Monday, December 25, 2017

Christmas Economics 2017

We are replaying our special Christmas podcast. The guest are Anna Goeddeke and Laura Birg, two economists from Germany. Together they coauthored an article in Economic Inquiry titled “Christmas Economics—a Sleigh Ride” that surveys the literature on the economics of Christmas. We covered a number of interesting topics like the seasonal business cycle, the deadweight loss of Christmas, and charitable giving during the holidays. 

Below is an excerpt from an earlier post when the episode first ran that touches on on the business cycle issues surrounding Christmas:
The seasonal business cycle discussion was particularly fascinating for me. There is a literature that starts with Barksy and Miron (1989) (ungated version) that shows most of the variation in aggregate economic measures like GDP comes from seasonal fluctuations. Yet most macroeconomists, myself included, typically start our analysis with seasonally-adjusted data. Here is a Barky and Miron summarizing their findings on GDP for 1948:Q2-1985:Q5:
The standard deviation of the deterministic seasonal component in the log growth rate of real GNP is estimated to he 5.06%, while that of the deviations from trend is estimated to be 2.87%. Deterministic seasonal fluctuations account for more than 85% of the fluctuations in the rate of growth of real output and more than 55% of the (percentage) deviations from trend. Business cycle fluctuations and/or stochastic seasonal fluctuations represent a relatively small percentage of the fluctuations in real output. Plots of the log level of real output (Figure 1) and the log growth rate of real output (Figure 2) make this point even more clearly. The seasonal fluctuations in output are so large and regular that the timing of the peak or trough quarter for any year is rarely affected by the phase of the business cycle in which that year happens to fall. 
Unfortunately, the BEA no longer makes available non-seasonally adjusted GDP data. However, we can look at other times series to see how large seasonal swings can be relative to recessions. For example, below is retail sales: 
 What makes this really interesting is that these wide swings in economic activity are not matched by similarly-sized swings in the price level. Most of the seasonal boom is in real activity. Put differently, there is an exogenous demand shock every fourth quarter where prices remain relatively sticky so real activity surges. This is a microcosm of demand-side theories of the business cycle. It seems, then, that more could be learned about broader business cycle theory from studying GDP and other time series in their raw non-seasonally adjusted form. That will have to wait, however, until the BEA starts releasing the data. 
There is much more in the show. Merry Christmas everyone!

Monday, December 11, 2017

Yes, Occupational Licensing is Making the U.S. Economy Less of an OCA

From a new working paper by Janna E. Johnson, Morris M. Kleiner:
Occupational licensure, one of the most significant labor market regulations in the United States, may restrict the interstate movement of workers. We analyze the interstate migration of 22 licensed occupations. Using an empirical strategy that controls for unobservable characteristics that drive long-distance moves, we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration.
Not only does this development have implications for workers, it also has macroeconomic implications. For the decline in interstate labor mobility, caused in part by occupational licensing, is making the U.S. economy less of an optimal currency area. From an earlier post:
So why does the decline in labor mobility matter for the U.S. economy? To answer this question, recall that the Fed is doing a one-size-fits-all monetary policy for fifty different state economies. That is, the Fed is applying the same monetary conditions to states that often have very different economies, both structurally and cyclically. For example, Michigan and Texas have had very different trajectories for their economies. Does it really makes sense for them both to get the same monetary policy?  
According to the OCA, the answer is yes under certain circumstances. The OCA says it makes sense for regional economies to share a common monetary policy if they (1) share similar business cycles or (2) have in place economic shock absorbers such as fiscal transfers, labor mobility, and flexible prices. If (1) is true then a one-size-fits-all monetary policy is obviously reasonable. If (2) is true a regional economy can be on a different business cycle than the rest of currency union and still do okay inside it. The shock absorbers ease the pain of a central bank applying the wrong monetary policy to the regional economy.  
For example, assume Michigan is in a slump and the Fed tightens because the rest of the U.S. economy is overheating. Michigan can cope with the tightening via fiscal transfers (e.g. unemployment insurance), labor mobility (e.g. people leave Michigan for Texas), and flexible prices (workers take a pay cut and are rehired).  
To be clear, a regional economy is not making a discrete choice between (1) and (2) but more of a trade off between them. Michigan, for example, can afford to have its economy a little less correlated with the U.S. economy if its shock absorbers are growing and vice versa. There is a continuum of trade offs that constitutes a threshold where it makes sense for a regional economy to be a part of a currency union. That threshold is the OCA frontier in the figure below: 

Circling back to the original OCA question, the decline in labor mobility documented above matters because it means that certain regions in the United States are becoming less resilient to shocks. This is especially poignant given the findings in Blanchard and Katz (1992) that interstate labor mobility has been the main shock absorber for regional shocks. Consequently, monetary policy shocks may prove to be more painful than before for some states. Unless increased fiscal transfers and price flexibility make up for the decline in labor mobility, the implication is clear: the U.S. is gradually moving away from being an OCA.
Johnson and Kleiner provide evidence that that suggests more licensing reciprocity agreements among states could increase interstate mobility. That, in turn, would help push the U.S. economy back in the direction of an OCA. 

HT Tyler Cowen

PS Here is my interview with David Schleicher on declining labor mobility. We discuss its implications, including the gradual retreat of the U.S. economy from the OCA criteria as noted above. Our conversation was based on his paper "Stuck! The Law and Economics of Residential Stability".

Why You Should Care about Divisia Monetary Aggregates

I recently had Bill Barnett on my podcast to discuss his work on Divisia monetary aggregates. Below the fold is a tweetstorm by Josh Hendrickson on why we should care about this work.

Thursday, December 7, 2017

Clashing Over Commerce

Doug Irwin's new book on the history of U.S. trade policy, Clashing Over Commerce, is now available for purchase. You may recall that I interviewed him about the book in this recent podcast. The podcast is embedded below. My colleague Dan Griswold has a nice review of the book over at National Review.  I learned a lot from the book and my conversation with Doug. I highly recommend it.