Sunday, May 24, 2015

Beating dead horses

The econ twittersphere has erupted in response to a provocative (but very blog-like) essay by the great Paul Romer, published in the Papers & Proceedings at AER. Romer is annoyed that certain old freshwater econ guys use math in an annoying way. Romer follows up here; Tony Yates has some thoughts here. Noah Smith, always up for a good bashing of said old guys, opines here, making the same points he usually makes (to wit: those silly freshwater guys just build models in which government can't be good, physicists and engineers have physics and engineering models that perform better empirically, here are some examples of silly things predicted by some DSGE models, etc.).

In recent years, guys like Noah have made very clear that they don't like bare bones RBC and that they don't like certain old guys in macroeconomics. But during these years, while the blogosphere has obsessed over this stuff, macroeconomists have been doing a ton of interesting work for which the blog debate is an uninteresting sideshow.

I've said this before and I will say it again: Whatever one might think of the contributions of the certain old guys to macroeconomics, the field has moved lightyears beyond that stuff. Nobody is using bare-bones RBC. The "freshwater vs saltwater" distinction is a redundant taxonomy--as best I can tell, it's really about Calvo pricing vs. flexible price models, while the sticky price assumption is just one of hundreds of ways that people add frictions to the RBC model. If you use the water-based terms instead of just describing specific frictions, you're just facilitating mood affiliation.

Few, if any, of the people writing models with flexible prices (but other frictions) would say that nominal frictions don't matter. It's just that nominal stickiness is one among many ways in which the real world deviates from bare-bones RBC, and every model must assume away something, and sometimes nominal stickiness is that something for good reason (meanwhile, a lot of good Calvo pricing papers ignore important financial sector frictions, not to mention heterogeneity and tons of other stuff, and that's ok). Sure, you can always find an absurd element of any model, as Noah does with relish in his post. But we're stuck with a world in which no model can explain everything, and in any case a paper that's good at some things and bad at others is an opportunity for another paper that's good at a few more things and bad at slightly fewer things. That's the nature of the discipline. It will always be easy to make the discipline look silly to outsiders who haven't confronted the magnitude of the problems we face.

Let me also say this: if there is anyone out there who criticizes the absurd oversimplification that is the representative agent model* but also criticizes mathiness, here's a newsflash: deviations from rep agent require hard math and/or nasty computation. The Mian and Sufi critique requires models in which agents differ at least along a wealth distribution. The Geanakoplos stuff requires hard math. So be careful how you use the term "mathiness" (I think Romer is using it in a reasonably precise way, and a lot of people are misinterpreting him and using it too broadly). More realistic models are going to require harder math, though I agree completely with both Romer and Roger Farmer that adding more math isn't always productive.

So while the blogosphere keeps restating 1970s fights, practicing macroeconomists are doing a lot of really interesting research that makes the freshwater/saltwater taxonomy irrelevant or at least useless. Bashing caricatures of the economics profession is a great way to get followers and sell books, but it doesn't advance the discipline.

*I actually think rep agent is remarkably useful, particularly compared to how much it costs.

Saturday, May 9, 2015

Mobilizing and upgrading idle, depreciated capital

Here's a Bloomberg article:

Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms. 
Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. 

The title of the article (likely not chosen by the author) is heavy on mood affiliation: "House flippers are back together with Wall St. What could possibly go wrong?"

Lately I've watched a few episodes of Flip or Flop, an HGTV show (on Netflix) that follows a couple who flip houses for a living. The show takes a fair amount of artistic license (producers: you can't portray your stars as living on the financial edge if they drive a custom Escalade), but it is a nice illustration of what flipping can do for the economy.

The houses are typically in pretty bad shape. Many of them were foreclosures. They have been sitting empty for some time. In some cases, the previous residents stole things or poured concrete down drains. Generally they are unlivable (well, by modern American middle class standards). The flippers buy the houses, do very nice renovations on them, then put them on the market within a month or two.

