Exactly How Much Does the Mainstream Literature Ignore Demographics?

Reader Steven Kopits writes about the economics profession:

We now have three presentations by headline economists — Ken Rogoff, John Williams and Jim Hamilton — that are noting declining yields without so much as a peep about the underlying causes.

Not one word about demographics in any of these presentations. Williams (in the previous post) notes that short term rates have fallen from about 4.5% to 2% without so much as a hint as to why this might be happening. And then he assures us that , notwithstanding this development, the Fed has plenty of firepower to handle the next recession, even though short rates are around 2% and the Fed normally cuts rates by 4-5% in a recession. WIlliams claims that another round of QE would do the trick (again, this is simply a bizarre assertion wrt the customary monetary policy toolkit in the pre-2007 economy) when in fact Jim’s analysis (see his comment, previous post) suggests that QE was associated with rising, not falling rates. We can therefore conclude that the does not have a full spectrum toolkit right now, if recessions are to be considered in the same light as they were pre-2007.

I have the same impression watching and reading these presentations as I do shopping at our local Stop ‘n Shop. The background music is all familiar, the greatest hits of the 1970s and 1980s. I know them all, they bring back great memories and I sing along with the lyrics. And this happens in store after store that I visit. And my kids, now in college, know all these songs — they are part of their standard canon. But I keep asking myself: Where are the songs of this generation? Where are their voices? Why are we still listening to songs from two generations ago?

I have the exact same reaction to these economics presentations. Truly, they are the greatest hits. Wonderful insights, great people, I can sing along with the graphs. But where are the modern interpretations? How can Williams say, oh rates have fallen from 4.5% to 2% and leave it at that? How can Jim say the term premium is negative because now people fear deflation more than inflation and leave it at that? Why? Why do people fear deflation? What has changed? Are we still in the Great Recession (the China Depression)? Unemployment just hit a 50 year low, so that doesn’t seem all that probable, does it? So what’s different? We need to hear some new songs, if not from new artists, at least from the superstars of our youth.

As pointed out by an expert source, on page 61 of the CBO’s Long-term Budget Outlook (LTBO):

To avoid using any of those possibly less representative periods, CBO considered average interest rates and their determinants over the 1990–2007 period and then judged how different those determinants might be over the long term. That period was chosen for comparison because it featured fairly stable expectations of inflation and no severe economic downturns or significant financial crises.

Some factors reduce interest rates; others increase them. In CBO’s estimates for the 2019–2049 period, several factors tend to reduce interest rates on government securities relative to their 1990–2007 average:

  • The labor force is projected to grow much more slowly than it did from 1990 to 2007. That slower growth in the number of workers would tend to increase the amount of capital per worker in the long term, reducing the return on capital and therefore also reducing the return on government bonds and other investments.24
  • …

Footnote 24 reads:

For more information about the relationship between the growth of the labor force and interest rates, see  Congressional Budget Office, How Slower Growth in the Labor Force Could Affect the Return on Capital (October 2009) (link fixed).

See also my post here.

I am constantly amazed by how the ill-informed project their own ignorance onto others.

 

73 thoughts on “Exactly How Much Does the Mainstream Literature Ignore Demographics?”

  2. pgl

    “We now have three presentations by headline economists — Ken Rogoff, John Williams and Jim Hamilton — that are noting declining yields without so much as a peep about the underlying causes.”

    These economists have discussed the potential causes of lower real interest rates. OK Princeton Stevie is too dumb to understand what they have said and so he writes garbage like this.

  4. pgl

    The 2009 CBO paper (see my link) is a short but excellent discussion. One of course which Princeton Stevie pooh pretends never existed even though it was written 10 years ago. The footnotes reference several other excellent publications – papers that Princeton Stevie pooh pretends never existed.

    Yes – Princeton Stevie pooh often arrogantly claims he is SO much smarter than economists when in reality is as bad as ignorant and dumb as it gets. Princeton Stevie pooh is a lot like Donald J. Trump in this way.

    1. 2slugbaits

      A quibble. Vindman is an Army officer, so the correct way to address him is LTC Vindman rather than Lt. Col. Vindman.
      The proper form of address for commissioned officers is:
      GEN => 4-star general
      LTG => 3-star general
      MG => 2-star general
      BG => 1-star general
      COL => colonel
      LTC => lieutenant colonel
      MAJ => major
      CPT => captain
      1LT => first lieutenant
      2LT = second lieutenant

    2. ilsm

      pgl,

      Try not to misattribute an “ism”doesn’t apply. ‘Patriotism’ is a common claim of most seditious conspirators.

      Did the young Lt Col step out of his role in the duty assigned at the White House? I suspect some one in the US Army will review the statements made by Lt Col Vidman. They should consider if the utterances rise to a violation of Article 88 of the Uniform Code of Military Justice (UCMJ). That article is specific to cause military members to think hard before supporting a coup.

      Not that anyone would question the motives of a note taker (O-5 in the White House) making judgments, he is not there to perform, about the president. Why I know about this type of violation, During Clinton’s first foray in to breaking up Serbia, a USAF general made comments off the cuff at a dinner and soon chose early retirement to avoid an Art 88. Clinton was far less popular among military officers than Trump. Whistleblower protections are for civilian employees.

      A special prosecutor to go after perpetrators of crimes defined in the Espionage Act may be in order.

      Why bring this up here I do not know?

      1. 2slugbaits

        ilsm In this case LTC Vindman wasn’t just making off-the-cuff remarks at a dinner; he was reporting to his superior through the chain of command whatever unlawful utterances he heard in the phone conversation. He was required to report what he heard to his superiors at the NSC. That seems like an important difference. He is also more than an O-5 “note taker” in the WH; he is the NSC’s principal analyst for Ukraine.

