January 24, 2006
Predicting the Future
Seems to be a slow news day in Cascadia--so here's something from farther afield. The economics-oriented Angry Bear blog has a nifty post on economic forecasts, in this case, of US Gross Domestic Product.
To a remarkable extent, economic forecasters from the private sector, the White House, and the US Congress tend to agree with one another about their predictions for economic growth. Most of their forecasts agree within a few tenths of a percent--a surprising degree of unanimity about something so uncertain. Which should, perhaps, give us some confidence in their forecasts--when different sets of economic experts tend to converge on the same prediction, it probably suggests that they're all onto something. Right?
Or maybe not. As it turns out, even though the forecasters agree with one another, their predictions don't do a particularly good job of predicting the actual econonmy. In fact, rather than going through all the econometric rigamarole, if they just used a simple rule of thumb -- next year's growth will be pretty much like this year's -- they'd actually make more accurate forecasts. Sheesh!
What's going on here? Why are professional forecasters--no doubt very smart folks, and just the sort of people who'd have a handle on this sort of thing--not so good at forecasting? Part of the reason, no doubt, is that the future is inherently unknowable. Even the best forecasters can't predict the impacts of unknown events, or the "animal spirits" that seem to rule the marketplace.
Or perhaps--as James Surowiecki, author of The Wisdom of Crowds, might have argued--the problem is that forecasters aren't a diverse enough group. As it turns out, groups of people who think pretty much alike tend to do a particularly bad job of sorting out uncertainty. They tend to make the same kinds of mistakes -- and in a group, those mistakes reinforce one another. To make better predictions, Surowiecki argues, you'd need to aggregate the opinions of people who are very different from one another, people with very different biases, experiences, and areas of expertise. To the extent that economic forecasters (whether in the private or public sector) all use the same methods and data, and share the same outlook and education, the quality of their forecasts can suffer.
This situation reminds me of the conclusions of this book (on my reading list, but not yet read), which argues that political experts do a lousy job of predicting future political events. In fact, the author argues that the more knowledgeable and expert is in a subject, the worse her/his predictions. People who are especially well versed in a subject matter tend to develop biases and blinders that make them overestimate the significance of some pieces of evidence, and underestimate the significance of others. Which makes one wonder what the value of expertise is, anyway, if it does more to cloud your judgment than clarify it (and also makes me wonder why anyone even bothers to listen to the bloviations of TV pundits, except to reconfirm their own biases).
OK, then -- economic forecasts aren't as useful as we'd like. Which, to me, raises this question: if we don't know how to predict the future, should we even try? Not trying to forecast economic trends could be considered irresponsible -- if you fail to plan, you plan to fail, and all that. But when the best minds, using the best available data, collectively come up with answers that are effectively worse than doing nothing at all, is there any real point in the exercise?
January 23, 2006
Green Saves Green
A couple of new studies have found that California can meet its ambitious 2010 goals for reducing climate-warming emissions at no net cost to consumers. And, even better, meeting the even more stringent 2020 goals could actually save consumers money:
"It's basically a very good news story," said Ned Helme, president of the Center for Clean Air Policy, an environmental think tank based in Washington, D.C. "We found you could do this very cheaply."
Now, I haven't looked at the studies--and I might not really be able to judge their quality even if I had. By their nature, studies like this tend to be speculative: they show what could happen, but not necessarily what will.
Still, this seems extremely plausible to me. Despite a period of relatively high oil and gas prices, energy is still pretty cheap relative to our incomes. And as a general rule, cheap energy means wasted energy. Consumers tend to demand very short payback periods for energy efficiency investments--usually, just a couple of years at most. While most businesses would be ecstatic to take advantage of such fast rates of return, most households, apparently, aren't run to the same fianancial standards. Which means that there's still a lot of very cost-effective energy efficiency investments out there--things that could easily pay back any initial investment in short order. That's as true in the transportation sector as in the home: we already know, for example, how to boost vehicle efficiency without compromising safety.
