Another example of the importance of starting dates

Back in October, Yglesias reported on how the Trump stock market rally wasn't all that impressive. Other countries' stock market indices had risen by more than ours had. To illustrate this, he included this graph comparing the US S&P 500 with Japan's Nikkei, Germany's DAX, and France's CAC indices:

It clearly shows that, while the S&P500 has risen considerably since Aug 2016, the rise is not as large as the gains experienced by other countries. He concluded:

That said, the fact that stock market enthusiasm over the past year has been worldwide with the United States lagging other key countries seems like a strong indication that Trump hasn’t done anything that’s particularly successful or exciting. ... For whatever reason, markets are up just about everywhere, not only in the United States. And markets generally seem to be up by more in countries with boring, competent-seeming leadership than they are in the United States.

I liked the graph and it is a good idea to think in terms of such counterfactuals, but I also had my doubts. Why normalize all the indices at the end of July, half a year before he became president and months before he won the election? In the middle of the semester I felt it was interesting enough to mention to my honors students while bringing up a concern or two, but I eventually forgot my desire to investigate further.

Well, time to investigate! Compare if you will the following graphs with three different normalizations: Yglesias' end-of-July 2016, the election in 2016, and the inauguration in 2017. I'm extending the data out to today, using weekly closing numbers.

The S&P's relative performance has improved since Yglesias wrote, so that even using his normalization the US is now modestly outperforming Europe and has been for the most part since the Tax Cut and Jobs Act. The Nikkei is still outperforming the S&P by a wide margin, but his conclusion would now have to be that the President's antics haven't harmed the US.

If we normalize just before the election, however, we see that the US is right on par with Japan and outperforming Europe by a wide margin.

And normalizing from the inauguration shows the US ahead of every other country with the most boring and competent seeming Germany performing worst.

So what's the takeaway? We need more crazy antics? I doubt it. My three lessons for today are about how little we know:

1) If you're going to do this kind of analysis, be forthright about why you are choosing your starting dates. Starting dates are everything. That's part of why statistics gets its reputation for lies: you can make the same numbers tell almost any story you want. If you want US stock returns to look as bad as possible, start at July 3, 2016 (really close to Yglesias' starting point) so that Japan is 20 points ahead of the US. If you want the US stock returns to look as strong as possible, go back nearly 3 years ago to June 28, 2015 and give Trump credit for growth that happened during Obama's term, putting the US 20 points ahead of Japan. Or maybe just pick a credible day from which we can justly and reasonably judge the President's performance.

2) Let's please remember on all sides that the stock market is not a great indicator of how the economy as a whole is doing. The correlation may even be negative in the very long run (http://www.businessinsider.com/equity-returns-and-gdp-per-capita-2014-2)

3) Let's not draw too many life lessons about how to run an economy and a presidency until all the data points are in. 

Fun with Forecasting

Some tongue-in-cheek forecasts for the new year:

Mungowitz: "So, the point is, to the extent the models matter, 2% growth and Obama loses. 4% growth and Obama wins in November."

Hayibo: Capetonians praying that the destruction of the world comes before the destruction by minstrel. The horror!

M. Nestle [who is serious] is less optimistic than usual. This being an election year, don't expect major movements on improving the food system: protecting Iowa farmers is a higher priority. She also predicts ongoing stalling and backpeddling from Congress, USDA, and FDA in practically every area. The lack of movement from the government will increase grassroots pressures to get something done ... later.

More on the difficulty making long-term predictions

From the magazine Technical World in 1904, heralding the discovery of radioactivity and the energy in uranium and radium:

The experiments of the last eight years have marked a most notable advance in science, in that they have proven the existence of this immense store of sub-atomic energy. It seems highly improbable, however, that this energy can ever be utilized on the earth to serve man’s economic needs.
…Radium may possibly prove to be of some practical value in the cure of disease, although it is too early yet to assert even this with assurance.

