but the values of other commodities that depend on the value of the bubble commodity or the expectation that the value of the bubble commodity will continue to increase forever. Those are gone, too.

Rather than implementing policies aimed at exploiting nonexistent productive capacity we should be identifying what will help the economy to grow and do that. I think it’s eliminating waste in the form of deadweight loss. Other people might have other views but I think that’s the shortest distance between two points. As my micro prof put it, we don’t know how to create prosperity but we do know how to create shortages.

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Look At It Another Way

Matthew Yglesias asks why people are so eager to avoid jury duty?

Let’s ask the question another way. Imagine that the judges, defense attorneys, and prosecuting attorneys were all selected at random from the pool of members of the bar in the jurisdiction and paid $20 a day for their service, essentially car fare. That’s not so crazy, you know. Every argument you might make in favor of non-lawyers being eager to serve on juries pertains equally well to lawyers providing their professional services, maybe even better.

Attorneys have no less civic responsibility than non-attorneys. Arguably they have more. They are officers of the court, after all. Why is it a law of nature that lawyers be paid more than carfare to serve as judges but jurors are paid a pittance to serve as jurors? Obviously, it isn’t.

The question we’d be asking then is why lawyers don’t want to serve as judges?

Over the years I’ve served four times as juror. By the grace of God, none of the trials in which I’ve participated has lasted more than a week. Each time I went to the dingy circuit or municipal courts, was treated like a criminal, did my civic duty like a good little boy, and took a substantial hit in the paycheck for the honor. I do it because it’s my responsibility as a citizen and, if I didn’t do it, somebody a lot dumber and less conscientious than I am would have ended up serving in my place.

So, in answer to Matt’s question I’d answer that not everybody is a salaried professional without responsibilities and whose employer doesn’t care whether they show up or not and every juror deserves to be treated better than juries actually are, at least here in Cook County.

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Zzzzzz…

I thought that last night’s Academy Awards ceremony was astonishingly (and expensively) dull. It was a little too transparently a three hour infomercial for going to the movie theater. I actually went off to bed before the major awards were presented. In what I saw there were a few bright moments:

  • I found the acceptance speech for Best Foreign Language Film for the Iranian film A Separation genuinely touching.
  • Cirque de Soleil’s astonishing performance which, ironically, undermined their purported theme. There’s nothing as exciting as live performance!
  • Angelina Jolie and the screenwriters for The Descendants. Angelina’s dress had a slit in it all the way up to her hip. She was “working it”, rather clumsily I thought, by sticking her leg out. When she presented the award to the screenwriters for The Descendants they aped her awkward leg-out pose in the funniest unscripted moment of the evening.

These awards had a number of milestones:

  • In accepting his Oscar for Best Original Song Bret McKenzie became the first songwriter to win that award who had also portrayed an elf on the big screen (LOTR).
  • In accepting his Oscar for Best Supporting Actor Christopher Plummer at 82 he became the oldest person to win one of the acting awards (I was pulling for Max Von Sydow, also 82).
  • With only two nominees in the category I don’t ever recall so few nominees for Best Original Song.
  • With its win for Best Picture The Artist became the first silent film to win that award since the very first winner, Wings.
  • In accepting her Oscar for Best Actress Meryl Streep became only the second actress to win three of those awards. She’s closing in on Katharine Hepburn.
  • Speaking of closing in with nine times at bat as MC Billy Crystal is closing in on Bob Hope’s record of eleven outings as master of ceremonies at the Academy Awards.

One last word. What in the world has happened to women’s fashions? Most of the gowns were horribly ill-fitting and unbecoming, succeeding in making wraith-thin women look fat and dumpy or, in the case of Gwyneth Paltrow’s, like patients in a burn ward. The only two that I liked were Melissa Leo’s and Penelope Cruz’s.

Update

I’m not sure where I should have mentioned Jennifer Lopez’s wardrobe malfunction—under highlights, milestones, or the sorry state of women’s fashions. Not only did her dress make her look dumpy but boob tape is supposed to solve a problem (gaping low-cut necklines) not create new ones when attached in the wrong place.

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Hollywood’s Annus Horribilis

In 2010 total worldwide Hollywood box office was around $31.8 billion, sharply up from 2009. In 2011 that dropped by 3% and Hollywood and movie critics have been kvetching about it ever since. This morning on CBS’s Sunday Morning they featured an opinion piece on the decline in revenues that I found jaw-droppingly obtuse. The assertion of the critic: that the reason for the decline is that Hollywood didn’t produce enough blockbusters.

For reasons I’ll explain later I find this completely circular.

Back at the end of 2011 Roger Ebert wrote a more thoughtful consideration of the decline in revenues. He listed six reasons:

  1. No must-see mass-market movie
  2. Ticket prices are too high.
  3. Unpleasant theater experience.
  4. Refreshment prices are too high.
  5. Competition from other forms of delivery.
  6. Lack of choice (the movieplexes all show the same list of the same, indistinguishable pictures)

He concludes:

The message I get is that Americans love the movies as much as ever. It’s the theaters that are losing their charm. Proof: theaters thrive that police their audiences, show a variety of titles and emphasize value-added features. The rest of the industry can’t depend forever on blockbusters to bail it out.

