Canada pulls the plug on the U.S. Keystone Pipeline – will send oil to Asia

brucetheeconomist:

I like President Obama, but I have never been able to understand why his administration is so lukewarm on increased supplies of North American energy, including that from Canada. It is one of the bright spots in this mediocre economic climate that we all have suffered from.

Originally posted on Watts Up With That?:

Approves Asia Supply Route, Ignores US Route

H/T Eric Worrall and Breitbart – Obama’s inability to make a decision on Keystone has finally yielded a result – Canada has made the decision for him.

Breitbart reports Canada has just approved the Enbridge Northern Gateway Project – a major pipeline to ship Canadian oil to Asia.

The Canadian oil will still be burnt – in Asia, instead of America.

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Jesus and Ayn Rand

brucetheeconomist:

I can’t add much, other than it has always amazed me that Christian conservative like Ayn Rand, when she was such a militant atheist.

Originally posted on Prometheus Unbound:

What sort of conservatism blends Jesus with Ayn Rand? Oh, that would be contemporary Tea Party conservatism.

But why isn’t it more widely noticed that “Christian libertarian” is an oxymoron? I would argue that this has to do with the human mind’s capacity for compartmentalization and cognitive dissonance, for Jesus and Rand simply do not go together coherently. Buckley, before he died, was less illusioned: he saw that his Catholicism and Randianism are not a match. Rand herself recognized this as well. She was an atheist.

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The Future is still Bright!

 

Trulia chief economist Jed Kolko wrote this morning:

“Median age in US ~38. But modal age is 23. Five most common ages: 23, 24, 22, 54, 53.”

This is an important change in the modal age. As I’ve noted before, by 2020, eight of the top ten largest cohorts (five year age groups) will be under 40, and by 2030 the top 11 cohorts will be the youngest 11 cohorts.
Demographics is a key driver of economic growth, and although most people focus on the aging of the “baby boomer” generation, the movement of these younger cohorts into the prime working age is another key story in coming years. Here is a graph of the prime working age population (this is population, not the labor force) from 1948 through May 2014.
Prime Working Age PopulatonClick on graph for larger image.
There was a huge surge in the prime working age population in the ’70s, ’80s and ’90s – and the prime age population has been mostly flat recently (even declined a little).
The prime working age labor force grew even quicker than the population in the ’70s and ’80s due the increase in participation of women. In fact, the prime working age labor force was increasing 3%+ per year in the ’80s!
So we when compare economic growth to the ’70s, ’80, or 90’s we have to remember this difference in demographics (the ’60s saw solid economic growth as near-prime age groups increased sharply).
The good news is the prime working age group will start growing again by 2020, and this should boost economic activity.
But that is medium term – in the near term, the reasons for a pickup in economic growth are still intact:1) the housing recovery should continue, 2) household balance sheets are in much better shape. This means less deleveraging, and probably a little more borrowing, 3) State and local government austerity is over (in the aggregate),4) there will be less Federal austerity this year, 5) commercial real estate (CRE) investment will probably make a small positive contribution this year.
For new readers: I was very bearish on the economy when I started this blog in 2005 – back then I wrote mostly about housing (see: LA Times article and more here for comments about the blog). I started looking for the sun in early 2009, and now I’m more optimistic.
Last year I wrote The Future’s so Bright …. In that post I outlined why I was becoming more optimistic.
Here are some updates to the graphs I posted last year.  Several of these graphs have changed direction (as predicted) since I wrote that post.  For example, state and local government employment is now increasing, and household debt has started increasing.
Total Housing Starts and Single Family Housing StartsThis graph shows total and single family housing starts. Even after the 28.2% increase in 2012, and 18.5% increase in 2013 (to 925 thousand starts), starts are still way below the average level of 1.5 million per year from 1959 through 2000.
Demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase another 50% or so over the next few years from the May 2014 level of 1 million starts (SAAR).
Residential investment and housing starts are usually the best leading indicator for the economy, so this suggests the economy will continue to grow over the next couple of years.
State and Local GovernmentThis graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, 249,000 in 2011, and 33,000 in 2012.
In 2013, state and local government employment increased by 44,000 jobs.
This year, through May 2014, state and local employment is up 46,000.   So it appears that most of the state and local government layoffs are over – and the economic drag on the economy is over.
US Federal Government Budget Surplus DeficitAnd here is a key graph on the US deficit. This graph, based on the CBO’s May projections, shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.
As we’ve been discussing, the US deficit as a percent of GDP has been declining, and will probably remain under 3% for several years.  
Here are a couple of graph on household debt (and debt service):
Total Household Debt This graph from the the NY Fed shows aggregate household debt increased $129 billion in Q1 2014 from Q4 2013.
From the NY Fed: “In its Q1 2014 Household Debt and Credit Report, the Federal Reserve Bank of New York announced that outstanding household debt increased $129 billion from the previous quarter. The increase was led by rises in mortgage debt ($116 billion), student loan debt ($31 billion) and auto loan balances ($12 billion), slightly offset by a $27 billion declines in credit card and HELOC balances. Total household indebtedness stood at $11.65 trillion, 1.1 percent higher than the previous quarter. Overall household debt remains 8.1 percent below the peak of $12.68 trillion reached in Q3 2008. “
There will be some more deleveraging ahead for certain households (mostly from foreclosures and distressed sales), but it appears that in the aggregate, household deleveraging is over.
Financial ObligationsThis graph is from the Fed’s Q1 Household Debt Service and Financial Obligations Ratios. These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.
The overall Debt Service Ratio decreased in Q1, and is at a record low.  Note: The financial obligation ratio (FOR) is also near a record low  (not shown)
Also the DSR for mortgages (blue) are near the low for the last 30 years.  This ratio increased rapidly during the housing bubble, and continued to increase until 2007. With falling interest rates, and less mortgage debt (mostly due to foreclosures), the mortgage ratio has declined significantly.
This data suggests household cash flow is in much better shape than a few years ago.
AIA Architecture Billing IndexAnd for commercial real estate, here is the AIA Architecture Billings Index. This is usually a leading indicator for commercial real estate, and even though the index has been moving sideways near the expansion / contraction line recently, the readings over the last year suggest some increase in CRE investment in 2014.
Overall it appears the economy is poised for more growth over the next few years.
As I noted at the beginning of this post, in the longer term I remain very optimistic. The renewing of America was one of the key points I made when I posted the following animation of the U.S population by age, from 1900 through 2060. The population data and estimates are from the Census Bureau (actual through 2010 and projections through 2060). 