 HT: Wondermark

Five Second ... Age of Declining Turbulence

I discovered a book in my mailbox a few months ago: The Age of Declining Turbulence: Are Alan Greenspan's Projections Wrong? by Douglas N. Thompson. There was no explanatory note attached, no information, just a thin, blue book. At the time, there was precious little information about it online, though now it has an Amazon page. One Amazon reviewer tells me why I find so little: "This 92-year old retired Professor of Economics from University of Utah..." aha. I just got around to it and since I can only assume I'm being asked for a review, here it is:

The main purpose of the book is to refute Alan Greenspan's prediction that we are entering an Age of Turbulence. I haven't read Mr. Greenspan's book, so I'm unable to judge whether Thompson addresses specific points from Greenspan's arguments. I came away agreeing that lower turbulence (economically and militarily) is one possible outcome, but far from convinced it must be so. It was an interesting read; I'm glad I read it; but it's not one I'm going to return to again.

An odd thing stood out to me from the close to chapter 1. He claimed to "demonstrate that Greenspan's two main worries will not likely be realized." The book is not about proving or demonstrating anything. It's an argument for an alternative version of what will happen, based largely on the optimistic assumptions that 1) the US government has learned from the recessions and macroeconomic shocks of the past how to deal with problems in the future; and 2) the lure of capitalism's abundance will continue inexorably to pull other countries into market or state-market institutions. He then follows these assumptions to show how a better long-term future is ahead of us. His arguments are plausible and his scenario holds together well. I like a good portion of what he says, but he does far more sketching out how events will eventually play out than defending why they will more probably follow his assumptions than Greenspan's.

While this is clearly a love poem to capitalism, his argument is not ideologically against governments: he argues for fiscal and monetary (mostly fiscal) response to the current recession, for some form of carbon tax, and for government programs of various levels to promote "the basic social service": full employment, with "nanny state" welfare and prison programs also having an important role to fill for those who cannot or choose not to be responsible citizens. These programs (promoting full employment on down) will be part of preventing the social tensions Greenspan foresees causing increasing strife because of economic inequality.

There is little discussion of the validity of his assumptions and he is sometimes not as careful as he claims to be. For instance, while he is usually content to say that the long-run trends are in his favor even if individuals or groups running governments sometimes make mistakes, he actually claims that "stock, credit, foreign exchange, and other markets will likely force Mr. Putin back onto the path toward capitalism and peace fairly soon." Like much of the book, it's a bald assertion (no slight to Mr. Putin's hair) with no facts brought forward to support it.

Some of his other interesting arguments (many of which I debate, but that's what makes them interesting to me. The stuff I already agree with was less interesting!) are below the fold:

Good News, Except for the Bad News

The IMF put up a couple posts this week with very similar themes: the global economy is doing better than expected ... except where it isn't; banks are doing better than expected ... except where they aren't. Global growth projections are up, but OECD country growth is more tepid than expected and far too slow to get us back up to trend. Bank write offs are smaller than originally anticipated, but there's plenty of blood still in the water so that "we run the very real risk of undermining the recovery and extending the financial crisis into a new phase." The handy phrase for things not going as desired everywhere is that there are "pockets." Deep pockets, but the wrong kind. The Poverty News Blog tells us more:

One of the "pockets" is Fiji where poverty has increased 10% to 45% despite increased anti-poverty spending. The government hopes to drop kick that 15 percent in the next ten years. A rather more ambitious national goal than the MDG it will have missed.

One of the "pockets" is Haiti, to no one's surprise. "May 1 marks the start of Haiti’s rainy season, which threatens to unleash a torrent of mudslides and flash floods on the Valley’s makeshift communities. The UN has determined that 9,000 of Bourdon Valley’s residents are at immediate risk of losing their lives in this area due to dangers posed by the rains." NGOs and UN programs are constructing new makeshift facilities with santitation, but many people aren't willing to leave for the next settlement. They're building the foundations for homes and restarting businesses.

And, demonstrating that "pockets" is a highly relative term, the Washington Post is concerned that Colombia has reduced poverty more slowly than its neighbors: 8 percentage points over 6 years (down to 43%) compared to almost 20 percentage point drop in Peru. Inequality has increased in Colombia.

Lit in Review: Food Demand

Roberts and Schlenker (2009), "World Supply and Demand of Food Commodity Calories,"  American Journal of Agricultural Economics November, 1235-42, ungated January version.
They use 2SLS to provide what they term "a useful reality check for whether microcomplexities add up to patterns that are observable in the aggregate data." They gather data on corn, wheat, rice, and soybean production in any country that produces more than 1% of the total (plus one "country" to take care of the remainder) to calculate individual country trends and weather shocks. These are then converted in calories so that there is a single aggregated term.