        LTC Vindman is a commissioned officer, which means that unlike a warrant officer, he received his commission from Congress and not the President. Officers take an oath to obey the Constitution, they do not take an oath to obey the president. They are only bound to obey lawful orders from the commander-in-chief. In fact, they are legally required to disobey an unlawful order even if that order comes from the president. That’s the dilemma that has caused so much angst among high ranking officers. It’s a hypothetical that generals and admirals discuss among themselves late at night.

      2. Dave

        ISLM proves he is a traitor (or GRU agent take your pick) by saying “That article is specific to cause military members to think hard before supporting a coup.”

        ISLM, impeachment is not a coup. An impeachment inquiry is not a coup. LTC Vindman was issued a lawful subpoena. As a law-abiding citizen, and under the UCMJ, he was required to respond.

      3. Barkley Rosser

        ilsm,

        Oh gag. A coup is an illegal overthrow of a government by a portion of its military. This is a constitutional impeachment inquiry against a president. Vendman was resonding to a legal supbpoena by Congress. You might charge a coup if somehow he were leading an illegal overhtow of the government. But if you think that is what is going on, you are very seriously deluded.

      4. pgl

        You are a slime bucket. If you think you have the right to question Vindman’s integrity, you are wrong. You do not even have the right to shine his shoes.

    1. pgl

      That’s the blog summary. Menzie has fixed his link which goes to the full 18 page paper (PDF format).

      Either way – something tells me Princeton Stevie will refuse to read this excellent paper as he continues with his incredibly stupid rampage about how economists are somehow not as smart of Princeton Stevie. It is what Stevie do!

  7. Bruce Hall

    This is not meant to be facetious, but I have a logical issue with this statement: The labor force is projected to grow much more slowly than it did from 1990 to 2007. That slower growth in the number of workers would tend to increase the amount of capital per worker in the long term, reducing the return on capital and therefore also reducing the return on government bonds and other investments.24

    This seems to be a chicken/egg situation. I recall at Ford that a lot of the manual work was replace with automation/robots, not because there were not enough workers, but because the cost of human labor and the quality of the output was disadvantageous relative to automation/robots. https://moneyinc.com/10-auto-industry-jobs-will-die-due-automation/ I’ve compared this to farming where the advantages of capital investment over intensive human labor costs have reduced employment in agriculture from nearly 50% around 1900 to less than 1.5% now yet the output is significantly greater. https://www.statista.com/statistics/193212/employment-in-us-farming-since-1998/

    The real demographic issue, in my opinion which I’m sure will be challenged, is that the U.S. need for low-skilled, less-educated individuals is much less than 50, 40, or even 30-years ago. Simply adding more individuals in that demographic is a burden, not a benefit to the U.S. The other obvious demographic issue is the retirement of the baby boomers. Too many of them were of the low-skilled, less-educated demographic and, consequently, have not saved enough to support their needs in retirement and, thus, are wholly dependent on government programs and/or living in poverty/near poverty conditions. “Importing” more unskilled/under-educated “laborers” does not seem to be a solution to either of the demographic issues.

    1. pgl

      “I have a logical issue with this statement”. Well Brucie – I have an issue with these two statements:

      “The real demographic issue, in my opinion which I’m sure will be challenged, is that the U.S. need for low-skilled, less-educated individuals is much less than 50, 40, or even 30-years ago. Simply adding more individuals in that demographic is a burden, not a benefit to the U.S.”

      Sentence 1 says we need more low skilled workers. Sentence 2 says getting more such workers will be a burden. Talk about contradicting yourself! This is why we call you Bruce “no relationship to Robert” Hall.

      But yea – not all workers are the same. That insight has been around for centuries. But I will give you this – what you write may be a bit goofy but it is 100 times more insightful than the dumb but arrogant intellectual garbage we routinely get from Princeton Stevie! The lowest bar ever!

    2. 2slugbaits

      Bruce Hall In growth accounting you don’t just look at the raw number of workers, but at the effective labor force. Increasing the raw number of workers allows a given piece of capital equipment to be more productive and therefore earn a higher return for the owner of that capital. For example, capital owners would rather operate 24/7 (assuming no depreciation or maintenance). But using more workers increases wages. Skill is a labor force multiplier, so it’s effectively the same as hiring more workers. Firms can substitute between low skilled and high skilled workers and more capital. So you need to look at the elasticity of substitution between labor and capital. And sometimes labor and capital are complements rather than substitutes. It gets complicated.

      Other industries paid higher wages than farming, so farm labor shrank. That meant owners of farms had to invest in more capital. It wasn’t that farmers invested in more capital and therefore needed less labor, but rather a case of farmers having to replace lost labor with more capital.

      The other obvious demographic issue is the retirement of the baby boomers. Too many of them were of the low-skilled, less-educated demographic and, consequently, have not saved enough to support their needs in retirement and, thus, are wholly dependent on government programs and/or living in poverty/near poverty conditions.