The benefits to consumers from energy effiency investments are, if anything, likely to compound. Once you hit the payback period, energy efficiency is like a cash cow -- it just keeps saving and saving. (And saving.) Plus, since most of California's energy from oil, gas, and coal comes from out of state, energy efficiency investments will tend to keep more of California consumers' money circulating in the local economy--which can be an effective way to boost demand for local goods and services.
All in all, I wouldn't be a bit surprised to see a push to reduce global warming emissions resulting in a substantial boost to California's economy over the long term. But we'll just have to wait and see how the state responds to the news.
January 19, 2006
Mind the Gap
The Northwest Federation of Community Organizations just published its annual job gap study, looking at the share of jobs that actually pay a living wage (defined as one that puts healthy food, acceptable housing, and other basic living expenses within financial reach). Not too surprisingly, it found that only about a quarter of the jobs in the Northwest pay a living wage for a single-parent family with two kids. (See press coverage in Washington and Idaho.)
To me, this news seems about right. For a family with kids, the cost of living seems pretty darn high, once you factor in housing, health care, child care, rising energy bills, etc. And many, many jobs don't pay particularly well. So it's little shock that there are lots of families who have to cut corners to get by.
But as plausible as the figures from the job gap report may seem, they're also hard to square with this claim from a recent article in The American Prospect:
[A]ccording to a 2004 Roper Poll for the American Institute of Certified Public Accountants, 93 percent of individuals earning more than $50,000 described themselves as doing well -- many as doing very well -- as did 77 percent of those who earned just $30,000 to $40,000.
So...few jobs pay a living wage, but most people seem to consider themselves as "doing well." Hm. I don't think this is exactly cause for scepticism about the "living wage" figures -- but it's certainly evidence that there's more here than meets the eye. Perhaps jobs below the "living wage" are more common for people without families to support, or where one partner in a family earns substantially more than the other. Or perhaps people are just reluctant to admit that they're not "doing well," even in an anonymous survey.
One thing is pretty clear, though--as a society, we haven't done a particularly good job of measuring how people are really faring economically. Part of that is lack of attention -- economic statisticians are generally more concerned with aggregate figures for GDP, productivity, and the like, rather than with the situation of real families. But part is just that, well, it's just really hard to decide how to measure true prosperity. Surveys? Fancy economics? Guesswork? Any one approach is bound to have its drawbacks--which means that you probably have to look at the problem a bunch of different ways, though a number of different lenses, to get closer to a useful answer.
January 18, 2006
A Loonie Comparison
The economy is on a roll, the stock market is soaring, jobs are plentiful, borrowing costs are low, consumer spending is strong and real estate is booming.
That's from a bizarre editorial in today's Vancouver Sun; an editorial that goes on to argue that Canada's--and especially BC's--recent boom is a chimera. The piece rightly points out some troubling counter trends, such as strong GDP growth coupled with anemic income growth for workers. But some of the article's assertions are quite plainly wrong--or at least misleading enough that it's tough to buy the anti-tax message the editorial is peddling.
Among the claims that don't add up:
In 1981, Canadian incomes were more than 80 per cent of American incomes. That figure has dropped to 67 per cent. In other words, our standard of living is now a third lower than that of our neighbours.
To be sure, if those figures are right, that's a worrisome trend for Canadians. But that's not at all the same as saying that Canadian standards of living are a third lower than Americans. Direct international income comparisons can be all but meaningless--like a business looking only at revenues but not at expenditures. To name just two of many items that chip away at Americans' income: health care and education are far, far less expensive in Canada. And in the US those the cost of those essential goods are drastically outstripping inflation. There's probably some North American disparity in the standard of living, but it's almost certainly not a third.
The editorial continues:
While additional spending on social services like health care and eduction are things Canadians desire, they are certainly not getting their money's worth.
The best single indicator of health outcomes, life expectancy, puts Canada in the top 5 countries in the world. And if BC were its own nation, it would rank second behind only Japan. By contrast, the United States ranks 19th, just behind Barbados. (Other measures put Canada at 8th best and the US at 29th.)
Similarly, international comparisons put Canadian education as among the very best in the world, often in the top 3. Where's the US? Way, way behind.
I'm not saying that the editorial's claims are entirely without merit. There may be reason to be concerned about Canada's economic growth. Rising income inequality, for instance, may point to problems. But the editorial's fawning over light taxation in the US should be taken with a grain of salt.