They assume that demand for calories is unrelated to current weather shocks that affect supply, so current weather shocks trace out the demand curve. There is nothing revolutionary in this, as they point out. The unique idea is that past weather shocks shift the demand for calorie storage but not supply. They is sadly undefended, but if farmers know that demand will be higher the year following a bad one to replenish stocks, there ought to be a supply response too. If their assumption holds, though, they can trace out supply curves too. They estimate a supply elasticity of 0.1 and a demand elasticity of -.04 that may or may not be significantly different from 0. These lead them to conclude that US biofuel policies increased each commodity price by 35%

Toler, Briggeman, Lusk, and Adams (2009), "Fairness, Farmers Markets, and Local Production," American Journal of Agricultural Economics, November, 1272-78.
They perform an experiment at farmers markets and local grocery stores in Oklahoma. Participants write down offers to purchase four tickets, one of which is randomly selected as binding. The tickets pay off:
A) $4 to themselves and $7 to a local farmer
B) $4 to themselves and $7 to an out-of-state farmer
C) $4 to themselves and $1 to a local farmer
D) $4 to themselves and $1 to an out-of-state farmer

The folks at farmers markets were willing to pay a little more for every ticket, but otherwise there was no difference between the groups, nor was there a difference based on how often one went to a farmers market. The average willingness to pay for ticket A was between $3-4; for B and C were $2.50-3, with 54% willing to pay more than $3 for ticket C [giving more to the farmer than themselves in essence]; and $2 for D. They fail to reject the notion that the shoppers at each venue have different concern for inequity or for local farmers. But there was a significant willingness to benefit local farmers over out-of-state farmers, and a significant preference for letting others have the better end of the deal.

Zheng and Henneberry (2009), "An Analysis of Food Demand in China: A Case Study of Urban Households in Jiangsu Province," Review of Agricultural Economics, Vol. 31, No. 4, 873-93.
Uses the update to the Chinese National Bureau of Statistics household surveys to examine basic food consumption elasticities for ten food products. Prices are household specific (amount paid divided by amount consumed according to diary entries). Most of the data is based on 900 households in 2004, and only in-home consumption. Highlighted series of results:

• 1990-2004: Rural households (60% of China) decreased annual grain consumption (262 kg to 219kg) and increased animal consumption (28 kg to 42kg).
• 1990-2004: Urban households decreased grains by more (131kg to 78kg) and increased animals by more (41kg to 73kg).
• Demographics: Average per capita income is $1,286, households usually of 3, it is more likely the third person is a senior than a child, 7% college educated.
• The most price-sensitive foods are grains, oils and fats, dairy, and "other" (tubers, alcohol, cakes, etc.)
• The least price-sensitive foods are aquatic
• As incomes increase, dairy, aquatic, other, poultry, and meats will increase their share of expenditures while fruits, eggs, vegetables, grains, and oils and fats lose share.
• "Pork accounts for more than 70% of ... total meat expenditures."
• Overall, diets are converging to those of Japan, S. Korea, Taiwan, and Hong Kong.
• Poultry consumption was rising steadily, but food safety concerns slowed this process recently.
• Dairy consumption is pretty low, and lower than other estimates have shown, but has increased by 400% percent.
• Half of the cross-price elasticities are significant: meats are substitutes for grains and eggs, but a complement to fish and dairy; vegetables are substitutes for poultry and dairy but complement eggs and fish. If you compensate demand, most everything is a substitute.
• Large portions of meat consumption (over half of poultry) are done outside the home.
• Demand for feed grain will outstrip demand for food grain as incomes increase, requiring an increase in imports from the US. China's land devoted to corn and soy have increased significantly (16% and 25%) with small decreases for rich and wheat (7% and 9%).

The Crystal Ball Speaketh: GM

Outsourced to Russ Roberts of Cafe Hayek (left):

You could do a survey on whether people think GM is going to improve its products and profitability with the help of the government’s steadying hand. Or you could just turn to the invisible hand for a measure of how people think it’s going at GM. The WSJ reports:

Ford Motor Co. posted a 33% rise in December U.S. light-vehicle sales, ending a stellar year for the auto maker compared with its rivals. Ford recorded its first full-year market-share gain since 1995.

