Good economic news

A grab bag of good economic news to start the year.

Arnold Kling notes that productivity growth continues to amaze and may even offer a way out of the federal government's long-term fiscal bind.

The New York Times(!) observes that for most Americans, buying a house is easier than it was a generation ago. (And while the Times doesn't mention it, those houses are bigger and more luxurious than they were a generation ago, too.)

Daniel Gross argues that macroeconomists spooked by the inverted yield curve are similar to weathermen trying to forecast snow in Florida.

Finally, Michael Mandel briefly discusses an academic paper that claims the current account deficit isn't as scary as it's cracked up to be.

Comments

[Kyle N]

I am not sure If I understand the article, If we export intellectual property in the form of investment. Then the other nations have this property and have not paid us anything for it except equity in a company. How does that lower the current accounts deficit?

[cactus]

Adding to Kyle N's question, I have a few comments of my own.

1. Whether this "dark matter" benefits Americans in the form of a measurable increase in real GDP per capita or something similar depends in part whether the dark matter or the effects it has are ever repatriated back to the US. That includes taxes on the income earned from that dark matter. If corporations are free to perpetually avoid paying taxes in the US or do so at greatly reduced rates (say, 5% on the dollar), then the benefit to the US will not be very large.

2. The benefit is further reduced if you take into account the fact that most large US corporations (and I assume the large ones are the ones most likely to have a relatively large presence abroad) are not necessarilly a US asset. This is the old GDP v. GNP argument. If a company is listed on the NYSE, has most of its intangibles parked in Bermuda to avoid taxes, and has most of its shares owned by foreigners - is a chip factory that company sets up in Ireland really a US asset? Regardless of definition, how much will this benefit the average American?

3. Productivity growth - I think the way productivity is calculated is tied up in the whole GDP v. GNP and outsourcing thing. I've always had issues with that figure but I haven't ever had the time to spend enough quality time at the BLS site. Looking at the chart Kling shows kind of points out some issues. Average productivity growth apparently was higher in from 1971 to 1975 than in any other five year period since. During the height of the oil embargo, productivity was growing faster than any time since? Perhaps in development of wide ties and platform shoes.

[Mike Mandel]

To answer the question: We are effectively paying for our imports of consumer goods with exports of intellectual capital. If we could measure intellectual capital directly, our trade deficit might even be a surplus.

Since we don’t measure intellectual capital directly, the benefits show up indirectly, as a higher return on foreign investments. That doesn’t have to be repatriated to be beneficial—it can go (directly or indirectly) into purchasing imports.

[Jake]

Have you tried to buy a long term treasury or municipal bond lately? They are in short supply. Thus the inverted yield curve is due to the high demand for long term bonds that resulted in lower yields as demand exceeds supply.

This high demand shows that investors, especially foreign investors, have great confidence in the economy. No recession is in sight.

[David Foster]

Jake...I question whether high demand for long-term bonds really is a sign of confidence in the economy. First, wouldn't confidence in the economy tend to drive one in the direction of buying equities? Second, wouldn't large planned capital spending projects (whether corporate or municipal) result in the issuance of new bonds to finance those projects, swinging the supply/demand balance in the other direction?

[David Foster]

Also: Regarding the Arnold Kling post, I don't think that productivity in "computers" should be assessed soley, or even primarily, in terms of Moore's Law. If the processor on your desktop is 50% faster, does that really make your computing tasks 50% more efficient? I think computing-related productivity is actually more related to software usability issues; and there is an awful lot of software in corporate American (and in government America) that truly sucks.

[Jake]

David:

You do have a point. But corporations are flush with cash so they are not borrowing. This has pushed the banks into buying bonds to earn some interest. Many municipals don't even get issued, they go directly into banks without being registered.

The main point is that investment money is not leaving the US, it is flowing in. On the other side, it is not going into equities so maybe the inverted yield curve gives a neutral indication of the economy's direction.

[cactus]

Mike Mandel said: "To answer the question: We are effectively paying for our imports of consumer goods with exports of intellectual capital. If we could measure intellectual capital directly, our trade deficit might even be a surplus."

I'm not really seeing this. A few years ago, I had the opportunity to do a project in Rio. I spent 3 months there, got paid, and was able to buy stuff in the US. I guess that amounts to my exporting human capital for a while. But if my neighbor goes to work for Intel in Ireland, and spends the next 15 years there (during which time he is consuming stuff in Ireland, not here) and I continue to consume stuff in the US, how does this qualify as an exchange of human capital for stuff? I only see two ways that this reduces the trade deficit:

1. The stuff my neighbor consumes no longer has to be imported into the US (and this is offset by the exports my neighbor used to be responsible for but not longer is since he isn't in the US any more)
2. When/if my neighbor and his cash come back to the US, you have an inflow.

The bit about not measuring the intellectual capital directly - I don't see it. Who exactly is supposed to get paid for the fact that my neighbor is "exported" to Ireland, other than my neighbor? And presumably he gets paid in Ireland. So why should this count as a US export?