U.S. Population 1990 through 2060

The Future is still Bright!
Bill McBride
Thu, 26 Jun 2014 16:56:00 GMT

Reconciling Hayek’s and Keynes’ views of recessions

 

Paul Beaudry, Dana Galizia, 1 June 2014
The views of Hayek and Keynes about the causes and consequences of recessions are often presented as opposing. According to Hayek, recessions are working out excessive investments, whereas Keynes regarded them as demand shortages. This column argues that these perspectives are not mutually exclusive. Recessions may reflect periods of liquidation but this could be associated with inefficient adjustment involving unemployment and precautionary savings. Stimulative policy may be desirable even if it delays the full recovery.
Full Article: Reconciling Hayek’s and Keynes’ views of recessions

Reconciling Hayek’s and Keynes’ views of recessions
Sun, 01 Jun 2014 00:00:00 GMT

What the State Produces

 

In anarchist literature, one often finds the contention that the State produces nothing, and is entirely parasitic on the rest of society.
This claim is false. Of course, it is true for some things that modern states do, such as the provision of welfare. But it is false applied to the state as a whole, because there is one service that is highly productive, and that only the state can provide: the service of being the final arbiter for all disputes between its members. This service must, logically, come from a monopoly provider: if there are multiple providers of arbitration at the same level, then none of them are final. (And that is why, if a network of ancap defense agencies can provide this service, they will, in fact, compose a state. And if they can’t provide it, then we will have “anarchy” in the bad sense of social chaos.)
Once one focuses on this service, one can easily understand why German barbarians would fight to get inside the Roman Empire: both productivity and security go up in the presence of such a final arbiter. And that is why we have never seen any wealthy, stateless societies.

What the State Produces
Gene Callahan
Wed, 14 May 2014 23:10:00 GMT

Maybe we’re not headed for demographic armageddon after all

 

The Census Bureau is out with a report on the changing composition of America’s old people, and in one way, the story is the same as it’s ever been: The Baby Boomers are retiring, and they’re going to be expensive to take care of. The number of working-age people who’ll be around to support their parents and grandparents is declining, in relative terms; the cost of pensions and social security payments and Medicare could take a toll. That’s caused no small amount of fretting about the “silver tsunami” that will come crashing down on the economy over the next couple decades.

But the report also contains a useful reminder: Even as the elderly population increases, the younger population decreases in relative terms, which leaves the overall dependency ratio relatively stable. In 2050, it’ll even be substantially lower than it was in the roaring 1960s:

Screen Shot 2014-05-06 at 11.24.43 AMOf course, youth dependency and old age dependency carry different kinds of burdens — older people require more medical care, while young people carry more educational costs. So the economy will still have to adapt to take care of the shifting load of non-working people. But overall, the picture is a lot less alarming when you know America has borne something similar in the past.

And besides, most developed countries are a lot worse off than we are:

Screen Shot 2014-05-06 at 2.17.08 PM





Maybe we’re not headed for demographic armageddon after all
Lydia DePillis
Tue, 06 May 2014 19:19:51 GMT

On Gary Becker

 

Gary Becker, as you must surely know by now, has passed away. This is an incredible string of bad luck for the University of Chicago. With Coase and Fogel having passed recently, and Director, Stigler and Friedman dying a number of years ago, perhaps Lucas and Heckman are the only remaining giants from Chicago’s Golden Age.

