The beer game

In my intro class this week I had the students play the beer game.

The good news is, we got fun results.

The sad news for them is that it involved no consumption of beer. After all, the class is from 9:30 to noon.

It is true that when I lived in Plzeň in 1991-92, the workers on the early shift at the Škoda factory would have a beer on their break at 10am, but the canteen only served the reduced-alcohol variety of Plzeňský prazdroj (aka Pilsner Urquell), and the workers were only making electric locomotives and nuclear reactors, so it wasn't that important to have a clear head. Drinking while learning macroeconomics would be far more dangerous.

You have four links in a supply chain:

1. A brewery
2. A distributor
3. A wholesaler
4. A bar

Everyone starts with some inventory. They have to order new product from the company above them in the supply chain. They try to satisfy orders from below them in the chain.

There's a series of delays built into the system:

Gimme an "L"!

The December jobs report came out, and while the unemployment rate is down significantly ("Yay!"), the portion of the population with jobs didn't budge from November (in other words, the number of jobs grew just about as fast as the population).

That means that the reason for the improving unemployment rate isn't that lots more people are finding jobs. It's that more people are giving up, or finding their way to early retirement, or making it onto disability, or perhaps slipping away into the informal sector, where they have an income but don't show up in the employment statistics (though this paper disputes the importance of that last factor).

It's been this way for four-and-a-half years. From December, 2007 to June, 2009, jobs fell away like limbs getting lopped off the Black Knight in Monty Python's Holy Grail. Since then, we've basically moved sideways. The unemployment rate has come down from 10% to 6.7%, while the portion of the population with jobs has stayed at the low level it reached in 2009.

 

Civilian employment-population ratio --
the percentage of the civilian adult population that is employed
(from Bureau of Labor Statistics)

We've managed to keep more limbs from falling off, but we're making basically no progress on growing new ones.

How long is this going to go on?

My colleague Jason Antrosio sent me to a post by Kaushik Basu about the possibility of an L-shaped recovery.

In the good old days (the first several recessions after World War II), recessions were V-shaped: the economy contracted quickly, a lot of jobs were lost in a short time, but then it rebounded quickly. Many of the job losses were layoffs rather than firings: "We don't have enough work for you for at least the next three months; we'll call you back when we need you." And after several months, people would be called back, and the economy would go along it's merry way as if nothing had happened.

In 1980-1982 we had a W-shaped recession, with a relatively small dip at the end of Carter's presidency, a brief recovery, then a deep second dip early in the Reagan years.

Our next two recessions were shallow U-shaped affairs: the total job losses weren't that high, but it took a long time to get down to the bottom of the job market, then a long time to get back.

Now the concern is that this will be an L-shaped recession: the economy falls, and it doesn't get back up for ... a long time.

I can see a case for an L, but I probably build my case on different foundations than most people who worry about L's.

There's a menu of common reasons that economists point to in looking for an explanation:

• The article talks about the incorporation of huge labor forces from developed countries into the global economy and how that's a drag on rich-country economies.
• There's also a passing reference to the need for "structural reforms" in Japan.
• Some people talk about demographic shifts, with rich countries having older populations and a smaller share of people in their prime working years.
• There's the inequality thread: wages have stagnated for most people while productivity has risen strongly, and that's keeping demand low. (This Jared Bernstein paper actually ranges much wider than that, but it includes that argument. There's also a literature that cites lower levels of initial inequality as a factor allowing some poor countries to grow out of poverty faster than others.)
• The inequality is feeding disproportionate political power, which in turn locks us into policies that benefit a few but damage growth.
• Fast-advancing technology replacing more and more labor, faster than the economy can come up with new things for the displaced labor to do (and get paid for).

I'd say all of those have some merit (though the "structural reforms" thing seems to me more of a symptom—if growth were good, the fiscal drag of current policies would largely go away; the other problems on the list aren't magically solved by growth itself).

But there's a big factor omitted from all mainstream discussion, which is that resource constraints are making it harder for economies to grow. Putting it in rather simple terms, cheap energy can support widespread high-paying jobs, while expensive energy can only support a small number of high-paying jobs; if there are going to be lots of jobs, they can only be low-paying. So even though the working-class is generally stagnating in the rich countries, their wages are still too high for the energy regime we've been in for about 10 years now; and since laws and expectations and fairness all make it hard to reduce wages in rich countries, we're stuck with slow growth. In poor countries, wages are higher than they were, but still a lot lower than here, and thus low enough for employment to expand even when energy is expensive.

