Wednesday, March 30, 2011

House Price Index Comparison

This is a rather technical note, probably of little interest to most readers. The most recent release of the Case-Shiller house price index (HPI) came out yesterday. The results were, unsurprisingly, not particularly good.

However, this reminded me that we should consider ourselves rather lucky to have such good data on house prices. During the inflation of the housing bubble in the first half of the 2000s, it was difficult to get reliable and detailed data on house prices in the US. The best data that was publicly available was a quarterly dataset put out by the Office of Federal Housing Enterprise Oversight (OFHEO), which has since been renamed the Federal Housing Finance Agency (FHFA). However, the OFHEO/FHFA HPI had certain shortcomings, primarily having to do with the fact that its analysis is restricted to houses with non-jumbo mortgages, so its results had to be used with a bit of caution.

Then along came the Case-Shiller HPI, which avoided the principal shortcomings of the OFHEO HPI. It wasn't publicly available until 2007, but now is released monthly. I've been curious about how different the two indexes are, or put another way, how flawed the OFHEO/FHFA data is when compared to the Case-Shiller HPI, which is widely considered to be more accurate.

The following table summarizes the differences between the two indexes over the past decade. I split the analysis into several major cities and two different periods to get a bit more texture.

I'm a bit surprised that the two indexes have been as close as they have been. No, they're not identical, and in one case the difference between the two reaches 10%. But overall, I'd say they match pretty well, particularly for something as inherently difficult to measure as house prices. It's always reassuring when two different methodologies come up with roughly the same answer.

Tuesday, March 29, 2011

Why Greece May Soon Get a New Currency

Is Greece really like Argentina? In 2002 Argentina abandoned years of painful efforts to maintain its currency’s hard peg to the US dollar, and shortly thereafter defaulted on its international debt. Greece will find it increasingly tempting to follow the same path, I argued yesterday.

But wait: It’s one thing for Greece to default on its debt, as seems increasingly likely. (Greek debt was downgraded further into junk status by S&P today.) But does it also have to drop the euro? And if so, how would that work?

When Argentina defaulted on its debt (thus freezing it out of international capital markets), it also dropped its uncompetitive fixed exchange rate, which helped tremendously to quickly pull the Argentine economy out of its tailspin in 2002. In Argentina’s case, in fact, its actions were primarily motivated by the desire to drop its peg. The default came afterwards and as a direct result, when dollar denominated debts suddenly became three times larger in local currency terms.

Greece’s situation is slightly different. The primary motivation for dramatic action in Greece’s case would be to reduce its debt service burden. Ideally, it would like to keep using euros even after defaulting on its debt.

But is that a realistic possibility? I’d say probably not. Imagine what will happen if they try to maintain the euro after defaulting. As soon as the Greek government announces that it will not make payments on its bonds, it will lose the ability to borrow money. Assuming no bailout from Germany (a safe assumption right now, I think), that means that the government will have to immediately balance its budget. Drastic cuts in government services, as well as possible tax increases, become inevitable – on the order of 10% of GDP. The economy tanks. At that point the Greek government will face a choice much like Argentina did in late 2001. It can allow the economy to collapse, the unemployment rate to skyrocket, protests to flood through the streets of Athens, and try to hold things together with the only credible economic plan being further years of debilitating deflation. Or, it can create its own currency.

Suppose that the Greek government begins printing pieces of paper – call them scrip, or IOUs, or New Drachmas – in order to pay government employees. In order to give the New Drachmas value, the government could promise to allow people to pay their taxes with them. Voilá, a new money is born, and the government has bought some time for the economy.

Note that this doesn’t mean that the Greek government has to prohibit euros from being used as legal tender; all it has to do is allow a second currency to come into existence. However, the government would probably have to impose capital controls and put a freeze on withdrawals from Greek banks in order to prevent a run on the banking system. (Note that in Argentina’s case, the government also forcibly converted all dollar bank account balances into the local currency.) The New Drachma would depreciate rapidly and substantially against the euro. There would undoubtedly be significant inflation in New Drachma terms, depending in part on how much of the government budget deficit was being plugged by the printing of New Drachmas. Greek citizens would effectively become poorer, virtually overnight.

But then the payoff would begin to be realized. Greece suddenly looks cheap to the rest of Europe, and by contrast the rest of Europe looks very expensive to Greeks. And as a result, the Greek economy would be in a position to take off.

So the choice that Greek policy-makers will face after default is this: (1) endure a spectacular economic crash, and then subsequently try to hold on through years of depression, deflation, and gradual impoverishment until high unemployment rates drive Greek wages down by enough to make the Greek economy competitive again; or (2) endure a spectacular economic crash, immediately make everyone in Greece poorer by introducing a local currency, but in so doing set the stage for a rapid resumption of economic growth.

I can’t predict what choice they will make – international political considerations will have to be weighed against domestic concerns. But I can tell you that the arguments in favor of creating a local Greek currency will seem pretty compelling to many.

Monday, March 28, 2011

Greece: This Decade's Argentina?

There's been a bit of discussion floating around about whether the US's deficit and debt situation makes it appropriate to draw comparisons with Greece. Of course, such a comparison is ridiculous for a number of reasons, not least because the US has its own currency. But Greece has been on my mind lately for unrelated reasons, including the following news:
Euro economists expect Greek default, BBC survey finds
Greece is likely to default on its sovereign debt, according to the majority of respondents to a BBC World Service survey of European economists. Two-thirds of the 52 respondents forecast a default, but most said the euro would survive in its current form.

...The forecasters the BBC surveyed are experts on the euro area - they are surveyed every three months by the European Central Bank (ECB) - and as well placed as anyone to peer into a rather murky crystal ball and say how they think the crisis might play out. The survey had a total of 38 replies and two messages came across very strongly.
Not only do I agree that default by Greece on its sovereign debt is quite possible... but I think it increasingly likely that policy-makers in Greece may decide that it is the least bad option at this point, particularly in the face of an increasingly hard-line attitude from Germany regarding bailouts (which will only be reinforced by recent election results).

The problem is easy to lay out: Greece has more debt than it can realistically make payments on, and being a euro country also has a currency over which it has no control. If it had its own currency, it would be in a classic debt crisis similar to several Latin American countries in the 1980s, or possibly Mexico in 1994.

However, it effectively has a fixed exchange rate with the rest of the euro zone, and has invested enormous political and economic capital in maintaining its committment to the euro. In that sense, the best analogy might be with Argentina in 2001, which was struggling to maintain a rock-solid fixed exchange rate with the US dollar through a currency board arrangement.

