Self interest and self care

“Self care” is all the rage. It’s heralded as a novel and progressive notion.

The stance one takes on Simone Biles is largely colored by one’s theory of self care.

So, as Biles occupies the headlines for days, why isn’t more credit going to Adam Smith and his intellectual descendants? “Self interest” was condemned, yet here we are in 2021 with “self care”!

James had a similar post yesterday! He went back in history much further than Adam Smith.

The Recession Is Over! (15 months ago)

Lately there has been lots of both good and bad news about the pandemic and its impact on the economy. But here’s once piece of good news you might have missed: the recession which began in February 2020 ended in April. And not April 2021… it ended in April 2020. At least, that’s according to the NBER Business Cycle Dating Committee, which made the announcement last week.

The 2020 recession of just 2 months is by far the shortest on record. NBER maintains a list of recessions with monthly dates going back to 1854 (there are annual business cycles dates before that, including important modern revisions of the original estimates, but the monthly series starts in 1854). In that timeframe, there have been 7 recessions in the 6-8 month range, but nothing this short. Still, it was mostly definitely a recession, as unemployment briefly spiked to levels not seen since the Great Depression. But only for 2 months. Keep in mind that the first part of the Great Depression last 43 months.

Unemployment Rate, 1948-present

But how can this be? Is the recession really over? There are still about 6-7 million fewer people working than before the pandemic began. Lots of businesses are still hurting. The unemployment rate is still 2 full percentage points above pre-pandemic levels. How in the world can we say the recession ended 15 months ago?

To answer that question, it helps to know what NBER and most macroeconomists mean by a “recession” — essentially, it is used interchangeably with “contraction.” It means the economy, by a broad array of measures (NBER uses about 10 measures), is shrinking — or we might say, going in the wrong direction. The only other option, at least in the NBER chronology, is an expansion — when the economy is going in the right direction.

Does an economic expansion mean that everything is fine the economy?

Continue reading

What Women Want

What do women want, if they have kids and no budget constraint? I think a lot of women would choose what this wealthy mom of 3 has, if they could afford it.

The title of a current article from Parents magazine is “‘Grey’s Anatomy’ Star Caterina Scorsone on Raising 3 Daughters of Different Ages and Abilities” The subtitle is “As a mom of three, … Scorsone leans on her own sisters and a community of chosen family to balance work and parenting, spend one-on-one time with each child…”

What is a “community of chosen family”? You pay those people. They are chosen, to be sure. According to the article, along with help from relatives,

The actress also relies on a babysitter, Sam, and a nanny and former restaurateur, Frances, who does much of the cooking. “I would never perpetuate the myth that it’s all easy,” says the actress, who shares custody with her ex. But she’s quick to count blessings, especially for the “ridiculous salary” that comes from playing Dr. Amelia Shepherd … “COVID-19 forced people to acknowledge how hard it is to work and parent. My sister and nanny lend their talents to our family while I lend my skills to the show.”

I’m all for specialization and trade. I think it’s great that she can pay someone else to clean up kid messes. The next part seemed more odd to me.

“She also carves out one-on-one time with each daughter on weekends. “I make sure to check in with each individually,” she says. “Besides, it’s more peaceful. If we spend an entire weekend as one pack, there’s a lot of fighting and crying!”

I better pause to say that I am not judging this woman. I’m not trying to tear her down or label her as out of touch, as so many internet dwellers did to Chrissy Teigen. I’m considering whether a wealthier society of the future would choose to wall off negative social interactions.

If you spend time as a family, there will be “a lot of fighting and crying”. My nuclear family spent the weekend “as one pack”. We took the kids through the Ruby Falls cave tour. Here is a picture of my kids fighting, 300 feet under the surface of the earth! They have also fought at 30,000 feet in the air.

Part of me would like to pay someone else to deal with the fighting (more likely to be a robot than a human domestic helper in the future). Would that ultimately be a good choice? One reason wealthy people live in atomized nuclear families is to shield themselves from humanity’s “fighting and crying.” Generally, the last human interaction we preserve is the highs and lows of our own children. (Lots of people live with a “partner” but people get divorced at a much higher rate than they abandon their children.)

How much fighting would very wealthy people choose? Would they make a good choice? Is there any such thing as a real relationship without fighting?

What if humanity avoids cataclysmic disasters for the next 100 years and they become much richer? What struggles would they choose to keep? Are there hardships that no one would choose, but which ultimately enrich life?

The highly atomized nuclear family is a modern phenomenon. Wealth enables us to live apart from each other, but that can in turn lead to loneliness and frustration. If the future humans are instead poorer than we are today, then there is a good chance that kids will be raised by a tribe once again. Sometimes I wish my kids had more tribe, but I also try not to romanticize the past. A tribe is not “a nanny and former restaurateur.”