I think he’s onto something with his last two points and, maybe, with the third but I think the others are misplaced criticisms or, as I mentioned above, circular.

Everybody complains about the high prices at the movie theater but IMO that’s mostly just misplaced nostalgia. In the golden year of 1939 movie tickets cost a quarter a piece and you could get a bag of popcorn and a coke for a dime and a nickel, respectively. Relative to median income of $1,800 that was just about .01%. Today a movie ticket costs $8 and popcorn and a beverage will set you back another $12. Relative to today’s median income that’s….01%.

Let me explain why I think that the reasoning on blockbusters is circular. The big production and distribution companies have a strategy for making money. The strategy, essentially, is to win the lottery: produce big, expensive, megahits and make money through worldwide distribution. Worldwide distribution in these big, glossy megahits implies lots of action and not much dialogue. Drawing room comedies don’t translate well (not to mention social satire or drama).

It’s not the only possible strategy. Most people don’t realize it but nowadays the viewership for Bollywood movies is bigger than that for Hollywood movies. The Bollywood strategy is different from the Hollywood strategy. Basically, it’s give people what they want, make the picture for a low cost, and do it in volume. I’ve only seen a handful of Bollywood pictures but every one of them seems like an explosion in the genre factory. They’re combinations of Busby Berkeley musicals, pretty boys, pretty girls, love story, family drama, comedy, and action/adventure. In my experience they tend not to be lurid, violent, or explicitly sexual.

When I think of why the Hollywood strategy is failing I blame Michael Bay. To my eye his movies are big, loud, muddled, incoherent action sequences in which the only role for women is to be leered at. That can be fun for a few minutes but gets tedious when stretched into hours and worse when replicated into endless numbered sequels, each more haphazardly made and thinly plotted than the last.

Worse yet for the Hollywood strategy, its audience is evaporating. Pre-teenage and teenage boys are much more likely to be playing games on their phones, tablets, or game consoles than they are to be going to the movies or even watching them at home so, unsurprisingly, U. S. grosses for videogames are exceeding box office grosses at a significantly lower cost of production and distribution cost.

IMO television, cable, and Internet streaming will increasingly be the sources of the variety that Roger Ebert mentions and Hollywood pictures will continue a long, dreary slide.

Update

To clarify the point I’m trying to make I don’t think that Hollywood isn’t making as much money as it thinks it should be because it isn’t making enough blockbusters. I think it isn’t making as much money as it thinks it should because it has adopted a strategy that requires it to make ever more ever more expensive blockbusters, it refuses to change that strategy with the times, and that strategy is running out of steam.

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Errors Piled On Errors

I do most of my foreign policy-related posting over at Outside the Beltway but, since I strongly suspect that the particular views I’m going to express in this post would be met with considerable derision by the OTB commentariat and life is too short to submit myself to ill-treatment willingly, I’ll air these opinions here. As I’ve written before if you can’t say what you think on your own blog, where can you?

As I’ve mentioned before I opposed the invasion of Afghanistan. It’s not that I don’t understand the impulse to act or the political necessity. Clearly, some action beyond lobbing a few cruise missiles at the Al Qaeda camps there was emotionally, politically, and even strategically necessary. The problem as I see it can be summarized in two words: what then?

There were any number of alternatives. Special forces attacks (as we in fact employed). A massive and prolonged bombing campaign. Nuclear weapons. We could have melted practically anything in Afghanistan down to the bedrock had we been inclined to do so.

However, once we had invaded and removed the Taliban, NATO became the occupying power with certain responsibilities under accords to which we are signatories including the responsibility to protect the population. Failing to do so would have been a war crime. There was no shadow government waiting in the wings, no liberal opposition, almost no civil infrastructure of any kind.

Consequently, I think that invading Afghanistan was an error. An understandable error but an error. Once we had invaded Afghanistan we could have pursued a counterterrorism campaign utilizing what Ralph Peters characterized as a “compact, lethal force”. The belief that we were capable of mounting a Desert Storm-style massive campaign in Afghanistan has always been fatuous for logistical reasons although I recognize that many Americans, possibly even including the president, believed or may continue to believe that was an option.

We have instead pursued a program of counter-insurgency. I think that has been an error. Subsequent to the experience in Iraq, it’s an understandable error but an error nonetheless. As Pat Lang has pointed out, you can’t pursue such a program successfully with one foot out the door and that has been our posture since the very beginning.

The folly of such a program is revealed by the most recent experience with the violence and rioting following the burning of Qur’ans. As Sam Clemens once put it if you pick up a starving dog and make it prosperous it will not bite you. That is the difference between a man and a dog. We’ve done our best to make the Afghans prosperous. Clearly, they would much rather that we leave so they can go back to killing and abusing each other without whatever hindrance that we provide. The difference between us and the Taliban can be summarized succinctly: the Taliban cuts off young women’s ears and noses and leaves them for dead; we restore those noses and ears and try to heal their scars.