Argentina in the late 1990s had a slowing economy, uncompetitive industries, large current account deficits, and a vast amount of external debt denominated in a currency that was not its own. Sound familiar? In an effort to meet its debt payments while simultaneously keeping its exchange rate pegged to the dollar, the Argentine government squeezed and squeezed the economy. Finally, however, the resulting deflation and recession grew so severe that the government collapsed, and in early 2002 a new government dropped the peg to the dollar (after fiddling with a hybrid system with multiple currencies existing simultaneously) and eventually defaulted on its debt.

And look what happened.

From 1999-2002 Argentina suffered through years of a gradually contracting economy as it tried to maintain its peg with the dollar and service its external debts. When it finally dropped the peg in January of 2002 and then defaulted on its external debts, the economy (along with the value of the peso) crashed quite spectacularly.

But after a year or two, things didn't look so bad in Argentina. And through most of the 2000s, the economy did quite well, despite the loss of the ability to borrow internationally.

I'm not necessarily advocating that Greece follow the same path. However, I do think that the comparison with Argentina in 2001 is a very good one, and because of that, that there is indeed a very good chance that policy-makers in Greece in 2011 will reach the same conclusion that policy-makers in Argentina did in 2002.

Thursday, March 24, 2011

Return to the Center of the World

Gavyn Davies points us to a neat map created by Danny Quah at the LSE in his recent paper "The Global Economy's Shifting Centre of Gravity" (pdf). In it, Quah calculates "the average location of economic activity across geographies on Earth." Here's the map:

The westernmost black dot on the map represents where the Earth's center of economic gravity was in 1980 - somewhere in the Atlantic Ocean, a bit west of the Madeira islands. Since then it has drifted eastward to its current position near Cairo. The red dots then extrapolate the motion of this point until 2050, assuming the next 40 years are characterized by similar growth patterns to the past 30 years.

One of the things I love about this map is that it reminds me (in an admittedly purely superficial way) of one of my favorite economic models: the "gravity" model of trade flows, in which the trade between two countries or regions is roughly predicted by the size of the two regions and how far apart they are, just like physical gravity.

More substantively, I also find it interesting to think about this movement of the world's economic center of gravity as really just backtracking, an undoing of the point's westward movement that took place between about 1700 and 1900. From the time of the first pyramids until perhaps the 16th or 17th century, the world's economic center of gravity consistently hovered in the Middle East somewhere. Its movement westward into the Atlantic is really a relatively recent phenomenon. (Granted, if Quah's projections are correct, we may overshoot a bit as the point moves back east to where it came from, but that remains to be seen.)

It's not a coincidence that nearly all European maps of the world until the 16th century had the Middle East (often specifically Jerusalem) in the middle of the map. To medieval European map-makers, the Middle East was, and had always been, right at the center of the world, geographically, spiritually, and economically. Note that the requirement to represent that visually is what led to the classic T-O maps of the European Middle Ages. (The T-O maps are oriented with east at the top, with the Mediterranean forming the vertical stroke of the 'T', and with the Middle East right at the center of the world where the three continents meet.)

In that context, Quah's map above - and the changes in the world economy that it so nicely distills - could be interpreted as simply the correction of a temporary global aberration.

Wednesday, March 23, 2011

The Effects of Austerity in the UK

The Conservative government in the UK has just released an update on its budget plans for the next several years. Ryan Avent comments:
Still Cutting

YESTERDAY, we learned that British Chancellor George Osborne has a harder task ahead of him than he'd been envisioning. Inflation continues to come in ahead of forecasts; that's no surprise. But it also seems that the government is borrowing more than it had planned to, largely because tax revenues have come in lower than expected. That probably has something to do with the weakening British economy.

Mr Osborne's new budget makes no bones about the likely near-term trajectory for growth. Projected output growth for this year has been revised down to 1.7% from 2.1%, and growth next year may be just 2.5%. Even so, inflation projections are higher. Prices are expected to rise between 4% and 5% this year, though the government reckons the increase will drop to 2.5% in 2012.
Last year the Cameron government announced that it would pursue an austerity drive in an effort to reduce the budget deficit, cutting government spending and increasing taxes by about £9bn in 2010, £41bn in 2011, and £66bn (about 4% of forecast GDP) in 2012. Because of this sharp and determined fiscal contraction, it forecast that the budget deficit would fall from about 10% of GDP in 2010 to around 3.5% of GDP in 2013.

That turns out to have been a bit optimistic. Unsurprisingly, raising taxes and cutting government spending by a couple of percentage points of GDP over the past year has contributed to a recent sharp slowdown in the British economy, as shown below.

This recent decline in economic activity in the UK is reflected in the forecasts on which the government's new budget is based. The next chart shows how the slowdown in the British economy has forced the Cameron government to lower its forecasts for GDP growth compared to 9 months ago.

Naturally, reduced economic activity in the UK means that the budget deficit will not fall by as much as hoped. The budget just released indicates that the sharp spending cuts and tax increases will lead to only about half the hoped-for deficit reduction in 2011 and 2012, thanks primarily to the slowdown in the economy caused in large part by... sharp spending cuts and tax increases.

All of this is unsurprising. But it bears keeping in mind as the fiscal clown show in Washington continues, because it provides yet another piece of evidence that mainstream new-Keynesian macroeconomic theory does an excellent job of explaining and predicting real economic events. Which is why we can be fairly sure that efforts to cut government spending during a tentative and rather delicate economic recovery will have a strong negative impact on the economy, and will probably end up failing to meet deficit reduction goals as a result.

Monday, March 21, 2011

The Unemployment Rate and Compensation Growth

Last week I took a look at the way that higher labor productivity has not translated into higher worker compensation, particularly during the 1980s and 2000s. This is at odds with classical labor market theory, which suggests that as workers become more productive, their increasing value to firms should cause their wages to be bid higher so that their compensation rises accordingly.

There are a number of possible explanations for the divergence between productivity and compensation, and for how this may play into the broader phenomenon of stagnant wages for average workers. Part of the explanation is that an increasing share of worker compensation takes the form of benefits rather than wages and salaries. As shown in the chart below, fully one-fourth of worker compensation in 2010 took the form of benefits. (Source: BEA personal income data.)

This upward trend has been driven almost entirely by the rise of health care costs in the US, and the corresponding rise in health insurance premiums. Note that the one dip in the series in the late 1990s was due to the widespread implementation of HMOs - but they clearly proved to provide a one-time gain rather than a permanent increase in health insurance efficiency. So part of the reason that workers' paychecks have not been rising is directly attributable to the rise in health care costs in the US.

But that's not the whole story, and doesn't address the question of slowly growing total compensation (as opposed to stagnant wages). There are, I think, reasonable arguments to be made about social and political factors, such as the decline in the power of unions. Along similar lines, Mike Konczal recently wondered to what degree this could be due to the Fed's consistent and explicit desire to prevent wage increases.