When I contemplate the low rate of voluntary vaccination around me, it makes me worry that we are headed for the poorer route. But it’s still worth thinking about what would happen if we get much richer.

Cars Are Likely to Stay Expensive for Years

Yesterday Jeremy discussed what spiking car prices mean for overall inflation.

Today I’ll discuss the outlook for car prices themselves, based on what I heard at the Philly Fed’s conference on auto lending yesterday. Some (approximate) quotes:

The used market is red hot

Used prices are likely to stay elevated for a few years

Because used prices are so high, “If you can find the car you are looking for new right now, there’s a good chance it makes sense to buy it instead of going used.” But it could be hard to find that new car you want because inventories are so low, and even then you probably won’t be able to bargain the price down like you normally would- “75% of new cars now sell for MSRP or above, vs 36% last year”

The average new car now sells for $40k, partly because SUVs are increasingly popular, and partly to bother those who care about financial responsibility, like fellow Temple Econ PhD Adam Ozimek:

https://platform.twitter.com/widgets.js

Because of manufacturing disruptions from Covid and the chip shortage, “We’re at least a year out before we start to restock to normal dealer inventory levels” in the new market. Supply in the used market could stay low for 4-5 years because of the lower production of new cars and lower turnover of existing ones. Normally cars coming off lease & out of rental car fleets are a big sources of used cars for sale, but fleet purchases & leases are down from 40% of new car purchases to 25%. Reposessions, another source of used cars, actually decreased slightly through Covid despite the huge spike in unemployment.

All in all, its a good time to own a car and a bad time to try to buy one, and this state of affairs could persist for years absent an unexpected drop in demand or spike in supply.

Electric cars, though, seemed poised to take over much more of the market- the forecast was about 1/3 of new sales by 2030, driven by improvements in the technology, continued subsidies to new EV purchases & EV infrastructure, and car companies offering electric models in popular categories like SUVs and trucks where they are currently rare.

Cars, Inflation, and the Quantity Theory of Money

You have probably seen the latest inflation data. The headline number is 5.4% increase in prices in the past year as measured by the CPI-U. That’s a lot! Even the Core CPI (removing volatile food and energy) is up 4.5%.

If you follow the data closely, you may also have heard that a big chunk of that increase comes from prices related to automobiles: new cars, used cars, rental cars, car parts. All way up!

If you are in the market to buy a car, or if you really need a rental, it’s a bad time for prices. (Conversely, if you have an extra car sitting around, it’s a great time to sell!)

But what if you aren’t in the market for a car? What does the inflation data look like? The White House CEA tweeted out this chart to deconstruct the factors in the recent CPI release.

What does it all mean?

Continue reading

It’s a Trap!

When I was 22 I applied to the MFA programs in creative writing at the Iowa Writers Workshop and Columbia. They summarily rejected me with a minimum of fuss. They were right to do so, but it is also without question one of the greatest pieces of good fortune to ever befall me.

Let’s talk about “trap” degrees – expensive, often multi-year endeavors that rarely lead to salaries commensurate with the investment and arguably carry negative signal value in the labor market. We could all dunk on the aspiring filmmakers and puppeteers who look as though they were sent from central casting to play exactly the sort of dude who forks over >$100K for the shortest path to becoming the next Spielberg without doing all the messy fundraising, friend-haranguing, lighting improvising, actor recruiting, writing, and film festival peddling that looks an awful lot like high-risk hard work. We could dunk on them, but…but I can’t think of a way to finish that sentence that isn’t arrogant and condescending.

Anyway, we really should put aside at the “they did this to themselves” schadenfreude, at least for a second, because regardless of blame, a lot of high opportunity cost human life years are being scammed with the siren song of “look at this great investment in yourself that will feel just like consumption while you are doing it!” There’s nothing new here, mind you. “Eat yourself thin” diets cycle through the zeitgeist with regularity, conveniently next to the book/video/3-week courses that will help you get rich in real estate with no money down. But we should be concerned when an entire sub-industry appears to be selling a human capital investment with negative real value. They may not be the modal or flagship product of higher education, but neither was the Pinto.

There’s similarly no shortage of people eager to point out that a lot of undergraduate education looks like a 4 year cruise, a pretirement if you’ll excuse a shameless attempt at coining unnecessarily cute terminology. We shouldn’t be shocked that purveyors are bundling consumption within an investment where, by design, the check-writers face high monitoring costs — part of the point of college is leaving the nest, right? Think about it from the other side of the equation– higher education is a scammer’s dream. The money folks are out of sight and desperately credulous to believe their child is on the path to status and financial independence. The customer is naïve and unworldly, eager to follow any external entity (other than their parents) that will do their decision-making for them. But the best part is the con’s mark won’t know for sure they’ve been scammed until well after the check is cleared (but not before they’ll receive their first solicitation for alumni donations).