      You’re expressing a commonly held fallacy that is rooted in a confusion between stock variables and flow variables. Retirement saving of the kind you have in mind is a stock variable. It represents the amount of consumption claims a retiree has against the annual flow of goods and services (i.e., GDP). If you have a bigger bank account, then you can consume a bigger share of GDP through dissaving. If you have a smaller retirement account, then you consume a smaller share of GDP through dissaving. Retirees who consume a bigger share of GDP also represent a bigger “burden” on the workers in that economy. And that’s true for two reasons. First, they simply consume more of a fixed amount of GDP. Some of the GDP flow bleeds off to unproductive retirees. Second, they consume GDP by dissaving accumulated wealth, which makes current period workers less productive because those workers have less capital. While those retirees were still working an saving they increased the productive capacity of the economy through capital deepening; but after retiring they consume down that accumulated wealth and shrink the capital stock. Contrary to the usual conservative talk show blather, it’s wealthy retirees who represent the biggest burden on the economy. The fact that some workers rely upon government programs to consume is irrelevant. The source of the income needed to consume GDP is irrelevant in terms of how we calculate the economic burden to the economy. The fact that the higher taxes needed to pay for those government programs probably represents a burden for wealthy individual retirees does not mean those programs are necessarily a burden to the economy. That’s an example of the fallacy of the whole. From the economy’s perspective what counts is how much each retiree consumes, not the source of retiree income.

      1. Bruce Hall

        2slug, I have a little issue with the statement: The fact that some workers rely upon government programs to consume is irrelevant. The source of the income needed to consume GDP is irrelevant in terms of how we calculate the economic burden to the economy. The fact that the higher taxes needed to pay for those government programs probably represents a burden for wealthy individual retirees does not mean those programs are necessarily a burden to the economy.

        There is a presumption that: 1) the cost of redistribution is negligible and 2) that the redistributed funds will both generate the same amount of economic growth. Are you arguing that the economic effect of consumption is the same as investment?

        1. 2slugbaits

          Bruce Hall The cost of redistribution is not zero, but neither is it first order. There are redistribution costs to both government funded retirement and privately funded retirement. It’s not at all clear which cost is greater, but it’s hard to beat the US Treasury’s transaction cost to issue an electronic check each month.

          Are you arguing that the economic effect of consumption is the same as investment?

          What investment? When a retiree lives off of wealth, that is dissaving which leads to disinvestment. Remember, wealth is a stock variable. Consumption is a component of GDP, which is a flow variable. Don’t confuse stock variables and flow variables.

          1. Bruce Hall

            2slug, your contention that retirees who use their wealth to support their retirement is a burden on our economy versus the government confiscating that wealth for others to use seems a bit strained. I think that was tried in Venezuela.

            You presume that retirees do not consume products or services or invest in ventures that generate more opportunity and wealth for more people (might I suggest that, at a minimum, their wealth generally resides in funds that invest in economic growth ventures?). I guess that’s consistent with a world view that value is only through more unskilled manual labor rather than investment in automation/robotics to generate lower cost, higher quality products available to a larger market.

          2. 2slugbaits

            Bruce Hall I think that was tried in Venezuela.

            Not exactly. Venezuela’s problem is that it doesn’t tax income and wealth in order to pay for government goods and services. Instead of taxing income nd wealth, Venezuela prints paper. See the difference?

            might I suggest that, at a minimum, their wealth generally resides in funds that invest in economic growth ventures?

            You’re missing the point. If retirees are dissaving out of wealth in order to consume during retirement, they are not investing in economic growth ventures. It’s called disinvesting. You cannot simultaneously draw down from accumulated wealth and save at the same time. Saving is a flow variable and represents a fraction of income, which is another flow variable. Wealth is a stock variable and represents consumption claims against current and future GDP. When you liquidate wealth to pay for consumption in retirement you are disinvesting in order to increase consumption. When you liquidate an asset someone has to buy it out of their saving, but that’s just a change of ownership and doesn’t add to the capital stock. In effect, the savings of the person who bought the asset gets converted into your consumption spending. You get the same result if the government funds your retirement. The government taxes a worker and deposits a Trustee’s bond; i.e., a government IOU. The revenue from the tax goes to fund the Social Security retiree’s consumption. The only difference is that the first case is a voluntary sale of a financial asset and the second case is an involuntary tax. But the result is the same either way. Why don’t you set up a little economic model and think it through?

            The correct argument for privatized retirements in lieu of tax funded retirements isn’t based on one being less of an economic burden than the other. Dollar for dollar they represent the same economic burden on current period workers. If you want to argue for privatized retirement funds, then you need to demonstrate that private investment will be directed towards projects with a higher rate of return than government funded projects. That’s an empirical matter. You also have to allow for the fact that privatized retirement is likely to lead to too much lifetime saving; i.e., it’s economically inefficient in the same way that self-insuring your car or your home or your health is inefficient. Smart folks don’t ignore the central limit theorem.

      2. Bruce Hall

        2slug, I view this as another chicken/egg argument: Other industries paid higher wages than farming, so farm labor shrank. That meant owners of farms had to invest in more capital. It wasn’t that farmers invested in more capital and therefore needed less labor, but rather a case of farmers having to replace lost labor with more capital.

        There is a presumption that farming would have remained status quo if other industries had not arisen. But it could also be argued that the rise of other industries such as those that developed the self-powered plows/seeders/harvesters made much of labor obsolete and uncompetitive.

        That’s why, in my other response to you, I questioned if you believed that consumption had the same economic effect as investment. While you could argue that consumption generates investment, it can also be argued that investment (in new technologies) generates more consumption by lowering the unit cost of consumables and broadens the marketplace. Yes consumption is necessary and is a feedback to investment, but in the end, it is the risk of investing in new technologies that broadens the marketplace, not simply consuming what you’ve always been able to produce through manual labor.

        I’m not arguing that we don’t need skilled labor; I’m arguing that we don’t really have a benefit from unskilled labor given the efficiencies and scale possible through automation and new technologies. You seem to be caught up in the idea of an old apprenticeship system that has long gone by the wayside.