January 11, 2006
Just My Opinion
Two op-eds in today's Seattle Times worth taking a look at...
- Biodiesel: short-term crush or long-term relationship? Bruce Ramsey takes a balanced, but ultimately favorable, view of government programs to encourage home-grown fuels.
- The rapid disappearance of America's middle class. We posted on a similar subject a few days ago, but it's worth repeating -- rising family incomes don't necessarily mean that we're better off. In fact, after adjusting for inflation, male full-time workers earn $800 less today than in 1973, which means that the rise in median family income is entirely due to increases in two-earner households. Of course, these sorts of trends are hard to make sense of across decades, since so many things change -- people's expectations, the quality of consumer goods and public services, enjoyment of time at work vs. time at home, etc. Still, there's ample reason to believe that the well-being of the middle class has become uncoupled from steady increases in per-capita GDP. The money quote of the article. "All the talk about family values is just that — talk — when our financial policies are driving middle-class families to the wall."
I'm not sure I share all the opinions expressed in the op-eds -- but don't really have anything to add to either piece, either.
January 10, 2006
Demographers are projecting that population in some parts of the globe -- Russia, the Ukraine, Japan, much of Western Europe -- are set to decline over the next 50 years or so. Of course, the talk of a shrinking population seems to send some people into a panic, which is why you occasionally see stories decrying the new "population crisis" -- not too many people, but too few.
People love to worry—maybe it's a symptom of ageing populations—but the gloom surrounding population declines misses the main point. The new demographics that are causing populations to age and to shrink are something to celebrate. Humanity was once caught in the trap of high fertility and high mortality. Now it has escaped into the freedom of low fertility and low mortality. Women's control over the number of children they have is an unqualified good—as is the average person's enjoyment, in rich countries, of ten more years of life than they had in 1960. (Emphasis added.)
That seems just right to me. And the article makes some other worthwhile points too -- including that economic output per capita is a far better measure of the health of an economy than total output. Measured by total output, a place with a shrinking population could seem to be in economic decline, even if the average person is getting wealthier. (Of course, even better than total output per capita would be a measure that looks at how the poor and middle class are faring. Still, policymakers should keep in mind that per capita measures of economic health are more significant than total output.)
January 05, 2006
Do Poverty Numbers Lie?
Poverty rates are higher in Mississippi than in Massachusetts. But it's easier to make ends meet in the deep south, where the staples of existence generally cost less. So which place really has worse poverty?
Among the more annoying problems with US poverty rates--and the problems are legion--is that comparisons between states can be spurious because the rates do not account for differences in the cost of living. So in an attempt to straighten things out, I did a little back-of-the-envelope calculation today to find out where poverty hits the hardest. (Assuming that median household income is a decent proxy for the cost of living, I adjusted state poverty rates by incomes. This has been done before, in lots of more complicated ways, but I wanted to figure out something specific.)
As it turns out, the worst states are still the worst--Mississippi, Washington, DC, and Texas have the highest rates of poverty by either accounting. Same for the best--New Hampshire, Minnesota, and the northeast states are the best in the nation using either method. But in the Pacific Northwest, things get interesting--and Washington is the biggest loser.
By official statistics Washington's and Oregon's poverty rates are fair to middlin' (their average 2002, 2003, and 2004 rate was 11.7) and the two states are tied for the 27th lowest rate in the US. But when you adjust for income levels, Oregon's poverty gets a teensy bit better, climbing to 24th place, while Washington drops like a rock into 37th place--slightly worse than the national average and tied with economic powerhouses like Kentucky.
California takes a page from Washington's playbook and plummets from 36th place to 48th--behind Mississippi, Arkansas, and Louisiana. Idaho and Montana, meanwhile, both rise substantially in the rankings as their poverty rates are balanced out by their lower costs of living (at least as it's reflected by median income).
Now obviously, there's at least one big flaw with my little made-up methodology. By adjusting poverty by income, I'm essentially favoring states for having low incomes. Still, income is something of a proxy for the cost of living. Moreover, some of the worst effects of poverty--crime, violence, poor health, etc--may actually be the effects of income inequality in disguise. So my poverty adjustment tells us which states are most severely amplifying poverty through income inequality (cough, cough, Washington and California).