But, you might be saying, graduate and professional schools are meant to be different. This is focused preparation for a narrow field of endeavor. These programs are decidedly not pretirement cruises. This is training. Why would anyone pay for training in something that has no payoff? I’ll offer a couple possibilities:

  1. This isn’t training, it’s consumption, and the buyers are fully aware of it.

I’m sure this accounts for a fair amount of fine arts training, particularly for retirees and hobbyists attending local community colleges, as well on the children of wealthy parents who have no intention of ever pursuing a vocation. More on them in a second.

2. This is training for aspiring men and women of leisure.

Remember gentlemen and ladies of leisure? They used to have their own Census occupation code! This might seem redundant with the previous point, but if your intention is to hob-nob with the rich and more-rich, there is something very much to be said for being able to discuss certain artistic fields at more esoteric levels. There’s also a modern middle-class version of this as well, what in an earlier, more coldly misogynistic, male-dominated time would have been referred to as an “MRS” degree. I imagine there are plenty of men and women who view school as a way of biding their time until a partner emerges who will be the primary earner. Match.com profiles and fix-ups are likely to be more economically fruitful for students mid-pursuit of a graduate degree than those working unimpressive jobs.

We also shouldn’t dismiss those opting for a graceful slide down the economic ladder. Generous families, perhaps a universal basic income, a rich artistic education, and comfortably living in a bohemian southern university town are for many the formula for a quiet, comfortable life unencumbered by the toils of a career. I’ve always enjoyed the company of such folks, at least until they try to tell me how the economy really works. Never follow these people to a second location.

3. This is a scam, and one with potentially far reaching costs.

Like so many scams, you could write a pithy story about well-dressed con-artists who open a “college” in an abandoned strip mall, throw on a coat of paint, and scam the spoiled children of upper-middle class social climbers by offering fake degrees that promise a shortcut to white collar riches and bohemian prestige. It’d be a two-act romp followed by a third where everyone ends up ok and kids learn the value of hard work.

In reality, though, no small number of the victims will be kids from higher education information deserts, who emerge from their undergraduate years with a relatively weak career they were guided towards after they struggled their first semester. Facing grim job prospects, they’re hoping two more years will thin the competition in the rarefied air of the applicants with “graduate education”. It is for these students that I fear the most.

It gives me pause when I see overly narrow masters’ programs that target a specific job rather than training in a set of tools. In service to my own cowardice, I won’t name specific programs, but suggest caution when considering a degree where the only job you’ll be qualified for is in the name of the degree.

I similarly worry about third- and fourth-tier MBA programs (especially if your employer isn’t paying for it). So much of the value of an MBA is the social network it will wire you into. If your parents haven’t heard of the school, it’s probably not much of a network.

Aspiring masters degree students, my advice is this: look up the individual courses you’ll be taking and then explain to the mirror what you’ll learn in each one and the market in which those skills are in demand. If you can’t do that, I advise reconsideration.


That’s all great, but what should we do?

I have no policy solutions, but I do have a piece of pedagogical advice. We need to update the standard operating procedure of guidance counselors in schools everywhere. We’ve been working so hard to convince kids they should go to college, we forgot to teach them how to be discerning customers of higher education. I’m all about caveat emptor as life advice, but if we want to hit people with it as an ex post I-told-you-so, we have to teach it to them ex ante, especially when we’re talking about 17-year-old and (ahem, perhaps mildly infantilized) 21-year-old kids. Just because you’ll walk away with a degree doesn’t mean that degree will be worth the time and tuition.

My guess is that we should up the status of community college, technical certificates, and not going to college at all. At the same time, we should probably lower the status of arts degrees for for artistic fields that are better suited to learning by doing and autodidacts.

Or maybe we just need guidance counselors to bring college seniors on field trips to carnivals across the country. Nothing will teach you the cold truth of scams faster than losing your last 20 bucks pursuing a fluffy bit of googly-eyed asbestos shooting on a bent basketball hoop in front of someone you planned on asking to prom but could never see value in you again after missing 10 shots in a row.

Trust me, that’ll stick with them.

Scale and Online Learning

A simplistic view that I have heard about online learning is that it is of worse quality but cheaper than traditional classroom learning.

We should take the cheaper part seriously. Cheaper can mean new opportunities for many people. Delivering a lecture online can mean that, once the fixed cost of creating the video is incurred, the marginal cost of adding a student is nearly zero. The average cost of delivering instruction goes down with every student who joins the course. Economy of scale is a wonderful thing.

Now, let’s assume a family that has a quiet home and reliable internet service. Assume that a mom, m, signed up for a rock/geology class, r, for her school-aged son who cannot read. It’s me. I signed my son up for an online “rock camp”. I thought it would give me 45 minutes of time to get work done while my son was distracted in a Zoom room.