We aren’t perfect. We continue to support the corrupt and predatory Karzai government. Our soldiers have disrespected enemy dead. And we have burned Qur’ans.

By apologizing to Afghan President Karzai, President Obama has compounded the error. If the published reports are to be believed we have nothing to apologize for. Not only were Qur’ans being used to pass messages among prisoners (a war crime, just as hiding munitions in a mosque or using ambulances to transport soldiers would be) but the soldiers doing the burning were not, apparently, even aware that they were burning Qur’ans. Subsequent to the burning of the Qur’ans some Afghan people have rioted and killed American and NATO soldiers. It is the Afghan president who should be apologizing to us not the other way around.

I understand the impulse that lead to the president’s apology but I think it is based on the false belief that counter-insurgency can be practiced successfully in Afghanistan. You can’t correct an error by piling errors on top of other errors.

If we have strategic interests in Afghanistan, we should stay to attend to those interests and do so unapologetically. If we have no strategic interests in Afghanistan, we should leave with all due haste.

Update

See Michael Yon for more on apologies.

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Extra

What’s your immediate reaction when you read this caption: “Santorum comes from behind in Alabama three-way”?

I don’t suppose it speaks well of me but mine was “I think you have to pay extra for that”.

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The Drought

Tyler Cowen has a graph up at his place taken, in turn, from the PPI and using BEA data that quantifies and illustrates a point I’ve been making pretty frequently around here: that there has been a decline in investment (at least as a proportion of GDP), not just over the last five years but over the last twenty years. Rather than reproduce the graph here you can go over to Tyler’s place to look at it.

To my eyes it illustrates that starting in the late 1980s investment (again, as a proportion of GDP) fell off the end of the world. Domestic business investment perked up a bit but only temporarily during the dot-com bubble and household investment went up for a while during the housing bubble but now both have just collapsed.

I wouldn’t be at all surprised if the graph is to some extent a bit of sleight-of-hand. There may have been substantial business investment just not domestic business investment.

As Tyler points out that drought of investment can’t really be completely explained by an aggregate demand story: it has been going on far too long and isn’t just an artifact of the business cycle.

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I’d Have Been Wrong

If you had asked me whether I thought that the percentage of lawyers elected to the Congress over the last 70 years had increased, I would have said “Yes”. As this study from the Congressional Research Service notes, I would have been wrong. In 1945 a little more than 40% of representatives and around 45% of senators were lawyers; by 2010 those numbers had fallen to around 20% and 38%, respectively.

The study analyzes the composition of the Congress by age, race, gender, tenure of service, occupation, religion, education, and other demographic factors and how that composition has changed over time.

A few true generalizations from the study:

  • There are more women than there used to be.
  • The proportion of women in the Congress is far smaller than the proportion of women in the country, generally.
  • There are significantly fewer farmers in the Congress than there used to be.
  • The proportion of those serving in Congress who served in the military is a lot smaller than that proportion in the country, generally.
  • Average length of tenure in office has increased over time.
  • Members of Congress are more likely to be affiliated with an organized religion than Americans, generally.
  • Catholics are represented roughly in proportion to their numbers in the population, generally (slightly over-represented in the Senate).
  • The proportion of those professing the Jewish faith in Congress is significantly greater than in the country, generally.
  • The proportion of those who characterize their race as “white” in the Congress is greater than in the country, generally.
  • The proportion of those who characterize their race as “black” in the Congress is slightly less than in the country, generally.
  • The proportion of those with college educations in the House has grown from more than 50% in 1945 to more than 90% today.
  • The proportion of those with college educations in the Senate has grown from more than 70% in 1945 to nearly 100% today.
  • The proportion of those with college educations in the U. S. has grown from less than 5% in 1945 to more than 30% today (or, members or Congress are not as much better educated compared to the rest of country as they used to be).

Interesting stuff.

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Household Debt and Deleveraging

I wanted to draw your attention to an interesting post on household debt from Josh Mason over at Mike Konczal’s place. Here’s some snippets that caught my eye:

What we find is that the entire increase in household leverage after 1980 can be attributed to the non-borrowing components of the equation above — what we call Fisher dynamics. If interest rates, growth and inflation over 1981-2011 had remained at their average levels of the previous 30 years, then the exact same spending decisions by households would have resulted in a debt-to-income ratio in 2010 below that of 1980, as shown in Figure 2.

and

Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking.

My takeaway from this is that, if the changes are not due to a change in borrowing behavior but rather due to changes in the “non-borrowing components”, deleveraging by changing borrowing behavior will be difficult if not impossible. Or, said another way, we won’t get where we need to go either by foreclosure or paying down debt.

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Modern Industrial Policy

If it’s been a while since you’ve eaten breakfast, take a look at Bruce Krasting’s take on Kansas City Southern Railway Company’s low interest loan from the Railroad Rehabilitation and Improvement Financing Program. The part that he misses is where a very small portion of GE’s earnings get recycled into political contributions.

The best government money can buy.

Here’s my contribution to this story. The number of GE’s U. S. employees has been declining for years. According to its financial statements over the last five years KCS’s head count has declined by about 5%.

Jobs, jobs, jobs.

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