The problem of Whoville

Depending on when you grew up and whether you have kids, you might have missed the Dr. Seuss clasic Horton hears a Who. That's the one about the elephant who hears a cry of help from a speck of dust floating by, and discovers (through his remarkably sensitive hearing) that there's a whole community of tiny people called "Whos" who live on that speck.

Horton vows to protect them and tries his best, in the face of social disapprobation instigated by a bossy kangaroo and her joey. He climbs over mountains and searches through a whole field of clover to rescue them, only to be captured and caged. The one clover with the Whos is about to be dropped into hot oil when finally the little creatures scream loud enough that the kangaroo can hear them herself.

Suddenly everyone is all grins and friendship, and the kangaroo and her joey declare their intention to protect the Whos through all sorts of weather. They even adopt Horton's oft-repeated mantra, "A person's a person, no matter how small."

Now, I think I get Dr. Seuss's message (which apparently makes me better at reading comprehension than Ted Cruz). And I fully support the sentiment behind it: As humans, we're entitled to certain rights—period.

And yet ... At the end of the book, the kangaroos are holding the precious clover, and keeping an umbrella over it. Um, if they're spending all their time looking out for the Whos, how are they going to gather their own food?

Advice from an old guy

This post is a follow-up for my introductory macroeconomics class, on the heels of our discussion this morning. I had them read this account of one woman's experience with long-term unemployment. I also sent them to this collection of case studies from the 1920's, documenting families coping with prolonged or repeated spells of unemployment, and asked them to write a couple pages comparing two of the earlier cases with the modern one. In the conversation, I also referenced Larry Summers' recent remarks about secular stagnation (covered here by Kevin Drum), looking back on 5 years of a week labor market and seeing more of the same for several years ahead. By the afternoon, I felt the need to try and provide a different perspective, maybe a more optimistic one.

Today’s conversation in both classes was more of a downer than I expected or meant it to be. It’s got to be tricky (or hard, or depressing, or discouraging—different responses for different people) to be 18 or 20 years old, and some middle-aged dude is having you read and talk about stuff that doesn’t have a clear way out.

And as I said—maybe a couple of times in each class—I don’t know what the answer is (and it’s a little early to expect you to have that one figured out for yourselves). But I wanted to share some perspective that became clearer for me after a little time away from the conversation (and after some food).

The first thing is to see that there are two distinct types of problems: a physical one and a social one. And there are two time scales: relatively soon (the next 10 years), and long (more than that).

The physical picture is mixed. On the positive side, our technological capabilities keep advancing. Every year, we understand more about how nature works, and find new ways of applying that knowledge to something that matters to us (or that matters to some of us).

On the negative side of the ledger, we face resource constraints that are far more challenging than what earlier generations had to deal with. If we want more lumber, we can’t just go find some new piece of forest and cut it down. Well, we can, but there are reasons to think it’s not a good idea to do much more of that. If we want more oil or gas, there is more, but it comes at much higher cash cost than was true 30 years ago, and often involves more environmental impact than comes from “conventional” extraction techniques. And even if we solve that problem and find lots more fossil fuels available cheaply, it looks like the combustion of it will bring potentially horrific impacts through climate change.

So a mixed picture with a lot of negatives (I could have extended that part of the list, but I figured I’d made my point), and the only positive being the ephemeral thread of, “But we’re getting smarter at stuff!” Nonetheless, when I look at that ledger from a strictly physical side, I’m actually an optimist. Perhaps I’m ill-informed, but when I put together what I know, I can picture a way of providing a respectable life for 9 billion people, in the long run.

A numbers puzzle

In my macro classes I like to have the students study a chart of the "output gap." That's the difference between the actual GDP (what the economy did in any given quarter) and the potential GDP (the standard estimate of what the economy "should have" done in that same quarter).

A positive output gap shows an economy in some sense out-performing (and maybe running a risk of inflation), while a negative output gap is associated with high unemployment.

If you take the output gap and divide it by potential GDP, you get the gap in percentage terms, where you can meaningfully compare the economy's performance across different decades.

I've come to rely on FRED, the very useful data tool from the St. Louis branch of the Federal Reserve. They have a vast number of data series, and a fairly flexible charting tool that lets you perform calculations on the data you've chosen and get a visual representation of the results.

This past weekend I went to make a chart of the output gap, and got this (I've added the red line at 0% to make it easier to see when the gap is positive and when it's negative):

And something struck me as not right. Because I'd made the same chart sometime in 2012 (I think in the fall), and it looked like this (again, the red line at 0% is my addition):

Either the numbers they're providing for actual GDP have gone up since last year, or the numbers they're providing for potential GDP have gone down--I didn't save the numbers behind last year's chart just the chart itself, so I don't know which of those possibilities is true, but clearly at least one of them has to be.

I've wracked my brains trying to figure out why this could be, and I can't come up with anything. It's not about a change in inflation adjustments, since both series are in nominal terms. And while the Congressional Budget Office does make some revisions to past estimates of potential GDP, they tend to be modest revisions covering only the last few years, whereas these two charts show changes from beginning to end.

I'm simply perplexed.