(And look at one of the counterarguments to the concern about robots: Sure, machines will reduce labor's share of income, but once we remove the expense of labor for producing things, we'll be living in a world of abundance, so the median person will nonetheless have more access to stuff than today. Without the merest consideration of the idea that providing medical care, driving people around, growing their food is still going to take energy and other resources, and there are tougher limits on replacing that than on replacing human labor.)

So, yeah—maybe an L-shaped non-recovery.

 

But even that is implicitly asking the wrong question, by assuming that recovery means return to GDP growth rates that were normal in the post-WWII era. If you take resource constraints seriously (not just "Are there limits on how much we can get our hands on?", but, "Are there limits on how much we can burn without ending up really, really sorry?"), then you're led pretty quickly to a very different question. Not, "How do we get the economy growing again?", but, "How do we arrange a decent standard of living for as many people as possible in a system that feels basically fair to most people, while limiting our ecological impact?"

That may sound like a sustainability question or an environmental question, because of the last clause. But it's also a deeply economic question. We have the technological ability to do less in total and still have enough for a decent material standard of living for all. But markets aren't good at answering the question of how to do that, and reliance on the state has its pitfalls, too.

So I don't have an easy answer, but I think it would help if more economists were asking the right question.

IV.2: The circular-flow model

This turns into something pretty much like the standard circular-flow model that's in any mainstream macroeconomics textbook, but it starts from the view developed earlier in the book of payments for value added being grounded in physical processes. And at the end, it draws on the mechanics of banking from Part I to explain how the circular-flow model can account for variations in aggregate demand, and even generate them itself.

Video here.

III.16 Physical causes of growth

(from the larger project of an introductory approach to Ecological macroeconomics)

Part I described the economy as a physical process with a social structure that coordinates the operation of the physical structure.

Part II introduced some of the basic tools for measuring the economy (NIPA, inflation, unemployment) as well as the conceptual tools of supply and demand on the micro level and aggregate supply and aggregate demand on the macro level.

Part III ties all that together to create an explanation of how growth happens over the long run.

Video is here.

II.11 NIPA

(from the larger project of an introductory approach to Ecological macroeconomics)

Part I was all about how the world works, something that seems inherently interesting to me, a giant puzzle to work out.

Part II gets into much more conventional terrain for economics:

• how unemployment is defined and measured, and what our experience with it has been;
• how inflation is defined and measured, and what our experience with it has been;
• the workings of supply and demand (familiar to almost anyone who's had an economics class, and to many people who haven't, though the presentation here does set it in a physical context);
• the concepts of aggregate supply and aggregate demand.

But the first part is an introduction to the National Income and Product Accounts, or NIPA. This is about how we track the economy. It may not be inherently as exciting as "how does the world work," but it's important to know if we're going to go beyond mere theorizing. And I try to ground it in the models from Part I.

The video is again in two pieces, part a and part b.

Is caring enough?

Everybody knows the story of the Lorax, right? The furry little creature who speaks for the trees? The powerless opponent of the wonderfully named Once-ler.

 

http://www.econesting.com/2011/04/07/a-lesson-we-can-learn-from-the-lorax-again/

The Once-ler is the guy who shows up, samples the local Truffula trees, and figures out how to make the tufts of the trees into ... well, it's not clear what they are, but they're called "thneeds," and as the Once-ler tells the Lorax, "A Thneed's a Fine-Something-That-All-People-Need!"

In other words, he creates an economy of mass consumption, complete with desires that are driven by marketing in order to soak up productive capacity, rather than production that improves in order to meet pre-existing needs.

As a card-carrying person-concerned-about-the-environment, I know I'm supposed to love this story, or at least like it. And I did as a kid ... at least I think I did. But I know that when I re-encountered it as an adult reading it to my own kids, I found it deeply unsatisfying.

What's the message here? (Again, I put myself to the harrowing test that Ted Cruz so spectacularly failed: can I comprehend a book written for children.) Dr. Seuss has the Once-ler lay it out pretty explicitly at the end: "Unless someone like you cares a whole awful lot, nothing is going to get better. It's not."

