On Higher wages at McDonald’s

28/Aug/2013 1 comment

Apparently fast food workers have struck in some American cities. It seems they want their wages increased to $15 an hour. Ordinarily I’d say it’s time to call in Pinkerton’s(NSFW), but then the strike doesn’t affect me. Still, We’re going to see more of this as the labor share sinks, so it’s worth pointing out a big ugly flaw in the ‘voluntary minimum wage’ argument.

Let’s assume McDonald’s (or whichever firm) has enough market power to pay its workers $15 per hour. They raise wages, the workers get bigger pay checks, customers pay a little more for their industrial food substitute and we all live happily ever after.  That is, until the legions of underemployed, former marginal university entrants (currently working at Starbucks) walk over to McDonald’s for a job application. Here’s the take home: There is no plausible way to rig the labor market so that low skilled workers can make a decent wage. If McDonald’s raises its wages, it will simply draw a bigger and higher quality pool of applicants who will take the jobs of the strikers. The problem is that the strikers have low productivity, not that McDonald’s is evil (that’s incidental).

You can see this dynamic at work if you go to a country with high minimum wages. In the Nordic Countries (and I assume France), where unions have set the wage floor quite high for most jobs, you’re unlikely to see the ‘bearded woman’ types working low end service jobs. If the super market has to pay something like $14 an hour for a checkout clerk—whom they can’t easily fire—you can be sure they’re going to  lean toward applicants who’ll make the customers feel at ease when they pick through that tall stack of applications.

I feel sorry for the McDonald’s workers, but I just don’t see a good option for them. It seems obvious that folks in the bottom half of the ability distribution have had their wages hammered down by pitiless automation in the last 30 years. Unlike past waves of innovation, there don’t seem to be a lot of good successor jobs (pulling leavers at GM plants in the 1950s), so more and more people are crammed into retail and food service. Libertarian economist types aren’t supposed to agree with this view, but it squares with stagnant median wages, falling labor share of income and experience in reality. I think it’s likely that we’ll have an ever-swelling cohort of low-wage workers, as technology goes on raising the bar for employability. It’s not all about IQ (I know of many feckless smart people), but that is the core of the problem. We need to think more about how an IQ 80 person can live a comfortable, dignified life in a world of Google Glass, driverless cars and nanotech solar. Part of the answer is a guaranteed income program for adults, but then we should be weary ‘the limits of what we imagine we can design’.

Thoughts on Obama’s new college funding proposal

23/Aug/2013 Comments off

It makes sense to me, on first pass.  Not perfect, but then in a near-monolithic state of 315 million people, perfect isn’t an option. The post below is not really about Obama’s proposal, but rather why I think action like this is needed.

American higher education costs are out of control. The number I see quoted a lot is an average of $20,000 in debt for new graduates, but this is a case of the mean truly not being the message. Students from outside the Northeast (especially Texas and California) apparently pay a good deal less, putting some skew on the average. Also, some students get full ride scholarships, pulling down the mean but still leaving many with a boatload of nondischarable loans. If you run the numbers on plausible debt at Penn State’s flagship campus, for tuition, room and board, a student who got trivial aid (which is common) could easily walk out of a four year program with $60-80k in debt. That’s an awful lot of money. Seems absurd.

I wish I had data, but I don’t. For what it’s worth, my sense is that the histogram of my college educated peers’ undergraduate debt looks something like this:


If you object to my making up data, well then you take yourself too seriously. My story works with many different distributions.

There are broadly three types of college-educated,  Northeast Americans in their 20s:

Group 1: People who have no, or little debt. These are military academy grads (they pay in other ways), uber smart and diligent students who forsook first tier schools, talented athletes and the children of upper middle income (class ≠ income) households. The children of the truly rich are such a small fraction as to be irrelevant for our purposes.

Group 2: People who borrowed to finance most of their school expenses. This is the second modal group around $40k-$60k in total debt.

Group 3: People who effed up. I know of a few people who ran up over $90k to go to unremarkable state schools. There are also stories in newspapers about these cases. Yes, the Federal government guarantees the debt of IQ 105 Psychology majors. I’d really like to see numbers here.

My nonAmerican readers have to understand that in the U.S., higher education is a sort of religion. The university serves much the same role as temples did in premodern societies. For some reason it has become accepted that to be a real person, you must spend the ages of 18 to 22 living in a place with overpriced housing and food, and you must sit through generally useless lectures. Think of this as a recklessly drawn out heathen initiation rite. The imagery of college is idealized in media, and the wealthy line up to fund new buildings and professorships.  When future humans examine our society, they’ll compare our lecture halls and dormitories with the Roman temples and Persian ziggurats.