And then there's plain old supply and demand as a possible explanation. What did the 1980s and 2000s have in common from a macroeconomic point of view? One answer is this: multi-year long periods of high or rising unemployment rates.

The chart below shows, in blue, the seven-year moving average of the portion of increased labor productivity that were paid to workers in the form of higher compensation. During the 1960s and 70s, for example, workers typically received around 80% of gains in labor productivity over any given seven year period. Then during the 1980s that portion fell to about 40%. Meanwhile, the series in red is the seven-year moving average of the unemployment rate.

To make it a little easier to interpret, I've color coded the 60 years shown in the chart by shading the periods when workers were losing their share of productivity growth red, while the periods when workers were increasing their share of productivity gains are shaded in green. This helps to make it quite clear that "green" times - i.e. times when workers seem to be enjoying more of the gains in productivity - were periods when unemployment was falling. "Red" times (I guess it actually looks more pink than red in this chart) are clearly associated with periods when the unemployment rate was stagnant or rising.

One implication of this is clear: the high unemployment rate in the US right now, which is expected to decline only slowly over the next several years, is likely to mean that it will be a long time before worker compensation begins to rise as rapidly as worker productivity. Put another way, the overall level of high unemployment right now not only has the obviously enormous personal implications for those who are unemployed -- it also is likely to seriously affect the compensation of workers who have never lost their jobs, for years and years to come.

The Fiscal Clown Show

Outsourced this morning to Ryan Avent at the Economist:
About that deficit

It's hard not to be cynical about government policymaking, and this is why. Forget about fiscal stimulus for the moment. At present, both Republicans and Democrats are committed to cutting the government's budget in the current fiscal year. These cuts will almost certainly threaten programmes with positive economic returns; job retraining programmes are on the chopping block, for instance. Certainly few party leaders are seriously discussing new spending on programmes with positive economic returns.

...Libya poses no threat to America. It's far from clear that American intervention will yield positive outcomes for Libyans. And yet here America goes, launching massively expensive sorties, dropping massively expensive ordnance. And obviously it isn't just America, Britain managed to join the fight despite its austerity drive.

The point here is not that government spending should never be cut. It should be, and it almost certainly must be if America is to avoid a serious fiscal crisis down the road. But for a very long time now, much of official Washington—Democratic and Republican leaders, along with policy intellectuals and op-ed pages—has acted as though an immediate fiscal crunch loomed. This was never true. American debt levels may be an issue by the end of the decade, but they aren't now, and deficits are forecast to fall sharply for the next few years. Bond yields have rarely been lower. The fiscal problem is long-term, not short-term. And yet dire fiscal scenarios have been used to sell painful short-term cuts, some of which were necessary but could have been accomplished later, many of which weren't necessary at all.

I have nothing to add to this, except that this fiscal clown show makes me want to pull out my hair while jibbering incoherently. I try to keep that to a minimum, however.

Friday, March 18, 2011

The Yen and the Earthquake

Dramatic events in currency markets this week. First, the value of the dollar vs the yen fell substantially on Monday through Wednesday. Then on Thursday the plunge in the yen/dollar exchange rate deepened, finally to be followed by the announcement yesterday evening of a highly unusual coordinated action by the world's major central banks to prop up the dollar against the yen.

LONDON (MarketWatch) — The United States and Canada joined other Group of Seven nations Friday to sell Japanese yen as the world’s major industrial nations intervened jointly in the foreign exchange markets to help Japan cope with last week’s devastating earthquake and tsunami.

The Bank of Canada confirmed it sold yen for Canadian dollars as North American trading got under way. The New York Federal Reserve also sold yen for U.S. dollars, traders and a person familiar with the situation said.

Whether joint intervention will be effective in the longer term remains to be seen, but the dollar surged versus the Japanese unit after the G-7 announced during Asian trading hours that members would move jointly to weaken the yen. The dollar traded at ¥81.15 in recent action, up from about ¥79.14 before the announcement.
What's going on here? Why have traders been so eager to buy yen in the wake of the disaster in Japan? After all, wouldn't common sense suggest that the disaster will weaken the Japanese economy, and by extension weaken the yen?

But clearly common sense is missing something in this situation. It's always difficult to forecast exchange rate movements, largely because there are so many different forces that have often countervailing effects on currencies, and it's rarely possible to tell which force is going to prevail. But to help understand the complexity of the issue, here is a list of a few forces (note that this is certainly not an exhaustive list) that will be acting on the yen as a result of the disaster:

1. Repatriation of capital. Japanese corporations and individuals will need to sell off some of their financial assets in order to rebuild their physical assets, such as factories and homes. To the extent that some of those Japanese-owned financial assets are in other countries, they will need to sell foreign currencies and buy yen. This force tends to increase the value of the yen.

2. Diminshed economic growth in the short term. For the rest of March (and possibly a bit longer), economic activity in Japan will be sharply curtailed due to destruction of assets as well as supply chain disruptions. This force (particularly when accompanied by firmly expansionary activity by the Bank of Japan) tends to weaken the yen.

3. Increased economic growth in the medium term. Once damage has been controlled and supply disruptions have been overcome, the serious cleanup and rebuilding will begin. In addition, Japanese firms will be trying to make up for lost production. Hence economic growth through the remaining 3/4 of the year is likely to be higher than we would have guessed two weeks ago. This force tends to strengthen the yen.

4. Lower national savings in the medium term. The Japanese economy will be using some of its savings to rebuild. This makes it likely that Japan will not export as much capital (i.e. it will not run such large current account surpluses) as it would have otherwise, much as with West Germany post reunification with the East. Smaller current account surpluses are effected in part through a stronger yen.

5. Decreased productivity. It's possible that the disaster has made a serious dent in the overall productivity of the Japanese economy through the destruction of physical assets and efficient supply networks. If so, then this loss in relative productivity may require a compensating depreciation of the exchange rate in order to maintain a given level of exports. This force tends to weaken the yen.

With all of these different forces to take into account, I am not willing to guess about how the yen/dollar exchange rate will move over the coming months. But a lot of traders apparently believe that the forces that tend to make the yen stronger will be more powerful than the forces tending to make the yen weaker. Hence this week's activity in the currency markets.

As a last note, let's throw a bit of anecdotal evidence into the mix. The following chart shows the exchange rate of three countries that suffered catastrophic natural disasters: Japan with the 1995 Kobe earthquake, Indonesia with the 2004 tsunami, and Chile with the massive 2010 earthquake. (I couldn't find exchange rate data for Haiti, otherwise I would have included that one as well.)