This is really good! Idle capital is a waste. Houses with concrete in their drains don't do us any good. Depreciation is bad. These people are making large additions to the US capital stock, so it's efficient to allocate resources to them (with all the usual caveats about overborrowing externalities, potential policy distortions, etc.). The economy needs this stuff; hence:

Home flippers are benefiting from rising prices, limited new construction and a shortage of inventory on the market.

And it makes sense for big, risk-neutral firms to play this game (see my brief conversation with Lucas Goodman about this).

There's also this:

The new lenders are focused on more experienced investors, many of whom have have established companies, rather than the amateurs that proliferated during the housing boom a decade ago. Today’s flippers are more sophisticated after the crash weeded out most of the weaker investors, Lewis said.

Friday, May 1, 2015

Why manufacturing?

From Dietz Vollrath:

One of my continuing questions about research in economic growth is why it insists on remaining so focused on manufacturing to the exclusion of the other 70-95% of economic activity in most economies. 

He mentions work by Chad Syverson and others. It's true--much of the productivity literature focuses on manufacturing.

Why do we persist in focusing on this particular subset of industries, sectors, and firms? I think one of the main reasons is that our data collection is skewed towards manufacturing, and we end up with a “lamppost” problem.

That is almost certainly the main reason. I guarantee that the people using the microdata would love to be able to carefully study productivity outside of manufacturing. Vollrath describes how industry code schemes are heavily tilted toward detail in manufacturing. Read his post; it's very instructive. (And hey--he's not the only one who blogs industry codes!). I think the switch from SIC to NAICS was a huge improvement on this, though the problem hasn't disappeared.

It's not just about industry codes. The big microdata sources are typically limited to employment information for businesses outside of manufacturing, i.e., there's no capital. And the lack of coverage has persistent consequences. Recent improvements to the data often aren't easy to roll back to earlier years, which means it's hard to study the time series.

The other issue, though, is that even our primary productivity concept--TFP--is really designed for a manufacturing world. The Census Bureau actually has survey microdata for firms in retail and services. But how do we measure capital in those industries? What other inputs are important? This is a much bigger problem than simple lack of coverage. (Obviously, there is a literature).

The further you get from producing widgets with machines, the harder it is to map the TFP concept to the real world. And that's just at the firm (or establishment) level! Facing this challenge in the microdata colors one's views of the TFP concept at the macro level. There is no clean mapping from micro to macro; go down this rabbit hole if you won't take my word for it. Aggregate TFP isn't actually a thing, even if it's still a useful fiction.

Wednesday, April 29, 2015

BED: 7.2 million jobs created, 6.6 million destroyed in Q3 2014

From the BLS:

From June 2014 to September 2014, gross job gains from opening and expanding private sector establishments were 7.2 million, a decrease of 259,000 jobs from the previous quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private sector establishments were 6.6 million, an increase of 115,000 jobs from the previous quarter. 

I like this data series, with some caveats.* If you're not familiar with this series, note that gross flows are large relative to net flows. Roughly speaking, think of the Great Recession as involving about 8.5 million net job losses. Entering and expanding business establishments create at least half that many jobs even in terrible quarters, but a recession is characterized by even larger numbers of jobs being destroyed by shrinking or closing establishments. So gross flows are large relative to net flows.

I like to slice the data by extensive margin (opening or closing business establishments) and intensive margin (expanding or contracting existing establishments). Figure 1 reports the flows of employment associated with opening and closing establishments, and Figure 2 reports actual numbers of establishments that opened or closed (click for larger images).

Figure 1

Figure 2

The last time I blogged this series was the 1q2014 release, and that release didn't look great. But, confirming the usual cautions, that release did not seem to mark a new trend. Reallocation from the extensive margin is moving sideways, more or less, with year-over-year job gains from openings slightly down and losses from closings barely changed.

Next, the intensive margin. Figure 3 reports employment flows from expanding and contracting establishments, and Figure 4 reports establishment counts for these categories (click for larger images).

Figure 3

Figure 4

On the intensive margin, reallocation seems to be sticking to its gentle upward trend since the Great Recession. Both jobs created and jobs destroyed on the intensive margin are slightly up year over year.