Becker is of course known for using economic methods – by which I mean constrained rational choice – to expand economics beyond questions of pure wealth and prices to question of interest to social science at large. But this contribution is too broad, and he was certainly not the only one pushing such an expansion; the Chicago Law School clearly was doing the same. For an economist, Becker’s principal contribution can be summarized very simply: individuals and households are producers as well as consumers, and rational decisions in production are as interesting to analyze as rational decisions in consumption. As firms must purchase capital to realize their productive potential, humans much purchase human capital to improve their own possible utilities. As firms take actions today which alter constraints tomorrow, so do humans. These may seem to be trite statements, but that are absolutely not: human capital, and dynamic optimization of fixed preferences, offer a radical framework for understanding everything from topics close to Becker’s heart, like educational differences across cultures or the nature of addiction, to the great questions of economics like how the world was able to break free from the dreadful Malthusian constraint.

Today, the fact that labor can augment itself with education is taken for granted, which is a huge shift in how economists think about production. Becker, in his Nobel Prize speech: “Human capital is so uncontroversial nowadays that it may be difficult to appreciate the hostility in the 1950s and 1960s toward the approach that went with the term. The very concept of human capital was alleged to be demeaning because it treated people as machines. To approach schooling as an investment rather than a cultural experience was considered unfeeling and extremely narrow. As a result, I hesitated a long time before deciding to call my book Human Capital, and hedged the risk by using a long subtitle. Only gradually did economists, let alone others, accept the concept of human capital as a valuable tool in the analysis of various economic and social issues.”

What do we gain by considering the problem of human capital investment within the household? A huge amount! By using human capital along with economic concepts like “equilibrium” and “private information about types”, we can answer questions like the following. Does racial discrimination wholly reflect differences in tastes? (No – because of statistical discrimination, underinvestment in human capital by groups that suffer discrimination can be self-fulfilling, and, as in Becker’s original discrimination work, different types of industrial organization magnify or ameliorate tastes for discrimination in different ways.) Is the difference between men and women in traditional labor roles a biological matter? (Not necessarily – with gains to specialization, even very small biological differences can generate very large behavioral differences.) What explains many of the strange features of labor markets, such as jobs with long tenure, firm boundaries, etc.? (Firm-specific human capital requires investment, and following that investment there can be scope for hold-up in a world without complete contracts.) The parenthetical explanations in this paragraph require completely different policy responses from previous, more naive explanations of the phenomena at play.

Personally, I find human capital most interesting in understanding the Malthusian world. Malthus conjectured the following: as productivity improved for some reason, excess food will appear. With excess food, people will have more children and population will grow, necessitating even more food. To generate more food, people will begin farming marginal land, until we wind up with precisely the living standards per capita that prevailed before the productivity improvement. We know, by looking out our windows, that the world in 2014 has broken free from Malthus’ dire calculus. But how? The critical factors must be that as productivity improves, population does not grow, or else grows slower than the continued endogenous increases in productivity. Why might that be? The quantity-quality tradeoff. A productivity improvement generates surplus, leading to demand for non-agricultural goods. Increased human capital generates more productivity on those goods. Parents have fewer kids but invest more heavily in their human capital so that they can work in the new sector. Such substitution is only partial, so in order to get wealthy, we need a big initial productivity improvement to generate demand for the goods in the new sector. And thus Malthus is defeated by knowledge.

Finally, a brief word on the origin of human capital. The idea that people take deliberate and costly actions to improve their productivity, and that formal study of this object may be useful, is modern: Mincer and Schultz in the 1950s, and then Becker with his 1962 article and famous 1964 book. That said, economists (to the chagrin of some other social scientists!) have treated humans as a type of capital for much longer. A fascinating 1966 JPE [gated] traces this early history. Petty, Smith, Senior, Mill, von Thunen: they all thought an accounting of national wealth required accounting for the productive value of the people within the nation, and 19th century economists frequently mention that parents invest in their children. These early economists made such claims knowing they were controversial; Walras clarifies that in pure theory “it is proper to abstract completely from considerations of justice and practical expediency” and to regard human beings “exclusively from the point of view of value in exchange.” That is, don’t think we are imagining humans as being nothing other than machines for production; rather, human capital is just a useful concept when discussing topics like national wealth. Becker, unlike the caricature where he is the arch-neoliberal, was absolutely not the first to “dehumanize” people by rationalizing decisions like marriage or education in a cost-benefit framework; rather, he is great because he was the first to show how powerful an analytical concept such dehumanization could be!

On Gary Becker
afinetheorem
Mon, 05 May 2014 02:17:29 GMT