It's telling, I think, that most states' rankings don't change terribly much with my adjustment. But a few states with average poverty rates and higher incomes may have some real--and hidden--economic problems to sort out. Because problems of equity often manifest themselves in other ways, the federal numbers may not tell us even half the story about how we're really doing.
December 30, 2005
Housing Affordability Confusion
From the NY Times yesterday, comes a surprisingly confused article arguing that home ownership has actually gotten less expensive over the last 20 years. Here's the article's upshot (and the part that contains the fishy reasoning):
Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company... it remains well below the levels of the early 1980's, when it topped 30 percent.
But median family incomes ain't what they used to be--and comparing family incomes over more than two decades is a case of comparing apples to oranges. To wit: family incomes today are much more likely to include two incomes (even two full-time incomes) than they were in the early '80s when many families were supported by a single primary breadwinner. So--to be overly simplistic with the data for a moment--22 percent of two incomes buys what 30 percent of just one income used to.
The good news here is that the share of women in the labor force has been steadily rising, as has the share of women working full time. Women are also steadily closing the pay gap with men. And because women earn more advanced degrees than men, there's reason to believe the gap may close or even eventually reverse. But the bad news is that families now commonly must employ both adults to make a grab for the brass ring of home ownership. Among other problems, that means substantially less wiggle room in family budgets because if one of the two wage earners falls on hard times, there's no one who can enter the workforce to help pick up the slack.
And there are at least two other glaring problems with the NY Times reasoning.
Family income is a lousy metric to begin with. Because more and more Americans are delaying marriage (the percentage of unmarried 30 to 34-year-olds has quadrupled since 1970), a smaller and smaller share of us are counted in the family income statistics. This means that the growing ranks of single Americans are facing homeownership with just one income at a time when two are needed.
The Times article also includes a nifty map depicting places where home ownership has gotten more affordable. The curious thing about the map though is that it doesn't appear to say what the writer thinks it does. According to the map, pretty much the entire states of Washington, Oregon, California, Nevada, Hawaii, Florida, New York, New Jersey, Delaware, and Maryland have gotten more expensive. So have the Chicago and Boston areas, along with much of Virginia. So even by the Times' rather lousy definition of affordability, a huge swath of the most populated parts of the country have actually gotten less affordable.
To cap it off, the article smirks that the hoi polloi don't really understand their own economic conditions:
In a nationwide New York Times/CBS News poll conducted this month, 75 percent of respondents said they thought most families in their community spent a larger share of their income on housing now than in the 1980's. Only 5 percent said the share was smaller.
The lesson for me is that--at least in this case--it's the people who are right and it's the data analysts who don't seem to understand the economy--or even what their data actually means.
UPDATE 1/3/06: Cleaned up some of the typos and atrocious grammar plaguing the first draft.
December 29, 2005
As of January 1, minimum wages will rise to keep pace with inflation in both Washington and Oregon. Guaranteeing workers $7.63 and $7.50 per hour, respectively, the two Northwest states are the most generous in the nation. But is a rising minimum wage really a good thing?
December 15, 2005
'Tis the season to be jolly, and all that. But, apparently, not if you want to accuse someone--or a lot of someones--of being naughty. This past Sunday, author Joel Kotkin launched a broadside against Portland, Oregon by publishing a dismissive op-ed in the Oregonian that derides the city thus...
Portland is becoming what I call an Ephemeral City. What do ephemeral cities do? Not much by traditional standards. They don't create a lot of jobs for working or middle-class people. Instead they mostly exist to celebrate themselves and provide an attractive setting for visitors and would-be migrants...
An ephemeral city doesn't compete with lesser places -- you know, those ugly cities with functional warehouses and factories, Wal-Marts and strip malls -- for jobs, companies or investors. An ephemeral city's economy relies largely on a high level of self-esteem among its residents.
Not to put words in Kotkin's mouth, but he seems to believe that Portland is simply too focused on creating an enjoyable city--the horror!!--and not enough on...well, manufacturing or strip malls or something sturdy and middle-American.
