Tuesday, January 29, 2013

How to think like Tyler Cowen

A comment I reread often:
I say, focus ruthlessly on substance and do your best to explore and present the limits and drawbacks of your own ideas and recommendations. Years down the road--or sooner--one will end up wiser and better informed.
The original post is here.

Wednesday, January 9, 2013

Everything you need to know about the "debt ceiling"

The debt ceiling, or statutory debt limit, is a law that limits the amount of outstanding debt the Treasury can have. The following equation tells you everything you need to know about the debt ceiling:

Spending = Taxes + Borrowing

This equation must hold at all times. The amount the government spends must be equal to tax revenue plus borrowing.* If Spending is $100, and Taxes is $60, then Borrowing must be $40 (100=60+40). Once spending and taxes are determined, borrowing is just the residual.

The silly thing about the debt ceiling is that it allows Congress to choose Spending, Taxes, and Borrowing without having to make the equation hold. Congress can tell Treasury to spend $100, raise $60 in taxes, and borrow $10, which is basically what Congress is doing when it threatens to not raise the debt ceiling. This forces Treasury to renege on existing spending obligations--obligations created by Congress!

This is why raising the debt ceiling used to be little more than a formality. Congress raised the debt ceiling 18 times during the Reagan administration and 7 times under George W. Bush.

So all the silly analogies you hear about how raising the debt ceiling is giving Obama a blank check, or whatever, are irrelevant. It's not a blank check; raising the debt ceiling just gives Treasury permission to honor legislation already passed by Congress. It's a stupid law, and it should be eliminated entirely--not used for political stunts.

*Obviously, I'm abstracting from seigniorage and other small sources of government revenue.

Thursday, January 3, 2013

Startups are really important

A lot of people are surprised to learn that startup firms create more jobs than all other firms combined. This is a key reason for the common view that small businesses are the engines of job creation; as it turns out, that result is basically driven entirely by young firms.

To see how important startups are for the job market, take a look at Figure 1 (click for larger image). The figure shows the number of jobs created each year by startups (firms with age zero) and continuers (firms of age 1 or older). The blue bars are startups, and the red bars are continuers; blue+red = total employment growth.

Figure 1: Job creation by age

Observe that in most years, continuers are job destroyers on net. So, at least from an accounting standpoint, without startups we don't create jobs. Of course, given the high failure rate of startups, a lot of the jobs created by them are eliminated shortly thereafter. But the data paint a picture of a highly dynamic economy with large flows of jobs to new firms (discussed this here).

Do some industries produce more startups than others? Figure 2 shows startup job creation by SIC sector (click for larger image). The total height of each bar is total job creation from startups for that year.

Figure 2: Startup job creation by industry

Observe that the dominant startup industries are retail and services (by the way, my understanding is that your typical internet company is a "service"; that is the case at least for Facebook).

In both figures, you can see the epic decline in startup activity that preceded the Great Recession (I discussed this here). This startup collapse accounts for a major portion of the Great Recession's labor market problems (again, from an accounting standpoint at least).