As you can see, after the 1995 earthquake the Japanese yen strengthened considerably, which is consistent with what we've seen this week. Meanwhile, for Indonesia and Chile the various effects apparently roughly canceled each other out, leaving their exchange rates with no noticeable change. Only time will tell how things will play out this time around.

UPDATE: Greg Ip at the Economist suggests that much of the recent rise the yen's value is due to the abrupt unwinding of short positions taken on the yen - the so-called "carry trade". I'm sure that Greg is right about that; add it to the list of factors influencing the yen exchange rate. However, it does raise the question of exactly why so many investors have just this week suddenly sought to unwind their short positions on the yen. Items #1 through #5 above probably have something to do with it.

UPDATE #2: One additional possible mechanism for the earthquake to have caused the sudden increase in the pressure on the yen to appreciate is highlighed by Rebecca in comments: the recent fall in US interest rates - exacerbated by the possibility that the Japanese disaster will be a further drag on the global recovery - has encouraged an unwinding of the carry trade, and more generally has made the dollar less attractive relative to the yen.

UPDATE #3: Rebecca Wilder provides a nice comparison between this intervention and previous central bank exchange rate interventions.

Wednesday, March 16, 2011

Growing Productivity, Stagnating Compensation

Yesterday Ezra Klein had a chart (from a paper by Larry Mishel and Heidi Shierholz at the EPI showing that both private sector and public sector wages have been stagnating for the past several years, and have certainly not kept up with productivity growth. I think it’s useful to look at the relationship between productivity and compensation over a longer time horizon.

The following chart shows labor productivity and real hourly compensation since 1950. (Data from the BLS.) Two things strike me particularly about this graph. The first is how closely the two series track each other between 1950 and 1980. During those 30 years labor productivity in the nonfarm business sector of the US economy rose by 92%; real hourly compensation paid to workers rose by a nearly identical 87%. Classical economic theory says that is exactly what we would expect – as workers become more valuable to firms by producing more output with every hour of labor, firms should compete with each other to employ them, driving up wages by an equal amount.

The second striking feature of this picture is, of course, how much the two series have diverged since the early 1980s. Output per hour of work in 2010 was 87% higher than in 1980, while real hourly compensation was only 38% higher.

The table below shows changes in labor productivity and hourly compensation by decade. Again, let me draw your attention to two features. First, this data confirms that the “great productivity slowdown” of the 1970s and 80s seems to have been vanquished; over the past 15 to 20 years US businesses have been improving productivity at rates as high as during the 1950s and 60s. Yet more evidence that Tyler Cowen’s “Great Stagnation” is not a productivity story.

The second remarkable feature of this table is that the vast majority of the gap between productivity and hourly compensation comes from the 1980s and 2000s, while during the 1990s workers shared in productivity gains nearly as fully as they did in the 1960s. And that, of course, leads us directly to the $64,000 question: what was it about the 1980s and 2000s that made it so difficult for workers to reap the fruits of their more productive labor?

Tuesday, March 15, 2011

Environmental Fallout from the Japanese Earthquake

I've had a recurring thought today, among the many others jostling for my attention as I follow events in Japan: the earthquake there could have serious, substantial, unexpected long-term environmental consequences across the globe.

My thinking is this (and I'm not trying to claim that I'm the only or first one to think of this): regardless of the eventual outcome of the Fukishima nuclear plant crisis, what has already happened is surely enough to increase the resistance to (and cost of) adding more nuclear power generation capabilities to the grid in democratic countries. Just look at Germany, which just today shut down a number of its nuclear power plants.

If you accept that the disaster in Japan is certainly going to drive up the cost of nuclear power power generation in democratic countries -- whether through outright bans or simply through increased regulation and safety requirements -- then you must conclude that one result of the disaster will surely be an increase in the carbon emissions that democratic countries make into the atmosphere. Petrochemical-based power generators are simply going to seem more appealing than they already are, and more of them will be built than would have been the case in the absence of some plate tectonic movements in the ocean near the coast of Japan on March 11.

Whether that's a good or bad thing is, I believe, something that reasonable people can disagree about.

Continuing Crisis

I have to admit that I've spent much of the past few days riveted to news coverage of the emerging crisis at the nuclear power plant in Fukushima, Japan. Given the demands of work and family it would be hopeless for me to try to keep up with every twist and turn in events there... but I have been following enough to know that the latest developments are not good. Very not good.
New fire hits Japan nuclear plant

Fire has again broken out at the quake-stricken Fukushima Daiichi nuclear plant in northern Japan.

The blaze has struck reactor four, where spent fuel rods are kept. The plant has already been hit by four explosions, triggering radiation leaks and sparking health concerns.
I have found the BBC's coverage to strike a good balance between speed, accuracy, and depth, but you can follow the story from a host of news sources, obviously.

I'll try to turn my mind back to economic issues in the next day or two...

Monday, March 14, 2011

Economic Effects of the Disaster in Japan

Like many other people around the world, I spent a sizeable portion of this weekend watching, with growing horror, the unimaginable scale of the disaster in Japan unfold before our eyes. There's no way to total up the cost of the thousands of dead and hundreds of thousands who survived but lost homes, businesses, loved ones.

And yet, they don't call us the dismal scientists for nothing. People have been asking me if I could provide some perspective on the economic impacts of the disaster. So while there's no way to measure pain, anguish, death, and despair, I can share my thoughts about how this disaster is likely to affect certain statistics that are dutifully calculated and recorded by governments, and that a lot of people seem to care about, like GDP.

Short Run Economic Disruptions

Unsurprisingly, in the short run there will be a substantial negative impact on Japan's economy, both for physical as well as psychological reasons. The stock market in Japan plunged today, and Japan's central bank has stepped in to provide emergency liquidity to Japan's financial sector.

Lots of businesses will be closed or severely disrupted for some time to come. For example, a substantial portion of Japan's auto production is likely to be shut down for at least the week. The electronics industry may be even more affected. This lost production will show up directly and noticeably in Japan's GDP statistics for the first quarter of 2011.

However, my guess is that supply and production disruptions will be substantially resolved by the end of March, and so there will be little impact on GDP in the second quarter of the year. After the earthquake in Kobe in 1995 it is estimated that lost production totaled at least $50 billion, according to a 10-year retrospective report (pdf) put out by Risk Management Solutions, Inc. in 2005. It wouldn't surprise me if it was higher than that this time, resulting in a loss of over 1% of Japan's GDP (which would mean an annualized contraction of 4% in Q1 2011).

Physical Property Losses

In addition to the production disruptions, of course, tremendous quantities of tangible assets have been destroyed by the disaster. But it's worth noting that the loss of an asset doesn't actually show up anywhere in GDP statistics. GDP measures how much stuff (goods and services) was produced during a period of time - it says nothing about how much stuff people and businesses already have and can enjoy using, such as tangible and environmental assets. (As an aside, let me note that that is one of the main shortcomings of GDP as an indicator of economic well-being.)