        1. pgl

          My God – his point was basic economics and you replied with utter nonsense? Have an idea for you. Google Dutch disease and see what that’s about as it plays on a similar theme. Oh wait – the actual disease is what has taken over your brain. Never mind.

          1. Bruce Hall

            pgl I see you’ve never actually been in business and have no understanding of decisions related to hiring versus capital investments. Let’s see: 1,000 unskilled laborers = good; 1 highly automated system and 10 highly skilled workers = bad. Got it. Now all we have to do is get everyone to consume the low quality crap that the 1,000 unskilled workers make and we have a humming economy.

            You probably would have objected to Henry Ford’s new assembly line concept. You should go back to counting your bitcoins.

            I’ll repeat my comment to 2slug:
            your contention that retirees who use their wealth to support their retirement is a burden on our economy versus the government confiscating that wealth for others to use seems a bit strained. I think that was tried in Venezuela.

            You presume that wealthy retirees do not consume products or services or invest in ventures that generate more opportunity and wealth for more people (might I suggest that, at a minimum, their wealth generally resides in funds that invest in economic growth ventures?). I guess that’s consistent with a world view that value is only through more unskilled manual labor rather than investment in automation/robotics to generate lower cost, higher quality products available to a larger market.

            Yup, let’s have an economy based on confiscation, redistribution, stifled investment, and basic consumption.

    3. Barkley Rosser

      Bruce Hall,

      While it is true that demand fore low-sklled labor will be declining, it has not declined so much so far that migration is causing an increase in unemployment for that segment of the workforce. Maybe that will happen somewhere down the road, although note that population is also growing more slowing in some of the nations that have been supplying such immigrants, most notably Mexico, where in fact a negative net number of immigrants have been coming from in recent years (although there has been uptick in the last couple of months).

      You are engaging in a premature hysteria. For now, the evicdence is overwhelming that even low skilled immigrants are stimulation the US economy. Go see out friend Steven Kopits, who is hysterical in the opposite direction from you about “demographisc.”

  8. Steven Kopits

    I could not express the challenge better than I have, and I thank you for bringing it to the attention of the wider economics community.

    1. Menzie Chinn Post author

      Steven Kopits: But your challenge is like asking statistics to use…statistical theory. Not much of a challenge. Only one that someone ignorant of large swaths of the literature would pose such a challenge.

      1. Steven Kopits

        Well, ok, let me ask you your opinion: Why are interest rates, inflation and unemployment all so low at the same time, especially give a trillion dollar deficit? Is it cyclical or structural in your opinion? Why?

        1. Dave

          “Why are interest rates, inflation and unemployment all so low at the same time, especially give a trillion dollar deficit? Is it cyclical or structural in your opinion? Why?”

          What a silly question. It is cyclical and structural. The two are not mutually exclusive. The global slow down in demographic growth of prime age workers, and economic results thereof including low inflation and low growth, has been forecast for a very long time. As far as unemployment, the economy is still growing. As far as the trillion dollar deficit, it’s all relative. The U.S. has the lowest deficit relative to GDP, highest yields, and highest inflation in the developed market (EU, JP, US), by far. All of which is to be expected.

          2. Steven Kopits

            And is that a problem, or not? If interest rates are merely cyclical and interest rates will return to, say, 6% in the next decade, then it’s a big deal indeed. Japan will go under for sure.

            If it’s not, then the debt-to-GDP ratio will continue to balloon, likely to Japanese levels. If I take a Rogoffian view of the matter, that’s quite unsettling because it leads to refinancing risk down the road, post-2030.

            So which is it, Dave?

        3. Julian Silk

          Dear Mr. Kopits,

          I can spend a lot of money, too, if I am left in good shape and do not prepare for winter. This will buy a lot of things, including labor, before prices start to rise. But winter comes.

          J.

    2. pgl

      You are still commenting? Seriously Stevie – you have been exposed to be a fraud for a long time. I bet you’ll have a better chance of impressing people if Fox and Friends lets you are on again. Oh wait – maybe they have grown tired of your intellectual garbage too!

  9. Steven Kopits

    If this could be changed: “….can therefore conclude that the does not….” to “….can therefore conclude that the Fed does not….”

    The error is purely mine, but it would help the readers, I think.

    “….Jim’s analysis (see his comment, previous post)…” – if you could link Jim’s paper. Very worth reading.

    Thanks, S.

  10. joseph

    “Kevin Drum captures that Lt. Col. Vindman has said. Of course Bimbo of the Year Laura Ingraham says he is a double agent. John Yoo agrees. Go figure!”

    Nothing to figure. Just par for the course. John Yoo is the lawyer who wrote the memos authorizing human torture on behalf of GW Bush, which everyone knows is a war crime. When asked in a debate about human torture if it would be permissible for the president of the United States to order that a child’s testicles be crushed in order to get his father to talk, Yoo did not say “No, of course not.” He said it would be okay depending on the circumstances.

    John Yoo is a monster. That he is still on the faculty of UC Berkeley is a disgrace.

    1. ilsm

      Top Dems alarmed!

      https://www.msn.com/en-us/news/politics/extremely-disturbing-top-dems-alarmed-over-vindmans-testimony-on-trump-ukraine-call/ar-AAJy0Gu?ocid=DELLDHP15

      “I was concerned by the call,” Vindman’s opening statement says. “I did not think it was proper to demand that a foreign government investigate a U.S. citizen, and I was worried about the implications for the U.S. government’s support of Ukraine.”