Now, I happen to feel that most of what Kotkin is trying to pass of as "analysis" is simply sneering. And if you scratch the surface, much of his case simply falls apart.
Economist Joe Cortright and George Washington University prof MIchael Lewyn have done a good job pointing out the inconsistencies in Kotkin's thinking -- and, just as importantly, showing where Kotkin's just mouthing off, as opposed to marshalling facts in support of an argument. Just to pile on, here are a few things that I thought worth mentioning...
- Kotkin writes: "Portland's sprawl has continued to spiral about as much, or even more,
than most American regions." This, as it turns out, is simply false -- unless, of course, Kotkin has some special definition of "spiral" or "sprawl" in mind. Back in reality, though, greater Portland has had some remarkable success in recent decades in curbing the loss of farmland and open space at the urban fringe.
- More Kotkin: "Four decades ago, author Neil Morgan used the term 'narcissus of the
West" to describe an already self-indulgent San Francisco. Now it's
time for the City by the Bay to move over -- the City of Roses wants to
take its place in front of the mirror." Hmmm. Seems like San Francisco's done surprisingly well for itself over the last couple of decades -- it attracted over 100,000 new residents since 1980; has one of the highest median family incomes in the country; is the major center of the business and finance industries on the west coast. Etc. San Francisco ephemeral? Every city should be so lucky.
- Still more..."Portland already has one of the lowest percentages of little tykes among American cities." True enough. But the share of households with kids is higher in Portland than in, say, San Francisco, Seattle, and Denver. Portland's just barely behind Minneapolis-St. Paul on this measure. But it's barely worth quibbling over numbers here, since it's not at all clear to me why it matters what share of in-city households have kids. Some cities attract and hold families with kids; some don't. It depends on a lot of factors -- the amount of single-family housing in the city; the size and density of the city; median incomes; poverty levels; the age and education levels of the population; whether empty-nesters choose to move out of their urban homes; you name it. (I doubt that the alleged "high level of self esteem" among Portland's residents has any role at all here.) And as Kotkin points out, lots of people move to the suburbs to have kids, for all sorts of reasons. So how does this make Portland a bad city, exactly?
- And this..."As regulation helped boost the housing prices in the close-in areas, the middle class has moved farther and farther out. It turns out that most families -- yes, they still exist -- usually opt not to raise their kids inside sardine cans if they can at all help it." This isn't even wrong -- it's just incoherent. You see, Portland can deal with its population influx--resulting from its deserved reputation for quality of life--in one of two ways. It can accept more density by building more multi-family housing within the city, for example by letting developers turn existing single-family homes into duplexes, condos, apartment complexes or row houses. Or it can prohibit density by stopping new construction, which would cause the price of the existing housing stock to rise as demand for housing outstrips supply. Either way, lots of middle-income families with kids will choose to move to the suburbs, either to seek a different combination of amenities, or lower prices. But in Kotkin's view, these basic market dynamics--more people competing for a finite amount of land--somehow prove that Portland is kid-unfriendly, narcissistic, and over-regulated. (Maybe if Portland could just make some more land, everyone could get a big house and a big green lawn at a reasonable price, all within city limits -- and a pony!!)
I could go on (and on) about Kotkin's whine, but I'll stop here -- except to note one thing.
A few years back, Portland contrarian Wendell Cox (one of Kotkin's sources for the article) held an anti-smart growth conference for conservative think tanks and funders. From what I read the conference was, in essence, a training session for how to vilify smart growth. The advice: don't engage on the substance -- because that gets sidetracked into a discussion of what kind of communities we collectively want to create, which is smart growth's strongest turf. Instead, the best way to stop smart growth is to tar its advocates as latte-sipping, brie eating urban elites who look down on ordinary Americans, are opposed to freedom of choice, and want to tell everyone else the how and where to live.
Kotkin's op-ed seems to flip this general strategy on its head. Now it's Kotkin and his ilk who are looking down on people who've freely chosen to live in Portland -- they're narcissistic and self-important, and insufficiently interested in bearing children and building strip malls, Walmarts, and factories.
So who's the sneering elitist now?