How much was lost? Here are two back-of-the-envelope calculations to help give us an estimate. First, the RMS report on the 1995 Kobe earthquake estimated that infrastructure and property damage was over $100 bn. That seems like a reasonable place to start to estimate the damage from this disaster; the Kobe earthquake was not followed by a tsunami and thus did not leave the same swathe of total annihilation, but on the other hand it hit an area of Japan that was much more intensively populated and economically developed.

The second way I'd estimate property losses is by noting that, in the US, households and nonfinancial businesses had roughly $45 trillion in tangible (i.e. physical) assets in 2010, or roughly $140,000 per capita. For Japan, it's probably close enough to the same number that we can use it provide a rough sense of scale. The Japanese government has stated that nearly 400,000 people have been left homeless by this disaster. Assuming that those 400,000 people have lost everything they had, and assuming that perhaps twice that number have lost at least a portion of their physical property, then this calculation suggests that the loss of private property is in the neighborhood of $70 to $100 billion. Add to that another $20 to $50 billion in destroyed infrastructure (roads, ports, railroads, airports, power grid, etc.) and we get an estimate of perhaps $100 to $150 billion in lost physical assets as a result of this disaster.

The Rebuilding

In the medium and long run, many or all of these destroyed assets will be replaced. Some of the funds to do this will come from insurance companies, some will come from the Japanese government, and a substantial portion will come from the savings of individuals and corporations, who will have to dig into their financial assets to start replacing their lost physical assets. Thus we can expect savings rates in Japan to fall for both households and corporations.

And then, of course, these funds will be used to pay for the massive cleanup and rebuilding effort. If we assume that much of the rebuilding money will come from financial assets that would otherwise not have been spent right now, then we could easily expect to see an extra $50 to $100 billion in economic activity over the remainder of this year, largely or completely making up for the lost production of the disaster's immediate aftermath. Construction companies will be the first beneficiaries, of course, but so will producers of all sorts of other physical property that will have to be replaced, such as shipbuilders, car manufacturers, household appliance and electronic companies, and producers of all capital goods used by corporations to manufacture, sell, and distribute their products.

I therefore expect a fairly strong and broad-based economic recovery during the remainder of 2011 from what might be a very ugly Q1 figure for GDP growth in Japan. And if 2011 GDP is unchanged in total, but more of it is squeezed into the remaining three quarters of the year, that means that the pace of economic activity will have picked up. Who knows, it might even be enough to cajole the Japanese economy out of the decade-long deflationary spiral it has been trapped in. While no one would suggest that such an outcome would make worthwhile the horror that Japan is going through right now, let's hope that this disaster does end up leaving something at least slightly positive in its wake.

Friday, March 11, 2011

The Survivors of the Famine

This week The Economist takes on something that I've highlighted recently: the relatively good perfomance of the US manufacturing sector.
Rustbelt recovery

Against all the odds, American factories are coming back to life. Thank the rest of the world for that

ACME INDUSTRIES is a small contract manufacturer with only ten big customers. But those customers are a cross-section of the industrial economy, spanning mining, oil, transport and construction. Right now, Acme’s order book is bulging. “Everyone is up across the board,” says Bob Clifford, the company’s head of sales and marketing.

...For the first time in many years, American manufacturing is doing better than the rest of the economy. Manufacturing output tumbled 15% over the course of the recession, from December 2007 to the end of June 2009. Since then it has recovered two-thirds of that drop; production is now just 5% below its peak level.
As I've said before, I happen to think that this is more than just the cyclical recovery of a badly battered industry. (Though it is certainly that.) The fact that manufacturing output and employment has been leading this recovery, rather than lagging it as is typically the case, suggests that we may have reached a sort of inflection point - the dramatic offshoring and shrinkage of the US manufacturing sector of the past 25 years may be coming to an end.

One analogy that I like is to compare factories in the US over the past 25 years with people living in Europe in the 19th century. Attractive new possibilities, and the chance to make great fortunes, provided a strong incentive to migrate overseas. And so there was a steady flow of migration drawn on by the chance for a better life in another country.

Simultaneously, though, there are plagues and famines that happen from time to time. Think of these as recessions in our analogy. These plagues and famines periodically wipe out wide swaths of the population, and also provide many people who haven't yet been killed by them a newly urgent reason to migrate overseas, as they figure it may be their best chance of survival.

We've been through three such famines over the past 25 years (1990-92, 2001-02, and 2008-09), and each one resulted in a substantial fall in US manufacturing output and employment. But those factories that are now left in the US - the survivors - are hardy, strong, and will clearly not easily be swept away. Furthermore, the incentives for companies to migrate their manufacturing operations overseas is finally diminishing, both because the attractiveness of moving operations to another country is not as great as it used to be, and because those factories that are now left in the US apparently have a very good reason to be there (for example to be close to customers).

I don't think there will be a complete halt to offshoring, of course. Companies will continue to move pieces of their operations around the globe as market conditions dictate. But I do think that the dramatic trend of the past generation of massive amounts of US manufacturing being moved to other countries is coming to an end. Those factories that are now left in the US are the stubborn survivors, and most of them are not about to pick up and leave at this point.

Thursday, March 10, 2011

Monetary Policy and Regional Divergences

Gavyn Davies of the FT has a thoughtful piece up about the way that the Fed and ECB have generally tended, until recently, to act similarly. In particular, they have both tended to be in tightening or loosening mode at the same time:
Strange bedfellows – the Fed and the ECB

The behaviour of the world’s two main central banks, and the relationship between them, have profound effects on global financial markets. As a broad rule of thumb, the ECB (and the Bundesbank before it) have tended to act in a very similar manner to the Fed, except about 6-12 months later. In fact, that is one of the most well established rules in the analysis of monetary policy making.

...For three decades it has been fairly unusual for the ECB or the Bundesbank to strike out in an entirely different direction from the Fed. Yet that is what seems to have happened last week, when the ECB clearly threatened an imminent rise in interest rates, while leading figures at the Fed equally clearly reiterated their very accommodating stance on monetary policy.

Why has this divergence of opinion developed, and what will be the consequences? I will return to this subject in the near future.
There are a few reasons for the present divergence, I think. But a crucial one has to do with the fact that the Fed has a relatively coherent national economy to manage, while the ECB has authority over an area that, while similar in geographic reach and population to the US, encompasses much wider divergences in economic performance.

Here's a picture of the unemployment rates in the Euro-15 zone (which basically consists of the the original euro adopters), along with unemployment rates in the 5 largest euro economies.