      “I realized that if Ukraine pursued an investigation into the Bidens and Burisma, it would likely be interpreted as a partisan play which would undoubtedly result in Ukraine losing the bipartisan support it has thus far maintained,” his statement adds. “This would all undermine U.S. national security. Following the call, I again reported my concerns to NSC’s lead counsel.”

      The NSC lead counsel should have asked Vidman why be so concerned for Ukraine aid? And advised him to contact a military lawyer and worry about Article 88.

        1. Barkley Rosser

          joseph,

          Apparently John Yoo has walked back his initial criticism of Vindman.

          ilsm,

          Vindman is “concerned for Ukraine aid” because he is the top expert on Ukraine for the National Security Council and has been involved with others such as people from the State Department in developing the policy and then carrying it out, which included folowing through on delivering this aid that supported by an overwhelmingly positive and bipartisan vote in both housed of Congress. He was doing his assigned duty and has continued to do so, including responding to a constitutional House subpoena investigating possible impeachment of the president. You could not be more out to lunch and just plain irrelevantly dwead wrong here.

          As for Trump Turnberry, how naive can you get? Simply note that nobody ever stayed at that place prior to Trump becoming president. And of coutrse the military will not offiicialy and openly go against the obvious wishes of the Commander-in-Chief, even if he is violating the emoluments clause, which he is. How foolish are you?

          1. Barkley Rosser

            Should have said “No US military ever stayed there prior to Trump presidency.” Obviously some other foolish people have stayed there before his presidency, although I gather like Doral, where he wanted the G7 meeting to happen, it has been having financial problems.

  11. 2slugbaits

    I’m sympathetic to Steven Kopits’ point about hearing the same old hits from ZMACRO 101.3 FM. I’m reminded of the old cliché that if your only tool is a hammer then all problems look like nails. My sense is that there is a tendency within the profession to try and frame all problems using business cycle tools. Given that we’re ten years into the economic recovery and the economy has been at or near full employment for several years without so much as a hint of inflation, maybe economists need to pay more attention to growth accounting and less attention to traditional counter-cyclical macro. And demographics is a key component of growth accounting. But here’s where Steven Kopits and I disagree. While he argues that economists don’t pay enough attention to demographics, I would argue that they probably pay too much attention to simply demographics, and especially so when exploring growth accounting. I realize this sounds nuts, so let me explain. First, in growth accounting the relevant variable isn’t just labor, which is a function of simple demographics, but effective labor. Economists shouldn’t be looking at the raw number of workers, but the effective number of workers. Effective labor can grow even if the number of workers doesn’t. So the fact that the labor force is growing more slowly does not automatically mean we’re doomed to lower labor productivity. A higher effective labor ratio means owners of capital can increase output without having to increase capital investment that might otherwise drive down returns to capital. Second, while it’s true that returns to bonds have decreased, I’m not sure that’s true with returns to capital. Capital’s share of total income has certainly been increasing. It’s hard to explain increasing inequality without recognizing capital’s increasing share of income. Third, with a shrinking labor force we would expect to see some upward pressure on wages. The evidence for that is scant at best. There might be other reasons why we’re not seeing the kind of wage growth predicted by the shrinking demographic argument, so flat wage growth doesn’t disprove the demographic argument; but it surely presents a problem that needs to be explained better than it has been. Fourth, it’s not clear to me that the old school capital investment model that was appropriate for a 1950s goods producing economy is as relevant for a 2010s service oriented economy. The dominant kind of capital in a service economy is human capital. And the returns to that kind of capital are likely determined by power relationships as to who owns the ability to exploit that human capital. Individuals have some monopoly power over the sale of their human capital. Firms haves some monopsony power over how much of that human capital they intend to rent because human capital tends to be specialized. The wage in a monopoly/monopsony market is determined by political power rather than supply and demand. Finally, I’ll note that in a series of four NBER working papers Joseph Stiglitz argues that we count land as capital, but empirically it has been land (a positional good) that has seen very high returns. So maybe we should think about the effects of shrinking land instead of a shrinking labor force…and by shrinking land I mean competition for prime real estate. The fact that there might be abundant land in remote areas of Montana is largely irrelevant.

    1. Barkley Rosser

      pgl,

      I think the problem here with Steven’s sequence of post on demographics has been what Menzie has noted. Sophisticated, policy oriented economists and even some theorists have been aware of and recognized the role of demography, which does indeed impact some macro variables while not doing so for some others (I have tried to identify which ones in some previous comments on all this),. while Steven has acted like he discovered the Holy Grail with nobody else aware of any of this. Menzie has shown is incorrectness on that claim.

      I suspect that Steven has fallen for assuming that “economics” is what one finds in introductory textbooks, where indeed aside from Solow-type models of long run aggregate growth, one does not find any discussion of relations between demography and macro variables (there is some discussion in some about slowing population growth exacerbating potential pension payments issues, arguably not a macro variable). There has been a lot of discussion on the internet about how lots of observers who are not actually economists, and even some who are, falling for this fallacy: assuming that “economics” is what is found in principles textbooks, when in fact most actual economists know better, although for many highly specialized ones it may only be in their area of specialization that the “know better,” with these the ones more likely to fall for the fallacy for other parts of economics.

      In any case, the problem is not that all or even most of Steven’s arguments about the role of demography and macro are outright wrong, although some are and some are debatable. It has been his claims that somehow relevant economists, especially macroeconomics have either ignorant regarding or ignoring this matter, and this is what Menzie shows.