This week I got an email from the online school company about how to get ready for rock camp. I’m instructed to assemble a supply kit of about 30 items so that my kid can do a hands-on science experiment every day of the camp. This is not what I thought I was signing up for, and I no longer think rock camp is going to save me any time.  It gets me thinking about scale and online education for kids.

All the parents of rock campers will have to separately assemble a kit of supplies. The economies of scale would come from having the children in a physical school. Buy the supplies in bulk and hand out a pack to each kid all at the same time. It would be great to have a *classroom* where the students could *go*. Even though many classes do not involve vinegar and magnets, the point can generalize.

We should take scale seriously. I support experimenting with different kinds of education and giving students choices. Personally, I benefitted from getting to pilot an experimental program at my high school that allowed me to take microeconomics for college credit online. I also participate in online education sometimes as an educator.

However, it’s overly simplistic to say that the scale idea always points us in the direction of online education. Even at the university level, some products/services can be cheaper to deliver in a traditional class setting.

CEA on Inflation Today and WWII

This week the Biden Council of Economic Advisers blogged about “Historical Parallels to Today’s Inflationary Episode”.

Consumer demand in 2021 is roaring back after pandemic shutdowns. Demand for airline travel is exceeding expectations. Car dealer lots are empty.

The authors argue that, of all the periods of rapid inflation in American history, the boom after WWII has the most parallels to today.

During WWII, Americans were obviously in war mode. Price controls and supply shortages led to deprivation on the Homefront. Families had trouble buying cars, just like today.

Instead of focusing on consumer or industrial durable goods, manufacturing capabilities were concentrated on military production. Today’s shortage of durable goods is similar—a national crisis necessitated disrupting normal production processes. Instead of redirecting resources to support a war effort, however, manufacturing capabilities were temporarily shut down or reduced to avoid COVID contagion.

Remember when oil had a negative price in 2020? While people in the US were staying home, many were building up personal savings. As soon as the “war” ends, consumers compete as buyers and drive up the prices of the limited available goods.

They present the post-war inflationary episode as dramatic but temporary, because it only lasted for two years. It’s short compared to inflation of the late ‘70’s. They are standing behind the Powell “transitory” story, in their conclusion.

On the other hand, they say that the most comparable moment in history to today involved the price level spiking 20% and taking two years to come down. I’m pondering a very expensive repair on our car, just make sure I don’t have to buy a new one soon.

“Zoning Taxes” — The Cost of Residential Land Use Restrictions

Fascinating new working paper on why housing prices are so high in some markets, by Gyourko and Krimmel: “The Impact of Local Residential Land Use Restrictions on Land Values Across and Within Single Family Housing Markets.”

Key sentence from the abstract: “In the San Francisco, Los Angeles, and Seattle metropolitan areas, the price of land everywhere within those three markets having been bid up by amounts that at least equal typical household income.”

Economists, libertarians, and more recently “neoliberals” have long complained about land-use restrictions as a primary factor contributing to unaffordable housing. This paper provides some pretty solid data, at least for some housing markets.

Here’s a key chart from the paper, Figure 5. Notice that there is a lot of heterogeneity across cities. In San Francisco, land use restrictions add roughly four times the median household income to the price of housing. But in places like Columbus, Dallas, and Minneapolis, there is essentially no zoning tax. That’s not because these cities have no land use restrictions! It’s just that they aren’t currently binding.

The paper also notes that “zoning taxes are especially burdensome in large coastal markets.”

This is similar to what I showed in a very non-scientific map that I created (in about 5 minutes) for a Twitter thread that I wrote in January 2020 on housing prices. In that map and thread I pointed out that there are still lots of fine US cities where you can purchase homes for roughly 3 times median income (a commonly used rule of thumb for affordability).

Image
Cities where you can buy the median house for about 3 times median income.

Will these cities continue to be affordable in the future? As demand increases, and supply-side restrictions remain in place, we would predict the same thing will happen to Columbus as happened to San Francisco. But probably not for decades.

So if you seek housing affordability, move to the Zone of Affordability! But let’s also work on reforming the rest of the country to make everywhere affordable.

Results on stability and gift-exchange

Bejarano, Corgnet, and Gómez-Miñambres have a newly published paper on gift-exchange.

Abstract: We extend Akerlof’s (1982) gift-exchange model to the case in which reference wages respond to changes in economic conditions. Our model shows that these changes spur disagreements between workers and employers regarding the reference wage. These disagreements tend to weaken the gift-exchange relationship, thus reducing production levels and wages. We find support for these predictions in a controlled yet realistic workplace environment. Our work also sheds light on several stylized facts regarding employment relationships, such as the increased intensity of labor conflicts when economic conditions are unstable.

Next, I will provide some background on gift-exchange and experiments.

Continue reading