The problem is that college education is pretty useless, and certainly overprescribed. Certainly far too many students are admitted nowadays, watering down the curriculum. Bryan Caplan’s blogging convinced me that education is mostly about signaling. The evidence is damning and it lines up with my experience. Most of what I know, I learned on my own. I’ve learned vastly more economic theory and history from blogs (econlog, Econtalk, and money Money Illusion) and a few short Milton Friedman books than I ever did from lectures. The only area where I think schooling is generally necessary is in mathematics and programming. Though even here, there are plenty of self taught masters (Ed Snowden).  If you really think school makes you smarter, rather than simply displaying your underlying properties and at best honing them in a useful way, that’s your problem. Read Caplan’s posts. This link should get you started. It’s a big internet and it’s not my job to save the benighted.

Education is really about confidence and the need for ritual. People need to believe that everything is going to be ok. As Howard Bloom taught in the ill-named The Lucifer Principle, (has nothing to do with the Christian pantheon, it is about memes) people function better when they they can reasonably hope things will work out. There is an example in the book (which you should read) where he tells of a primitive tribe which asks a witch doctor to save a sick man. If the witch doctor ‘succeeds’ he is hailed as a powerful shaman. If he ‘fails’, well then those must have been some mighty evil spirits in the sick man, if such a skilled witch doctor couldn’t save him! The point is that bringing in the witch doctor met an important psychological need for the tribe. I think education does the same thing for us today (as well as the modern witch doctors: physicians, macroeconomists and most other experts).

People want to think their children are going to be ok. This is reasonable and governments are happy to facilitate.  This is a tricky chicken and egg problem. I saw a video once in an anthropology class that I still think of often. Down in Peru or Ecuador the natives in a small town have this tradition where they have to pay a white priest or town elder (I forget which, but he must be 100% Spanish blood) to say a blessing so that a statue of the Virgin Mary can be brought through the streets. It is a hefty sum and is negotiated. I’m sure a few of the Indians think “This guy is scamming us! We can bring this wooden broad through the streets on our own.”, but as long as the society buys into the idea that the priest is doing a needful service, anyone who protests is going to pay a social cost. This bad equilibrium could be broken if the Vatican would step in and say that anyone could perform the ceremony (or maybe not, but let’s say it could). Likewise, our own silly religious burden can be lightened by a leviathan.

The federal government should absolutely put some limits on what types of loans it will back. There are two issues. Firstly, the government should try to break the bad equilibrium by indexing the total amount of university tuition subsidies to the CPI, or some other index so that the government’s distorting effects are limited. Next, the Feds should not invite students to take on unreasonable debts. If you’re going to Harvard to study…anything…you’ll probably have a job at Goldman waiting for you. The Feds can safely back a sizable amount of debt for you (if you somehow got into Harvard and don’t already have a well off, high ability family, hooray emerging American caste system dystopia!). If however, you got into StateU, the government should take a closer look at your profile before backing your funding. The Federal government should absolutely not be in the business of making it easy for people to sabotage themselves.  Note that the bad equilibrium breaks down when all subsidies (mostly debt guarantees) are pulled. If you’re inclined toward a state-planned approach, the German system seems to work well and could probably be adapted to America. The key to the German system is that fewer people to go university, student’s are given realistic assessment of their potential career paths and there is no societal shame in apprenticeship or technical school.

To close, I’ll say that I don’t blame people for their sacrifices at the alter of education. If it wasn’t college it would be something else. We aren’t purely logical beings. We’re fancy apes and that’s just the way it is. But we need to find a cheaper, more socially productive way of meeting our need for symbolic, hope-stoking action. Obama’s new proposal seems like a step in that direction. Maybe we could build temples to the god of solar technology. At least then we’d get some useful infrastructure instead of a closet full of gender studies books.

Categories: Off Topic, rant, troll

Why we need to build efficient forecast

1/Aug/2013 Comments off

How long until the Fed starts an NGDP futures market?

Do you think Bernanke reads blogs?

Do you think Yellen even knows what the internet is?

How about the glorified sociology majors and clueless quasi Keynesians who’ll more or less run the American state through 2020? To say nothing of the knuckle-dragging Republicans and their drift toward tinfoil-hat Austrianism. Think it’s high on their lists?

We’ll be lucky if the Treasury rolls out NGDP-linked bonds in 5 years.  That’s a long time to have our thumbs up our butts.

Millions of people trade in the markets. The NGDP forecast is hidden within the information they aggregate. Our inability to distill that forecast, with some quantitative precision, springs only from a lack of imagination. If you have a better method, tell me, I’ll build it and give you all the credit.

The best way for us to convince people that the market’s are smarter than experts, is to show them.

Never argue. In society nothing must be discussed; give only results. -Disraeli

Categories: Uncategorized

Review of efficientforecast’s first FOMC statement

1/Aug/2013 Comments off

I think it was Taleb who said that you can basically ignore daily stockmarket movements under +/-1%, paying exponentially more attention outside those bounds. This suggests that yesterday’s FOMC statement had little impact on market expectations. This is precisely what our system implied, if you only looked at the pre 14:15 EDT forecast and the closing forecast.