      I might also note that especisally for policy-oriented economists, while demography may be important, it is very hard to deal with from a policy point of view. Some nations do try to fiddle with incentives for having children through the tax code or transfer payments system. But these are long run policies and often not very effective. While indeed demography may impact some macro variables such as interest rates, there is no short-run macro policy that can do anything about it, so it often disappears from short-run policy discussions, even as it is important for many longer run macro outcomes.

      1. 2slugbaits

        Barkley Rosser It has been his claims that somehow relevant economists, especially macroeconomics have either ignorant regarding or ignoring this matter, and this is what Menzie shows.

        I agree with that. The distinction I’ve tried to make is that a lot of macroeconomists recognize demography is a challenge, but they tend to perceive the problem in terms of conventional business cycle tools; viz., fiscal policy & monetary policy. Those are also the policy oriented economists, as you’ve noted. I think we’d be better off listening to the growth accounting economists, but they don’t get a lot of attention. Unfortunately, growth accounting is very long term oriented. And the even sadder truth is that we really don’t understand what drives long run growth. I don’t think an aging and shrinking demographic is a problem that conventional business cycle macro can fix even though those same economists do discuss it in advanced textbooks and papers. That’s what I meant when I said that the problem was that business cycle macroeconomists probably paid too much attention to demography given the paucity of macro tools. I’m not an economist, but from my outsider perspective I would like to see the profession focus less on the sexy business cycle stuff and more on the growth accounting stuff. Trying to solve secular stagnation and demographic realities using business cycle tools seems like a forlorn enterprise.

      2. pgl

        “I suspect that Steven has fallen for assuming that “economics” is what one finds in introductory textbooks”.

        Maybe. But I would argue that Steven would benefit from even reading an introductory textbook.

      3. pgl

        “Some nations do try to fiddle with incentives for having children through the tax code or transfer payments system. But these are long run policies and often not very effective.”

        An important point. We used to talk about slowing population growth and now we want to reverse this – at least in some nations. Of course China has traditionally tried to limit its population growth. I’m no expert on China’s situation but maybe our host can help us understand the role of demographics and population growth for the world’s largest nation.

        1. 2slugbaits

          Yes, a lot of those kinds of policies are ineffective. In fact, a lot of the macro policies advocated by conservative “think tanks” are sold to gullible politicians (and voters) as economic growth policies. You see that kind of thing coming from Club for Growth or Heritage, but also various economic development lobbyists at the state and local level. Tax cuts, tax cuts, tax cuts. Or sometimes “targeted” tax cuts. Those are examples of fiscal tools that might be appropriate (in some cases) to prop up weak aggregate demand, but they are not effective tools for increasing the long run productivity of the economy. Or selling privatized retirements as a solution to an aging workforce.

          A note about introductory econ textbooks. It seems to me that intro textbooks concentrate on taming the business cycle, and demographics isn’t really a big player in that regard. More advanced textbooks (e.g., Romer’s Advance Macroeconomics begins with a few chapters on neoclassical growth models and growth accounting. That’s good. But even Romer’s book reads like it’s two books; the first few chapters on growth theory and the rest of the book on advanced (i.e., mathy) treatments of business cycle macro. I don’t think it really integrates growth theory and business cycle macro in a convincing way.

      4. Steven Kopits

        “It has been his claims that somehow relevant economists, especially macroeconomics have either ignorant regarding or ignoring this matter, and this is what Menzie shows.”

        Find me the work of Rogoff, Frankel, Williams, Hamilton or Chinn that puts low inflation, low interest rates, low unemployment, (large deficits) and low GDP growth into a single model which explains what we see in real life.

        Albert Einstein’s famously said, “God does not play dice with the universe.” Let me assure you, Jim Hamilton does not play dice with presentations. He can see that investors want protection against deflation, but he doesn’t explain why. If he felt he had a pretty good answer, he would have said it. But just like Williams, he can see the numbers and the trend, but is not quite sure how to interpret it. There’s nothing wrong with that, but the profession needs to expend some effort in rethinking rules of thumb in an aging world.

        1. Barkley Rosser

          Steven,

          Why should I focus on this narrow and precise question you have asked? It is silly. If you keep up this sort of nonsense you may find yourself starting to look like the completely ridiculous liar, CoRev.

          You initially posed this as a matter of Fed policymakers not being on top of your worries about demography. I think Menzie has already shown you are off on this, and I may be about to repeat sources already cited. But I note that Williams talked about a link between slowing population growh and lower interest rates back in May, if not in a full-blown model. As for others at the Fed, admittedly research staffers and not top dogs, here are links to two studies noting this same point, one from 2017 out of the San Francisco Fed and one from earlier this year out of the St. Louis Fed (As is is often the case, I may mess up on these urls, but these are easily found by googling “low interest rates low population growth rate Federal Reserved).

          frsb.gov/economics-research/publications/economic-letter/2017/september/demographic-transition-and-low-us-interest rates

          by Carlso Carvalho, Andrea Ferrero, and Fernando Nachia

          research-stlouisfed.org/publications/economic-synopses/2019/19/factors-behind-the-decline-in-the-u-s-natural-rate-of-interest

          by Sungki Hong and Hannah G. Shell

          1. Steven Kopits

            So, Barkley, should the Fed be cutting rates or raising rates? At above full employment, with growth near 2%, tell me, why is the Fed cutting rates?

          5. Steven Kopits

            Oil prices were taking off about now in 2007, maybe a month or two early. So you would have looked at soaring oil prices and said, hey, let’s cut interest rates to 1.75%?