So there isn't a lot going on along the establishment entry margin, with things pretty much moving sideways (which means fairly constant positive net job creation from entry). Reallocation associated with growth or contraction of existing establishments is steadily rising and may soon approach pre-Great Recession levels.

Now some usual thoughts: gross flows give us an idea of where jobs are being created and destroyed, which fleshes out the net job numbers that are more popular (and timely). More broadly, these data help dissuade us from always thinking in representative agent terms, which is what the net numbers incline people to do. It's tempting to think that net numbers tell us about the experience of most businesses, but in reality there is a lot of heterogeneity among firms, and reallocation proceeds at a high pace.

Some previous BED posts are here.

*The BED are quarterly data provided from the BLS based on state UI data. They are released with a lag of about 8 months. Like the BDS (the dataset I usually use here), the BED basically covers the universe of private nonfarm employers; unlike the BDS, the BED is available at higher frequency and is released more quickly. BED has other drawbacks compared to the BDS, such as a more limited ability to track firms.

The BLS effectively expanded the sample definition in the first quarter of 2013. The 2013q1 observation was the most obviously affected, as it reported all establishments that were added to the sample as establishment openings. For openings data, I have replaced the 2013q1 observation with the average of 2012q4 and 2013q2. I haven't dug into the data enough to know whether users can manually correct for this over the longer run.

It is also important to note that these numbers are seasonally adjusted, and any guess at net numbers based on the difference between two seasonally adjusted series is very, very rough. Non-SA numbers are available on the BLS website.

These numbers track business establishments, which are different from firms. Costco is a firm; your local Costco store is an establishment. Most firms consist of only one establishment. The BED is not ideal for tracking firms, as it has limited ability to correctly link establishments to the firm level.

Monday, April 20, 2015

Thinking about family firms

The Economist has a really nice special report on family firms in the April 18th issue. I think this is a fascinating topic. I don't know the literature on this well, but I'd like to. Here's a literature survey from a recent working paper by Mullins and Schoar:

These studies document that family firms, on average, tend to be smaller than non-family firms, have lower performance, weaker governance structures, and are often concentrated in older, more regulated industries (e.g. Morck, Strangeland, and Yeung, 2000, and Claessens et al., 2000, 2002; Faccio and Lang, 2002; Anderson and Reeb, 2003; Bertrand and Schoar, 2006). Attention has also focused on the importance to firm outcomes of the CEO position (e.g. Bennedsen et al., 2010, 2012) and on the individual characteristics and styles of CEOs (e.g. Bertrand and Schoar, 2003; Malmendier and Tate, 2008; Schoar and Zuo, 2011).

Mueller and Philippon argue that "family firms are particularly effective at coping with difficult labor relations" because they can provide a more credible implicit contract; it would be interesting to study job flows specifically at family vs. non-family, controlling for size and age. In any case, I'm already obsessed with the fact that private firms are different from public firms; these data on family firms give me another thing to obsess over.

Recent literature also finds that transfer of control from founders to heirs can be hard on a firm, though transferring control to professional CEOs is less costly. The tricky problem, of course, is that selection effects might mean that founding CEOs are high ability, but there is less reason to assume that their heirs will be. From The Economist:

The biggest problem for family companies is the distinct possibility that the children or grandchildren of business founders may not match the founder for either brains or character. Warren Buffett, a veteran investor, once compared family succession to “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics”. A family grandee says that the biggest barrier to keeping the family show on the road is the “growing sloth of family members”. And CEOs who bear the family name are far more difficult to sack than hired hands, even if they turn out to be useless. 

Why do I find this interesting? I think a lot about young firms and entrepreneurs generally, and how they matter for macroeconomics. One way to model questions in entrepreneurship is to follow Quadrini (2000) and separate the entrepreneurial sector from the "corporate" sector (where entrepreneurs are special in that they are linked to households); this is a nice modeling approach that I use in my research. But firms that start out as entrepreneurs or family affairs don't always stay that way forever, and there may be interesting things going on during the transition to more "mature" ways of doing business.