Even when times were good, differences in unemployment rates among the major euro countries were 5 percentage points or more. And now, of course, the differences among the euro countries are far, far larger. And note that this chart doesn't even include the troubled peripheral countries such as Greece, Portugal, and Ireland.

Now look at the same chart for selected regions of the US. The Census divides the US into 9 divisions; to keep the chart a bit cleaner, this picture only shows the two best and two worst performing regions of the US, measured by average unemployment rates from 2001-2010.

Until the Great Recession, unemployment rates in the very best-performing regions of the US were less than 2 percentage points lower than in the very worst-performing regions. And even now the difference is less than 5 percentage points.

What does this mean for monetary policy? One thing that's going on now, I think, is that the ECB is conducting monetary policy exclusively based on the economic situation of the best-performing countries in the euro zone (which could possibly, by some stretch of the imagination, warrant an end to expansionary monetary policies). Meanwhile and somewhat inexplicably, the ECB is clearly ready to completely ignore the plight of the euro countries that are doing so badly right now. It's a classic illustration of why Europe's currency union has been so problematic for so many economists (at least on the US side of the Atlantic). It's also the reason why I wouldn't be surprised if we see more efforts (small-scale though they may be) in Europe's peripheral areas to try to escape the euro trap that they're in.

In the US, on the other hand, Ben Bernanke has a much easier job of it. Regional differences are not so great in the US, so he doesn't have to just make monetary policy based on how one part of the US is doing, regardless of the possibly substantial costs to other parts of the country.

I would never argue that Bernanke has an easy job to do... but at least his task seems a bit simpler compared to what central bankers are facing on the other side of the Atlantic.

Wednesday, March 09, 2011

Speculating About Oil

As usual when the price of oil rises, there are some people out there who would like to blame "speculators". In response, let me note two things. First, speculation can only drive up the price of a commodity or asset through the hoarding or storage of that asset. Second, I haven't seen any evidence yet that there has been hoarding or storage of oil.

The blue line in the following picture shows the amount of oil being stored, with the exception of the US strategic petroleum reserve, expressed in terms of the number of months of US consumption it would satisfy. The red line shows the price of oil.

Just as during the last spike in prices in 2008, there is no evidence that people have been, on net, hoarding (and thus speculating in) oil. Yes, it is certainly true that some people have been speculating that oil prices will rise, and they have been buying futures contracts or actual physical oil in storage. But there have apparently been an equal number of people willing to part with their stored oil, as evidenced by the lack in any net increase in oil stocks.

When it comes to oil, it seems, plain old supply and demand considerations are enough to explain the fluctuations in oil prices without invoking the specter of speculators.

Nine Hundred Years of Productivity Growth

On the subject of how productivity growth affects our daily lives, this one is outsourced completely to Brad DeLong, as he evaluates the effect of productivity improvements on the expense and value-added implicit in committee meetings in his 21st century university:
We have already gone through the great transformation by which the general business of life--growing and processing our food, building our shelter, weaving our clothes, and telling ourselves stories for information and entertainment--has been extroardinarily, comprehensively automated. And yet we have found things to do.

Consider... Total economic value added produced in the Durant Hall Basement Conference Room at Monday lunchtime was $3215.50.

Of this, 1.7% was food and shelter. 5.0% was making the food tasty and delivering it on target on time. 0.05% was for items--tables, chairs, carpet, projector--to make our meeting more productive. And 93.3% was the work of attempting to plan and revise U.C. Berkeley's breadth requirements.

Contrast this with a similar academic meeting taking place at Sorbonne 900 years ago with the same purpose...

A total of $5650 is the cost of having the same lunch meeting. Academic labor is 53%. Bare calories and shelter are 26%. Food processing and delivery are 19%. And that leaves just a smidgeon--under 2% of the meeting cost--for furniture, parchment, inkstones, etc.

Even in an institution as rarified as one of the world's leading universities, the share of economic activity of even the most-high powered meeting--multiple deans, Nobel Prize winners etc.--that was simple basic food and shelter was about 50% a millennium ago, and is down to 2% today.

In short, the automation revolution already happened. And we adjusted.
Thank you, internet, for dramatically increasing my productivity by allowing me to write this post without having to write it...

Tuesday, March 08, 2011

The Internet and Consumer Surplus

Brad DeLong takes on Tyler Cowen's astonishing argument that the internet is, in Annie Lowrey's paraphrasing, "not as revolutionary as we think it is." Cowen is quoted as saying:
"we have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy... When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sectors of our economy have been slowing down and the big technological gains are coming in revenue-deficient sectors."
He contrasts the internet to railroads, which clearly produced substantial revenues and profits for identifiable individuals and companies in the 19th century. By contrast, his argument seems to be, the internet just drives down costs but doesn't create new revenue.

Really? The internet is "revenue-deficient"?

Let me rephrase the question implicit in Cowen's argment: is the internet something that people are willing to pay for? Would anyone reading this blog today be willing to pay for internet access? Does no one reading this post actually spend money to be able to do so?

Based on my experience, the answer is a resounding YES to all of these questions. Of course the internet provides intensely valuable services - services which hundreds of millions of individuals are willing to pay for every day. Add up some of the following, and tell me what you get: monthly internet subscription fees paid to telecom companies; spot charges paid to access Wi-Fi on airplanes and in cafes; purchases of hardware whose primary function is to access the internet; advertising revenue earned by thousands of content sites. Add that up, and tell me what you get. I'm guessing it's a pretty big number. It would not surprise me if it were at least as big, proportionally, as the revenue earned by railroads in the middle of the 19th century.

Yes, the technology revolution of the past generation has driven down the cost of certain things (primarily information) in a relentless fashion. But wasn't the primary contribution of the railroad to dramatically drive down transportation costs? Yes, lots of companies that have tried to make money from the internet have failed. But isn't that true of all competitive industries?

Lowrey makes an astute observation about this in her piece in Slate:
But revenue is not always the end-all, be-all—even in economics. That brings us to a final explanation: Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient.
And this is Brad's point, as well. Much of the benefit of the computer and internet revolution of the past generation has been in the form of increased consumer surplus. And that, I would like to emphasize, has everything to do with market structure. The internet is a hyper-competitive marketplace. Intense competition drives down costs, drives prices down to the suppliers' marginal costs, and leaves most of the benefits in the hands of consumers. Can anyone think of a more apt description of what the internet has done?

Winners and Losers in US Manufacturing

Manufacturing in the US has recently been doing quite well, as I've noted before. But as I continue to ponder exactly what is driving US manufacturing growth, I thought it might be interesting to get a better sense for exactly which types of manufacturing activities have been doing particularly well and particularly poorly.