And as with the previous installment, about Horton and the Whos, I'm on board in principle. My concern is that the book misses the heart of the problem.

In general, the reason we have environmental damage is not that people get up in the morning and say to themselves, "Today's a great day to trash a piece of the planet." That's generally not what happens.

(There is the disturbing study from last year that found some people became less likely to buy a money-saving compact fluourescent lightbulb if it was labeled as being "good for the environment." But that seems to be an exception.)

Rather, people get up and ask themselves, "How can I make my life a little bit better?" And so they head out the door and grow food or make things, for themselves or to sell to others. Or they invent new things, or new ways of making things. And all the massive envrionmental damage we see around us is merely the byproduct of that blameless intention.

"But ... corporate greed!" Well, sure, there is that whole business about ALEC, which corporations fund to try to reduce our already inadequate efforts at protecting and improving the environment (see here, here, here, here, ...). (Actually, of course, it's not really "corporations" but "the people who run corporations deciding to use the group's assets" to fund ALEC.) But their goal is not environmental destruction. Their goal is reducing the cash cost to their corporation of producing things they think people want, or things they think they can convince people to want. As the Once-ler tells the Lorax, "You never can tell what some people will buy."

It's possible to read The Lorax as saying the same thing. The Once-ler isn't cutting trees just for the sake of making a wasteland; he's cutting them in order to make his thneeds. And the thneed is a reasonable stand-in for modern consumption in general: most of what we consme is useful or enjoyable on its own terms, the question is merely whether the use and pleasure are worth the corresponding ecological havoc.

And I suppose if we cared enough (or rather, "a whole awful lot"), we'd give up some of those terribly convenient thneeds and preserve reproductively viable stands of Truffula trees here and there.

But if we focus on needing to care, we sweep under the rug the likely necessity of reducing consumption. And if that's what we have to do, then "caring" has to be more than merely "keeping in mind," or "wishing well," or "thinking it's important." The necessary "care" has to be embodied in action, and that action is a lot harder to carry out than the book suggests.

(For the record, I have no beef with The Grinch ... except for the improbable physics of that little dog pulling that giant sled up that snowy mountain!)

On deck: Babar!

(Previous installment: Horton Hears a Who)

I.9 Government

(from the larger project of an introductory approach to Ecological macroeconomics)

This is a discussion of ways of thinking about the proper role of government in the economy, as well as an overview of the different kinds of taxes and the various types of spending undertaken by the different levels of government in the U.S.

Video is Part a and Part b.

A further numbers puzzle

Back in November I wrote about some weird numbers from the generally very useful FRED data site, run by the St. Louis Federal Reserve. That problem is still there, and I've discovered another one.

Here's a chart I made in Spring, 2013 (the last data point seems to be 2012, 4th quarter). It shows a particular measure of whether the government is running a surplus (negative numbers on this chart) or a deficit (positive numbers on the chart). I've added the red line at zero to make it easier to distinguish surplus (below the line) from deficit (above the line). The denominator is the nominal potential GDP, so that the more recent numbers don't overwhelm the early ones merely by being the product of a much larger economy with higher prices.

Here's the same chart, produced this evening. The FRED site sets the vertical scale for you in order to accommodate the data, so the lines look quite similar, but I've again added a red line, and some differences are clearly visible. In general, the later line seems to have been shifted upward by a couple of percentage points in the earlier part of the data, and half to a full percentage point in the later.

 

My earlier data puzzle concerned the nominal GDP and the nominal potential GDP, and because my original chart there only showed the difference between the two, I couldn't tell which of those two data series had changed, only that at least one of them had (either the figures for nominal GDP had been made larger, or the figures for potential GDP had been made smaller).

The charts for this new puzzle also include nominal potential GDP, so the first obvious possibility is that this is the culprit in both, but that actually doesn't fit the facts. Potential GDP is strictly in the denominator here, so making it smaller wouldn't have the effect of shifting everything up. More specifically, if you compare the two charts I've presented here, you can find data points that are negative on the earlier chart and positive on the later one. That means that there has to be a problem in the numerator: government current expenditures are now recorded as larger, or government current receipts are now recorded as smaller.

Either way, it's a new problem, not just another occurrence of the same problem as before.