When thinking about the macroeconomic role of family firms it's important to get the weights right. From a macro perspective, simply looking at what percent of firms are family firms will give us an exaggerated sense of how much they matter (remember: most firms are small, but most people work at large firms). Says The Economist, "Family businesses make up more than 90% of the world’s companies. Many of them are small corner shops." I think you could replace "many" with "nearly all".

What I would really like to see are figures on the share of employment or revenue accounted for by family firms. The Economist doesn't give us that, but they do cite a BCG study finding that family firms account for 33 percent of U.S. firms with revenue over $1 billion. That's a lot--more than I would have expected! It's not just Cargill and Koch. Some of these firms are publicly traded; many of them are not--a reminder that a lot of activity does not show up in SEC filings.

More broadly, this stuff about family firms is a reminder that management matters.

Friday, April 17, 2015

The Starks are dumb, and other thoughts

The great Jim Tankersley has an article arguing that people should learn from A Song of Ice and Fire when thinking about the business cycle. It includes a quote from your humble savings scold. I want to expand on this a little.  

!!!Some spoilers from the books may follow.!!!

Winter in Westeros is a major recession; in particular, it is a real business cycle (RBC) recession as it decimates agricultural productivity when agriculture is the largest and most important industry. In some (or most?) parts of the country, agricultural output falls to something close to zero.

I always think of two major mistakes the Westerosi are making with respect to their business cycle. First, they are not saving enough. Second, they are not sufficiently focused on technology.

The lack of evidence of saving is by far the most striking economic fact from ASOIF. An important point to remember is that Westeros is in some ways a planned economy. Medieval economics is far outside my wheelhouse; but what we can say is that a large share of Westerosi resources are allocated by planners, with huge resources going toward making war. These planners are typically really bad at taking precautionary actions with respect to the coming winter. While various indicators are suggesting that winter is imminent, we have the major houses fighting over a crown. Not only does warmaking require significant resources, but these people also seem to enjoy literally burning fields while they're at it.

This is really puzzling behavior from heads of houses who seem to care a lot about the future of their brand. It seems like these people should be making huge efforts to store food. The only reason to buy weapons is to protect your storehouses. The only reason to build castles is to protect your storehouses. The only reason to mine gold is to buy food, buy food storage technology, or buy castles and weapons to protect your storehouses. And so on.

The Starks, whom a lot of readers are inclined to like, really look bad in this context. They have the most to lose from Winter--they are the first to enter and the last to exit winter, and their winter is likely the hardest. So why is Ned accepting a job in King's Landing when he should be scrambling to prepare his jurisdiction for winter? Even worse, why does Robb leave home to pursue a revenge war whose ostensible purpose is to gain independence from a monarch who won't even matter when winter comes? This is seriously reckless and irresponsible behavior.

As summer drags on and on, the Starks' time should be increasingly occupied by building huge greenhouses and building huge walls around them (Eric Crampton has noted the greenhouse issue). There's really no excuse to focus on anything else, unless it's figuring out a diplomatic solution to the Wildling issue or, depending on your priors, fortifying the Wall against the Others. When Robert Baratheon shows up to hire Ned as Hand, Ned should be laughing him out of the North. "Me, come to King's Landing when my people will be the first to suffer in winter?! No way." And at the very least, he goes only on the condition that he's going to play Joseph of Egypt (or Andrés Velasco) and make the realm's famine preparation agenda his top priority. If he does that, he gives Catelyn and Robb strict instructions to carry on his work preparing the North. No silly excursions south when our people aren't ready.

So the Starks are idiots. Most of the other houses are too. Frankly, Tywin Lannister seems far too smart to waste time and resources on the war when he should be sending cartloads of gold to Highgarden in exchange for food (Matt Yglesias has touched on this before). And even if you do go to war, you don't go around gratuitously burning other peoples' fields. When winter comes, you want other people to have food too (so you can take it, or at least so they don't come to your door).

Maybe you end up saving too much. But, as I mentioned to Jim, that just means you'll have a chance to buy other house's assets at fire sale prices during winter. You may come out of winter with not only a full belly but also a new fleet of Iron Islanders' ships and a portfolio of Lannister gold mines.