          6. Steven Kopits

            And let me add that there was a shudder in the financial system in July 2007. The only comparable event we seem to have now is the repo market. Do you think the Fed screwed the pooch on that one? Do you think the Fed is about to bring down the global financial system?

          7. Barkley Rosser

            Steve,

            You go from claiming nobody at Fed or other top economists is paying any attention to demography, although it is cleat hat for short run policy decisions demography is completely irrrelevant. Changes in it are simply happening over a long period of time, although we pretty well know what most of the macro implications are for some of them, including that interest rates will tend to be lower, which has been happening.

            So this last query from you is silly. I shall turn it back on you with an addendum: Should the Fed be cutting interest rates, and do any recent changes in US demographics have anything to say regarding the answer to this? Put up or shut up.

          8. Barkley Rosser

            BTW, SK, you are the one claiming to have all the answers, especially regarding the significance of demography to even short tun Fed policy, which I find just silly and absurd. I have made no claims about hat the Fed should be doing right now and am not going to.

            Again, let me remind you that some time ago I already agreed with you regarding the impact of slowing population growth on interest rates, a conclusion clearly recognized by lots of people at the Fed, and I have also agreed that interest rates are not as important now for influencing the economy as they used to be, although I am not sure that has jack bananas to do with demography, in fact, I think it has zero to do with demography.

          9. Steven Kopits

            Barkley –

            I am absolutely not claiming to have all the answers, but I am deeply concerned that the profession has not adjusted to new realities. Let me give you a really simple example: Back in 2007, the max debt-to-GDP ratio which was considered healthy was 60%. We now have a bunch of countries well over that. The US is now around 77%, with a massive budget deficit, and growing. And there’s virtually no pushback either politically or from the profession.

            So let me ask you, Barkley, is the 60% number still the right number, or not? If it is, shouldn’t there be some great outcry from the economics community about pending doom? If it’s not, what, in your opinion, is the correct debt-to-GDP max ratio? 200%, like Japan? Where does the economics community say you have borrowed too much?

            Feel free to provide a number and a rationale. I sincerely doubt you can, and I know Menzie can’t, or won’t. You think that’s a problem? I do.

          10. Steven Kopits

            Menzie –

            So we are above potential GDP? Unemployment rates are thus unsustainable? Shouldn’t we be seeing signs of an overheating economy? Inflation picking up, interest rates rising?

          11. Steven Kopits

            Menzie –

            I would be very pleased if you would run a post, “Is it 2007 again?”, as you are begging the question.

            I think that’s an interesting line of inquiry.

          12. Steven Kopits

            “Should the Fed be cutting interest rates, and do any recent changes in US demographics have anything to say regarding the answer to this? Put up or shut up.”

            Let’s start with the second question. Do I think demographics are responsible for lower equilibrium interest rates? Yes. That long downward trend in interest rates since the early 1980s mirrors the demographics of the Baby Boomers, more or less. They are now retiring. So yes, I think demographics are principally responsible for 1) low inflation, 2) low nominal interest rates, and 3) low unemployment. This has a couple of implications: 1) fiscal policy will not stimulate growth, because the issue is the number of workers, not a lack of aggregate demand. So supply side factors will be dominating the discussion in general (though not necessarily during recessions). 2) Low interest rates will tend to make deficits and debt balloon, just as I predicted in my Japan piece. I am firmly in the Rogoff camp on this one. I don’t like it, for lots of reasons, but clearly, when growth is low, dependency is high and growing, and money is cheap, running up the tab is the path of least political resistance.

            In addition, unlike Menzie, I am not convinced the economy is operating above effective capacity in the sense that I think structural unemployment rates will go lower, by maybe 0.5-1.0 pp.

            Furthermore, I believe business cycles — in the absence of supply shocks or monetary policy mistakes — occur because of the lag between the demand for and delivery of fixed assets. So, when I was an investment banker back in 2007, oil tankers were trading at three times replacement cost and the loan-to-value ratio was 70%. That means the leverage on these vessels was 2x long-term replacement cost. And you say, that’s crazy. Yes, but these valuations were underpinned by fixed, long term customer contracts. Those valuations would only turn out to be bad if…well…the global economy collapsed. But sitting there as an analyst, it was plain as day that the situation was unsustainable. And what was underpinning all this craziness? The rise of China. If you wonder why I call it the China Depression, that’s why.

            So that’s the context. In a stable or declining demographic, you can’t get cycles like that, because the stress on fixed assets isn’t acute enough to generate meaningful asset price bubbles. Or so the thinking goes. Instead, you get what we see now in Germany and Japan, a kind of porpoising of GDP, some quarters in technical contraction, some in technical expansion, very few with conviction either way. So maybe monetary policy doesn’t need to do so much.

            Maybe.

            But maybe it still has to be potent. In that case, the Fed is virtually out of options today. The Fed has used up almost all of its powder wrt to lowering interest rates. QE is becoming a dirty word, in part because it raises rates (Jim); in part because it was sold as a transient approach which could be easily unwound like ‘watching wet paint dry’, and that turned out to be categorically false. So what’s left? Fiscal policy? We’re running a trillion dollar deficit at the top of the cycle! How much more can we goose that number up?

            That leaves MMT. That CRS piece on MMT, it’s ten days old. They are discussing MMT at the CRS today. MMT is the crack cocaine of public policy. As a born Argentine, let me assure you, then is no better way to screw up your economy forever than leaning on a money printing exercise. Once you start, a part of the government’s spending program depends on it and it is very, very hard to end, because it implies trading off high inflation for austerity. The failure of the Macri government to make this trade-off doomed the Argentine economy.