Of course we all know that manufacturing employment in the US has been on a secular downward trend for about 3 decades now. This has been driven largely, I would argue, by technological advances that have dramatically increased manufacturing productivity. As illustrated by the picture below, improvements in productivity mean that the US manufacturing sector now requires a third fewer workers to produce the same output compared to the year 2000. That largely explains the 33% drop in manufacturing employment in the US between the years 2000 and 2010.

But some sectors of US manufacturing have done better than others. To get a better understanding of this, I put together a table showing the change in manufacturing employment in the US during the 2000s by type of manufactured product. Here's the result:

As the table above shows, lumber, primary metals (e.g. steel), motor vehicles, and textiles & apparels have done particularly poorly. But other sectors have done relatively well, such as the aerospace industry, some types of fabricated metal products (chiefly industrial equipment and intermediate inputs to other manufactured goods), medical equipment, food & beverages, and chemicals.

Can we generalize about the differences between sectors that have performed well compared to those that haven't? It's a very old and well-investigated research question (far predating the famous Leontief paradox, which provided a surprising answer to that question in the 1950s), but it's still interesting to think about.

To some degree, I think you can see the impact of international trade here. Some of the products that seem to be more sensitive to international competition (e.g. textiles & apparel) do worse than products that are probably less vulnerable to international competition (e.g. food and beverages). But I think a more consistent theme is that the strongest sectors in US manufacturing are those that require more highly-skilled labor, and/or are more highly automated. Not a surprising result, but perhaps reassuring nonetheless.

Monday, March 07, 2011

Resolving the Paradox of Thrift in Spain

This is a creative way to get people to spend part of their savings:
Spain town reintroduces peseta to boost economy

A small town in northern Spain has decided to reintroduce the old Spanish currency - the peseta - alongside the euro to give the local economy a lift.

Shopkeepers in Mugardos want anyone with forgotten stashes of the old cash at home to come and spend it. It is nine years since the peseta was official currency in Spain. But Spain's economic crisis has forced some to be inventive. The hard times have seen thousands of businesses close and more than two million jobs go.

More than 60 shops in Mugardos, a small fishing town in Galicia on Spain's northern coast, are accepting the peseta again for all purchases, alongside the euro.
This is a good reminder that we're still very much in the classic situation described by the notion "paradox of thrift". The boom leading up to the Great Recession (in Spain just as much as in the US) was in large part the result of excessive household borrowing. Over the last two years households have been very busily and effectively reducing their debt burdens by saving more (or paying down their debt, as the case may be). This is very good news for individual households, as well as for medium-term prospects for the recovery.

But the paradox is that what's good for individual households - rebuilding their balance sheets - is bad for the economy. To spark a solid recovery in the short-term (especially when governments in the US and Spain both seem set to enact contractionary policies in 2011), households need to be willing to spend, not save.

So I applaud some clever thinking in Spain that may help them to square this circle; this plan allows people to spend some peseta savings that were sitting in the figurative mattress, while simultaneously reducing their euro-denominated debt. Who said paradoxes were unresolvable?

Sunday, March 06, 2011

Simple Foods: Tortilla Española

Another weekend, another deeply satisfying, simple dish. Tortilla española, also known as tortilla de patatas, is a true staple in Spain. (It has nothing to do with the Mexican tortilla, by the way, other than the superficial resemblance, being round and yellowish.) It's usually translated as a "potato omelet", though I would say that it's more like a crustless quiche with a potato filling than an omelet. Most Spanish families have a tortilla for dinner once or twice a month, if not more: sort of the functional equivalent of mac-n-cheese in the US (another excellent Simple Food, by the way). And you'll find a tortilla sitting on the counter of just about every bar in Spain, from which little pieces are served up to customers along with their small glass of beer or wine.

It's a simple, simple dish, a magical combination of just five ingredients: olive oil, potatoes, onions, eggs, and salt. The potatoes and onions, sprinkled with salt and cooked in the olive oil, create a composite that is soft yet al dente, savory yet sweet (from the slight carmelization of the onions), and wholly suffused with the deliciousness of olive oil. Add it to the substrate of the beaten eggs and you get pure, simple happiness in a 10-inch diameter circle.

Such an easy, uncomplicated dish, which is why it's so versatile. In my house it's often dinner on those random Tuesday nights when I haven't been shopping and don't have anything particular planned, because I can pretty much always count on having the few ingredents required to make a tortilla. At a party you can cut it into little squares, stick toothpicks in them, and you have an alternative to chips and salsa as sideboard munchies. In bars in Spain, as I mentioned, it's one of the most common little tidbits of food (you can call it a tapa if you want) served with a drink. Cold, you can slice it up, put it on a baguette with some mayonnaise, and you've got a great sandwich.

All in all, tortilla española reminds us of one of the best things about simple foods: you don't need a special occasion to have something wonderful to eat.

Thursday, March 03, 2011

A Look at State and Local Gov't Employment

The struggle by state and local goverments to reduce spending continues. Yesterday Ben Bernanke gave a speech on the subject, beginning with the following comments:
As you know well, the deep recession of 2008 through 2009 and the subsequent slow recovery have battered state and local budgets. As the recession took hold, revenues dropped precipitously, especially at the state level. Driven partly by balanced-budget requirements under their constitutions, many governments have responded by cutting numerous programs and reducing workforces. As necessary as these cuts may have been, they have left some jurisdictions struggling to maintain essential services. The fiscal problems of state and local governments have also had national implications, as their spending cuts and tax increases have been a headwind on the economic recovery.
As Bernanke points out, there are really two problems caused by this wave of budget-cutting. The first is the sharp reduction in the actual services that S&L governments are expected to provide to their residents. Voters do not like electing politicians who raise taxes, of course; but will they reward politicians that have substantially reduced government services? I'm not sure, but I am quite sure that these cutbacks by state and local governments will become even more noticeable to voters over the coming year than they already are, particularly since the vast majority of S&L spending is on quite visible things like roads, police and fire departments, and of course the biggest single element, education.

The following chart shows the number of state and government employees per 1,000 people in the US since January 2003 (which is when the US economy was at a roughly similar point in the business cycle, emerging from recession but not yet enjoying a strong recovery). The blue line is all S&L employees, while the red line (measured on the right axis) shows only educators. The picture speaks for itself.

The second issue highlighted by Bernanke is the headwind that these S&L government cutbacks create for the US economy. In the final quarter of 2010, S&L government budget cuts reduced annualized GDP growth by about 0.3% -- by far the biggest negative effect of any sector of spending in the US economy. In terms of employment, layoffs by S&L governments have reduced employment by more than 400,000 over the past two years. While clearly not large enough to push the economy back into recession, losing hundreds of thousands of additional jobs while the US economy struggles to regain its footing certainly can't help.