We do see a few people taking things seriously. I don't know if we hear it explicitly, but it seems very likely that the Manderlys are on top of this. They seem to have a pretty long game generally. Wyman stays home and lets his sons fight the war, and we later learn that while home he's been focusing on a lot of long-game preparations. We also learn from the new Winds of Winter Sansa chapter that Littlefinger is getting things ready too (of course, as Master of Coin he really should have been focused on this at the realm level instead of selling royal debt the whole time).

One other thing. My friend Jack has this to say:

The savings problem is precisely why the Lannister-Tyrell schism of A Feast for Crows and A Dance with Dragons is so important.

The Tyrells came into the War of Five Kings very late so they still have much of their military, agricultural, and economic might, and Cersei just alienated them by having Margaery thrown in jail for adultery and treason. This is happening at the same time that Winter Is Coming and Aegon is taking castles in the Stormlands.

So Martin is likely to do something with this in coming books. I hope he takes it seriously. So far, I have a hard time making sense of the behavior of some of these houses.

UPDATE: Matthew Klein notes, "the food isn't grown in the North. If anything he should have focused on evacuating his subjects down to Dorne." Good point. Getting out of the North seems like a decent priority.

Tuesday, April 7, 2015

Public earnings buying private firms

A few weeks ago there was a story that caught my interest, and I'm just now getting time to blog about it. The amazingly entertaining and informative Matt Levine pointed us to the NYT story:

Big money managers including Fidelity Investments, T. Rowe Price and BlackRock have all struck deals worth billions of dollars to acquire shares of these private companies that are then pooled into mutual funds that go into the 401(k)’s and individual retirement accounts of many Americans. With private tech companies growing faster than companies on the stock market, the money managers are aiming to get a piece of the action.

I think this is a cool story for two reasons. First, I've complained before about the inability of small investors to own young, non-public companies in a diversified way. Unless you're an accredited investor, you can't really get into venture capital or private equity (and even if you could, then you'd have to pay huge management fees). The only way for me to own non-public firms is to start one, and then I won't be diversified. But we know that private firms are different from public firms, so holding a diversified basket of public firms isn't really owning the whole economy (by the way, this is what annoys me about Buffett's "favorite stock market indicator"). For one thing, public firms are almost never young--that NYT comment about "private tech companies growing faster than companies on the stock market" has probably always been true and is probably true in other industries. Since young firms are the ones growing quickly, leaving them out of your portfolio seems nontrivial (with all the caveats about how the bulk of them actually have zero growth potential). Levine points out a complaint some people have about this:

One worry is of course that the big investment professionals might lose money on these investments, since the professionals are perhaps not experts at private company investment, and since the investments are made at pretty fancy valuations. My view is that you can lose money on public investments too, and there are lots of reason not to worry too much about your pension being invested in Uber.

We already know that professionals aren't great at picking public stocks--or, at least, their abilities aren't paying off for their investors. So I don't have a reason to think they're any worse at picking private ones. But I admit that this is way outside of my wheelhouse; I just think it's interesting that these vehicles for investing in private firms are being made available to regular people. That's sort of how I've always thought of Berkshire Hathaway, by the way.

The other reason I find this story interesting is that J.W. Mason has done this interesting empirical work (I discussed it here) documenting a declining propensity to reinvest earnings among public firms. Mason's empirical facts are interesting and persuasive; what I found less persuasive was the conclusion that he was drawing from them: that this trend hurts workers. I don't think we know that yet because that depends very much on where the money is actually going. I'm a macro person, and macro people are pretty obsessed with aggregation identities and general equilibrium stuff, and I don't see Mason's story happening in general equilibrium. He asked me on Twitter what he could do to make his story convincing, and I think the answer is that he could try to trace where that money is going. If it's going under rich peoples' mattresses, or if it's being set on fire or thrown in the ocean, then his story might have legs. Though I think the mattresses thing isn't out of the question, I'm still pretty skeptical of that theory. This story about earnings being invested in private firms seems like one piece to the puzzle.