            But if demographics are creating low inflation and low interest rates, is printing money warranted to keep interest rates and inflation meaningfully positive? Does an elderly economy need to take an MMT pill every morning to find the energy to get out of bed? Put another way, is the 2% inflation target important, or something we can discard, just like the economics profession has de facto with the 60% debt to GDP rule?

            I don’t know the answers to these questions. But I know they are pretty important questions and I am pretty confident the economics profession doesn’t have the answers either.

            And if you think that worries me, you’re right.

          13. Barkley Rosser

            Steven,

            Why do you keep asking me these silly questions? Just as I have never been a fan of the NAIRU, I have also never been a fan of specific debt/GDP ratios that are supposed to apply universally. There were and are nations (poorly run ones with poorly functioning economies) for which even a 60 percent ratio is way too high, and they are likely to get into an international financial crisis if they anywhere near that. There are others for which it was never relevant and just a joke, with Japan the poster boy for this, now at about a 250 percent ratio, it is on the verge of making money off its national debt because so much of it is bearing negative interest rates.

            Go back to the foofaraw over the 2011 botched Reinhart-Rogoff study where they pushed a 90 percent cutoff. Despite the data errors, they did find a negative relationship between the debt/GDP ratio and growth rates. But this refelected a sharp division between nations. There were some with high debt/GDP ratios that did just fine, but there was another group that had low growth and financial crises, with, of course, low growth tending over time itself to raise the debt/GDP ratio.

            Especially here on Halloween, the devil is definitely in the details, certainly on this one in any case.

          14. Steven Kopits

            That’s fine, Barkley.

            So do you endorse $1 trillion US deficits and seeing the debt-to-GDP ratio in the US rise above 100%? Is that good policy? Or should we aim to reduce the deficit and curtail it below Japanese levels? Why?

          15. Barkley Rosser

            Sorry, Steven, game over. You throw one macro variable after another at me for commentary that has either little or nothing to do with your demography argument. This last one is just more of this. Budget deficits do not have a thing to do with demography. Sorry. No further comments on this, and if you drag yet another variable out for me to comment on, I shall only give you silence. This has become pathetic.

    2. Steven Kopits

      Long list, Slugs.

      “…the relevant variable isn’t just labor, which is a function of simple demographics, but effective labor. Economists shouldn’t be looking at the raw number of workers, but the effective number of workers. Effective labor can grow even if the number of workers doesn’t.”

      Yes, this is correct. It’s a good reason to take a look at the Japan numbers. You can see that women have been entering the workforce in pretty big numbers This has not, however, materially increased the workforce, but rather delayed its decline. Another source of labor is unemployed people. So you might see higher labor force participation rates and lower unemployment rates, at least for some groups. And you do. That’s where these unnaturally low unemployment rates come from, so it seems.

      “So the fact that the labor force is growing more slowly does not automatically mean we’re doomed to lower labor productivity.” I think this is a very tricky matter. One of the papers someone linked showed that productivity growth declined at older ages. I am agnostic about the matter, but I seem to recall productivity growth in Japan has been weak lately. In my Japan article, I actually assume pretty healthy productivity growth, 1.4% / year. That may prove too optimistic.

      “…with a shrinking labor force we would expect to see some upward pressure on wages. The evidence for that is scant at best. There might be other reasons why we’re not seeing the kind of wage growth predicted by the shrinking demographic argument, so flat wage growth doesn’t disprove the demographic argument; but it surely presents a problem that needs to be explained better than it has been…Finally, I’ll note that in a series of four NBER working papers Joseph Stiglitz argues that we count land as capital, but empirically it has been land (a positional good) that has seen very high returns. So maybe we should think about the effects of shrinking land instead of a shrinking labor force…and by shrinking land I mean competition for prime real estate.”

      We would see upward pressure on wages if productivity increases, I would think. You could reallocate some profits from capital to labor, I suppose. How big a reservoir is that? It assumes capital is somehow earning above market wages. Certainly possible in some cases, but overall?

      With a growing population, land per person is falling. With a decline in population, land per person is rising. Thus, demographics on the way up should provide good returns to real estate, but on the way down, returns should be poor, indeed, possibly so poor that long-term interest rates fall to low levels. Let me ask then the same question I have posed a least half a dozen times to Menzie: What mortgage interest rates pair with a declining population? Don’t you get structural deflation? And is that bad? Well, it may be for monetary policy, because now a central bank has very low or negative rates to play with in case of a recession.

      So you have to be careful about wages, because wages may not rise much, but certain outlays may fall. And of course, you have to be cognizant of taxes, because fewer and fewer people are pulling at the oars.

      I think we also need recognize that an aging population is not a steady state proposition. When the retiree population is vastly outstripping the growth of the workforce (if it’s growing at all), business will struggle to replace labor. If and when society returns to steady state, ie, the 65+ population is changing at the same pace as the 20-64 population, then labor markets may loosen up again. But in between, labor markets should be pretty tight.

  12. Steven Kopits

    Haverford Trust Company. in light of an expected 25 bp cut in interest rates by the FOMC following the 1.9% GDP print:

    “After the next cuts, the Fed funds rate would re-enter the zone where there is no evidence that further cuts help the economy. If ultra low rates and negative rates are such a panacea, why aren’t Japan and Germany growing at 6% rather than teetering on recessions?”

    Why indeed.

    https://www.cnbc.com/2019/10/30/us-gdp-q3-2019-first-reading.html

    1. Barkley Rosser

      Booooo! It will be Halloween all the time in much of Japan, full of scary ghosts! Booooooo!

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