Meanwhile, Chrysler Group LLC posted a 3.7% decline compared with a year earlier and said its full-year sales were the worst the auto maker had seen in 47 years.

The largest U.S. auto maker—General Motors Co.—posted a 5.7% decline, but said its process to sell down Pontiac and Saturn inventory was ahead of schedule and reported a 2.2% increase for the four brands GM will keep after its streamlining.

Toyota Motor Corp. of Japan said its U.S. sales rose 32% to 187,860 vehicles last month.

Crazy new business strategy: convince the government to take control of your competitors. It works until the government can no longer deny it's losing. When that happens, sell. Governments tend to be poor sports about such things.

Malthus wasn't Malthusian

Yi Wen, one of my macroeconomics professors, once asked the class why economics was different from physics in the context of a particular model we were covering that predicted certain doom. The answer was that humans have agency to choose to do something other than what was modeled. Adam Martin, guest blogging at Aid Watch, demonstrates that this was something Malthus understood, but that neither his supporters nor most of his critics have realized he did:
Malthus was not arguing in a vacuum. He was responding to William Godwin’s proposal to overthrow basic social institutions like private property and the family. In a free love-fest where no one is responsible for the offspring resultant from their passions, Malthus argued, population growth would run amok. If individuals don’t bear the cost of procreation, they will procreate too much. If they do bear costs of offspring, “preventative checks” such as birth control and delayed marriage will make population self-regulating. In his own words: “Impelled to the increase of his species by an equally powerful instinct, reason interrupts his career, and asks him whether he may not bring beings into the world, for whom he cannot provide the means of subsistence.” An Essay on the Principle of Population, Chapter II). Reproductive choices respond to incentives. The laws of economics are more powerful than the laws of attraction. …

A top-down perspective on population that treats individuals like mindless lemmings will panic: “Unless we reduce the human population humanely through family planning, nature will do it for us through violence, epidemics or starvation.”

Malthus gets right what both his followers and his more technocratic critics get wrong: the institutions within which individuals make reproductive decisions matter. The way to increase GDP per capita is not to cut the denominator. And while today’s scare tactics (Mali is “really in for a Malthusian disaster,”) and recommendations to stop having babies are not as monstrous as those of yesteryear, we should be wary of those who would intrude on one of the most personal and sacred choices individuals confront – whether to have a child.

Update: I was highly entertained when I read the comment section from a Krugamn post last July defending himself against the accusation that his climate change advocacy makes him "Malthusian." He said, great, Malthus was right 58 of the last 60 centuries. Then the kicker:“We only think Malthus got it wrong because the two centuries he was wrong about were the two centuries that followed the publication of his work.”

The first comment came from someone thrilling to the name of mugwump:

Only an economist could say that with a straight face.

Shorter version: “Malthus was wrong because his theory had zero predictive ability”.

Economists always have an explanation (usually several competing explanations) for past events. They’re just lousy at predicting what’s going to happen.

Five Second ... Scott Sumner

Sumner's thoughts about our current recession are deeply important and well-worth reading. In three seemingly unrelated comments, here he is being pithy as well:


In other words [Krugman] makes an assumption ... that monetary injections are expected to be temporary. But that doesn’t mean monetary policy is ineffective in a liquidity trap, it just means that a silly and misguided strategy might be ineffective in a liquidity trap.


Socialism is what happens when right-wingers get in charge, create tight money, drive [nominal] GDP down, and create a lot of unemployment. In desperation the public then turns to the left. When money is stable (1990s) left-wing governments are not able to implement any of their big government plans, because the public doesn’t want to rock the boat.


6. Recessions should be unpredictable, if we are doing our jobs.
As James Hamilton once argued:

“You could argue that if the Fed is doing its job properly, any recession should have been impossible to predict ahead of time.”

Unfortunately, he then went on to talk about how we might better forecast recessions in the future. To the extent that economists cannot forecast recessions, we should wear that failure like a badge of honor. Would you want to fly on an airline that could forecast its own fatal accidents? The search for a recession forecasting formula is like the search for the Holy Grail. We’ll never find it. If we could forecast recessions we could (and would) prevent them. But we will eventually develop formulas that are capable of “retrocasting” past recessions, if that makes anyone feel better.