These things are cyclical, of course. Back in the early 1990s S&L governments also savagely reduced spending on basic services - including education - in response to the fall in their tax revenues, resulting in horror stories about neglected infrastructure and neglected children. With the strong economic growth of the late 1990s some of these deficiencies were repaired -- but permanent damage was done to countless lives along the way. It's too bad that politicians and voters seem unable to resist following the same path all over again.

Wednesday, March 02, 2011

Making Sense of Current Policy-Making

Dear Brad,

I understand your frustration about the current state of macroeconomic policy-making. You write:
"Today, we face a nominal demand shortfall of 8% relative to the pre-recession trend, no signs of gathering inflation, and unemployment rates in the North Atlantic region that are at least three percentage points higher than any credible estimate of the sustainable rate. And yet... leaders in Europe and the US are clamoring to enact policies that would reduce output and employment.

Am I missing something here?”
Allow me to attempt to ease your distress and self-doubts about what you call your “understanding of the world”. I think that you have fallen into a simple and very common trap for economists: you are imputing the wrong objective function to politicians. Think Helpman and Grossman, "Protection for Sale". Policy-makers may care to some degree about national economic welfare... but they often care as much or more about being reelected. And voters do not always (or even often) correctly assign plaudits or blame for the condition of the economy. Once you embrace these assumptions, all becomes clear and the world makes sense again.

Consider the following:
  • Congressional Republicans (and their public mouthpieces) reason that a poor economy in 2012 will improve the prospects for Republicans in the next election, since the President is almost always most directly held responsible for the condition of the economy. Hence they have a strong incentive to enact contractionary fiscal policies. Similarly, they will take every opportunity to apply pressure on Ben Bernanke to cease his efforts at expansionary monetary policies. The “intellectual” and “academic” arguments in favor of contractionary fiscal and monetary policies (the ones so enthusiastically parroted by Republicans in Washington right now) are convenient to them; but the complete lack of intellectual consistency on the subject is evidence to me that they are nothing more than convenient talking points.
  • President Obama faces a tradeoff. He would like to enact expansionary policies (both to improve his reelection chances and because, I believe, national economic welfare does enter significantly into his own objective function), but he also recognizes that his ability to do so is very limited. Given that, it is reasonable to suppose that there are a substantial number of swing voters that will appreciate him more (and be more likely to vote for him in 2012) if he appears reasonable and conciliatory with Congressional Republicans.
  • Angela Merkel enjoys a reasonably robust economy in her own country, but faces substantial voter displeasure over perceived subsidies to the periphery of the EU. In fact, I think one could reasonably argue that German voters are far more likely to penalize her party for allowing the wasteful periphery countries to escape unpunished for their wasteful ways than they are to penalize her for any knock-on contractionary effects her policies have for Germany. She therefore has every reason to attempt to force policies on the rest of the EU that minimize the perception of German largess – i.e. to advocate fiscal contraction across much of the EU.
  • Governments in the troubled periphery countries of the EU do face a genuine (even classic) crisis of investor confidence. Given the lack of German assistance, it is a rational response for them to decide that the total collapse in investor confidence would be worse than the contractionary effects of their employment-reducing fiscal policies.
  • Ben Bernanke, I would argue, is probably one of the few significant policy-makers who really take national economic welfare as his own objective function. I honestly believe that the US’s 9% unemployment rate screams at him every single day that he is at work. And he has responded by being as expansionary as he is able.
  • And David Cameron? Okay, you’ve got me there. Can we allow for the possibility that policy-makers also sometimes simply get it wrong? And/or that they may be susceptible to a bandwagon effect? After all, since everyone else seems to be so vociferously arguing for fiscal contraction...
To help clarify this point with respect to the US, let’s conduct a simple thought experiment. If we were slowly, slowly emerging from a recession, job creation was far from satisfactory, and elections were coming in the next year or two... and a Republican were President... do you really believe that Congressional Republicans would be behaving in the same way that they are today?

Oh wait, we don’t have to conduct such a thought experiment. We just have to look back to 2003.

Sincerely yours,

Tuesday, March 01, 2011

Public Sector vs. Private Sector Compensation

This is largely for my own benefit, as a way of keeping track of some of the more interesting, rigorous, and compelling academic research that I’ve found on this topic. The research question? Michael Miller phrases it properly in his important 1996 article:
If two persons are doing the same job, at the same level of duties and responsibilities, with one person performing that job in state or local government service and the other in private industry, are they also paid alike?
Note that this list is preliminary and very incomplete. Consider it a work in progress.

Dale Belman and John Heywood (1995), “State and local government wage differentials: An intrastate analysis,” Journal of Labor Research. Summary: lower-level government employees earned more than their private sector counterparts, but mid- to upper-level employees in government were paid less than those in the private sector. For the seven states examined, six underpaid local government employees and three underpaid state government workers compared to similar workers in the private sector.

Michael Miller (1996), “The public/private pay debate: What do the data show?Monthly Labor Review. Summary: Contrary to comparisons based on overall averages or broad occupational groups, private industry paid better for virtually all professional and administrative occupational job levels and for the majority of technical and clerical jobs levels. For blue-collar workers, the situation was mixed, . Pay premiums for private sector professional and administrative positions exceeded 10 percent; for technical and clerical jobs, a private sector pay advantage was found in 60 percent of the jobs examined.

Dale Belman and John Heywood (2010), "Out of Balance? Comparing Public and Private Sector Compensation over 20 Years," Center for State & Local Government Excellence and National Institute on Retirement Security. Summary: "Wages and salaries of state and local employees are lower than those for private sector workers with comparable earnings determinants (e.g., education). State employees typically earn 11 percent less; local workers earn 12 percent less. Over the last 20 years, the earnings for state and local employees have generally declined relative to comparable private sector employees."

Gregory B. Lewis and Chester S. Galloway (2011), “A National Analysis of Public/Private Wage Differentials at the State and Local Levels by Race and Gender,” Andrew Young School of Policy Studies Working Paper. Summary: “Holding constant education, estimated work experience, occupation, location, race, and gender, State and Local Government (SLG) employees earned 4 to 6% less than comparable private sector workers in 1990, 2000, and 2005-06, whether we used a dummy variable or modified Oaxaca method. Neither method suggests that the SLG/private pay disparity has widened or narrowed much since 1990... [the] disparity varies widely with race/ethnicity and gender. Both methods indicate that white and Asian American men consistently have lower expected earnings in the SLG sector, with disadvantages of at least 10% for white men and at least 5% for Asian men in most years. White and Asian women probably also have lower expected earnings in the SLG sector, but the findings are not consistent and the disadvantage is probably only about 2%. In contrast, black and Latino men and women are generally expected to earn more in SLGs, though the advantage is typically less than 5%.”