However, the forecast became somewhat volatile during the Bernank’s speech. More volatile than the markets seemed.


At first, I blamed this on my foolish inclusion of an unreliable indicator like 5-year Treasury yields (up is good, unless down is good), though this only explains the general downward trend of the forecast through the late afternoon. Then, when I looked at my data mining records I realized the problem was from the TIPS market.


And then I found the problem. Because Yahoo! Finance doesn’t publish TIPS yields (that I can find), I’m instead scraping those from the source code of a certain financial website (owned by a certain person I desperately wish would run for President in 2016). However, this website doesn’t give away the goods for nothing, so our TIPS yield quotes are lagged about 30 minutes, whereas everything else is nearly real time, thanks to Yahoo!.

This means that the TIPS spread variation was driven by the 5 year bond yield. This means that the 5 year yield’s variation was basically counted twice, which caused our principal components to be distorted. This is a fixable flaw in the system.

Also, some of you may have noticed that the forecast fell off this morning. Don’t be alarmed, this is just because the GDP revisions.

Here is a comparison of the latest forecast, with yesterday’s close.  The discontinuities form GDP revision should be damped as I roll out the model averaging system. I also think that the y/y % change graph is probably not the best way to show the data, as it is so dependent on small changes in the level of GDP. We’ll have to keep experimenting.


Lastly, I just had a power outage, so the system will have a ‘dead spot’ of about 45 minutes, still working on moving the thing into the cloud.

Categories: EfficientForecast.com


The market-driven, intraday NGDP indicator is now available at efficientforecast.com.

All credit goes to Kenneth D’Amica, the Staten Island native, recovering economist and Silicon Valley expert in all things computer who is splitting this daunting task with me.

Japan, you are next.



Update: I would be grateful if one of my Japanese readers would leave a translation of “Expected NGDP Growth in next year” in the comment section.

Categories: Market Monetarism

McArdle on Detroit and unwisdom from a Vermonter

27/Jul/2013 Comments off

Scott Sumner had some thoughts on Detroit (what!). This reminds me of an article Megan McArdle had on Bloomberg News this week. McArdle’s article is worth reading and I’ll trim down a quote:

The first time I went to Detroit, I got lost. … It was getting dark, and I had no idea where I was or where I was going. I kept driving, figuring that eventually I’d reach either the city limits or downtown. What I do know is that the people around me didn’t think I belonged there. I was told as much. I stopped to get gas and an elderly gentleman stared at me. “Little girl, you do not belong here,” he said. Item: I am 6-foot-2[187cm]. Shortly thereafter, a cop pulled up…while I was waiting at a light, and rolled down his window. “Are you lost?” he said. I affirmed that I was. He asked me where I was staying. “Make a U-turn,” he directed me. Item: There was a no U-turn sign, somewhat tattered, directly in front of me. “Start driving,” said the cop. “Don’t stop at the lights until you get to downtown.” I think it was downtown. I don’t remember anymore. When cops start telling you to break the law, you get a little nervous.

I have to confess that I don’t understand the whole race thing in America. And by that, I mean, I really don’t understand it as in I am ignorant of the facts and don’t have an intuitive grasp, experience, a vocabulary or knowledge. The two sides of my family are from the whitest places outside Iceland: Vermont and Maine. I could probably write a book about how awkward old stock New Englanders are (hint we’re descended from religious nutjobs from East Anglia). The bedrock of my cultural context is snow, deer hunting, farm foods, pseudo-Christian environmentalist shame, lobsters/various chowders and sugar on…snow. I once heard about red lining or something in a mandatory course taught by a very angry (white) professor, but I spent most of the lectures preparing for linear algebra.

I’ll stop with the biographical details but my point is I’m not really from America, I’m from Vermont and can’t help it. For what it’s worth, I suspect that whatever explanation is really behind the Detroit tragedy has something to do with race/poverty/white flight/and industrial monoculture. Profound huh? Frankly, I think we should ask disinterested third parties to study America’s sociological issues, namely Chinese, Russian and South Asian academics living in their respective home countries. They can be relied upon to not have a dog in the fight.

So check out McArdle’s article.

Update: Upon reflection, I realize that I really just want to write a book on The Culture that is Vermont and seem to have misused this as an opportunity to dip a toe into that pond. All NGDP from here on I swear…

Categories: Off Topic

NGDP expectations live on Google Docs

The test version of the NGDP expectations system is running. A graph of the forecast in y/y % change format can been seen at this link.

Let me know in the comments if you’d like the data shown differently and I’ll see what I can do.

Big thanks to Lars “The Market Monetarist” Christensen for the shout out.

Categories: Uncategorized

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