San Antonio Economic Forecast Update

I recently presented an update to my 2016 forecast for the San Antonio economy.

Please find the full presentation slides here.

In short, the growth in the San Antonio economy has slowed this year as anticipated. As shown in the following two graphs, through July, employment had grown 2.15% compared to July of 2015 and unemployment was at 2.8% (seasonally adjusted). My forecast for San Antonio this year was for employment growth between 2.25-2.75% and an unemployment rate in the range of 3.5-3.7%. While the July figures are slightly outside these ranges, I am leaving my forecast as is with the recognition that employment growth may end the year a bit lower than 2.25% and unemployment may come in at a rate slightly above 3.7%.

Unemployment rate as of July 2016Employment growth through July 2016

Please feel free to contact me with any questions regarding the report.


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Blind Pursuit of the Free Market Does not Lead to Prosperity

While I think the perfectly competitive model as it is presented in economics has some uses in helping us understand economic behavior, I believe the way it is presented in economics classes has lead to a vast misunderstanding of the workings of the economy. The presentation typically gives the impression that government intervention in the economy is only bad, except for instances where market failures exist. The problem, in my opinion, is that very little attention is given to the assumptions necessary to make the model work. Sure, these are most often covered quickly at the beginning of the presentation of the model, but the rest of the course or discussion of this model is spent showing who this leads to equilibrium in the markets and how government intervention pulls the market away from this equilibrium and leads to a loss of welfare. However, if one stops and thinks about it, the assumptions of the model (e.g., economic agents act rationally, perfect information, perfectly mobile resources) mean that the free market really never exists. By its very inherent nature, market failure is always present, and because of this and the fact that markets and the economy are huge complex systems, not the isolated static mechanisms of the perfectly competitive model, they are rarely, if ever, in equilibrium.

I want to stress again that there are still some valuable lessons that can be taken from the perfectly competitive model. It is an elegant model that lead to some intoxicating conclusions, but because of this and the lack of emphasis of the assumptions underlying the model, it has lead to a lot of misguided economic policy. This is especially the case with respect to macroeconomic policy, which has been misguided by the absurd dynamic stochastic general equilibrium model. This has lead to the belief by many that all regulations and government intervention are bad and that if we would only get rid of almost all regulations, cut taxes, and minimize the size of government, markets would be able to operate freely leading to more prosperity and a better society.

To be clear, I am not arguing that government is the answer to everything, nor am I arguing that we should raise taxes to exorbitant levels. But, this blind pursuit of the free market based on the misapplication of economic theory or just bad economic theory does not lead to prosperity either. There has to be a balance between the two. Even Adam Smith (one of the greatest, if not the greatest, political economists, to have ever lived), whose Wealth of Nations is the standard bearer for all those in blind pursuit of the free market, recognized the need for balance, as he thoroughly discussed in his Theory of Moral Sentiments.

This has lead to the belief that the ideas of cutting taxes (mostly for those in the upper income strata and the wealthy) and shrinking the government will lead to prosperity and improved social outcomes. Two articles recently published in the New York Times provide even more evidence that this is not the case. One of the articles was written by two political science professors, Jacob S. Hacker of Yale University and Paul Pierson at the University of California, Berkeley. The article, “The Path to Prosperity Is Blue,” is a brief summary of their book, American Amnesia: How the War on Government Led Us to Forget What Made America ProsperI think the following quote from the article summarizes their argument.

Mr. Trump and House Speaker Paul Ryan are united by the conviction that cutting taxes – especially on corporations and the wealthy – is what drives growth.

A look at the states, however, suggests that they’re wrong. Red states dominated by Republicans embrace cut and extract. Blue states dominated by Democrats do much more to maintain their investments in education, infrastructure, urban quality of life and human services – investments typically financed through more progressive state and local taxes. And despite what you have heard, blue states are generally doing better.

Work by Jon Bakija, Lane Kenworthy, Peter Lindert, and Jeff Madrick in their book, How Big Should Our Government Be?provides some evidence against the argument that small government facilitates economic growth. They show evidence that there is a direct relationship between the growth of government and economic growth. Over the past fifty years, those countries where governments have grown the largest over the  past fifty years have also experienced some of the fastest economic growth (see the chart here).

While governments are certainly not perfect, and as I have already mentioned, government is not the answer to every issue or problem, but it seems clear to me that government has an important role to play in the proper functioning of an economy and society. Blind pursuit of the neoclassical notion of the free market with the wildly unrealistic assumptions at its foundation can be very appealing, but it leads to bad economic policy in many cases.

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The Emergence of a San Antonio/Austin Metroplex

I gave a speech today to the San Antonio chapter of the Commercial Real Estate Women.

The topic was the potential for the San Antonio and Austin metropolitan areas to merge into a metroplex or mega-region.

The presentation can be found here: The Emergence of a San Antonio/Austin Metroplex.

Thank you to CREW for the invitation to speak.



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Insights from The Wealth and Poverty of Nations

I recently finished reading The Wealth and Poverty of Nations: Why Some are so Rich and Some so Poor by David S. Landes. It was originally published in 1998, so it is a bit dated, and it is still very much worth the read. The themes that run through the book, as I understand them, are still very relevant today. Plus, it is always good to learn more about our economic history. Some of the main themes/points are:

(1) The ability for one society to take over another society through force has often not only meant the decline of the nation being taken over but also the decline of the imperialist nation. Access to steel and the ability to manipulate it, especially into weapons like quick-loading or more automatic guns, and the introduction of foreign germs was often the key to success in battle. (Jared Diamond wrote an entire book on this premise titled Guns, Germs, and Steel, of course. While I found the book to be somewhat redundant, I do think it is worth a read.)

(2) Institutions, including culture and values, are very important factors in determining whether or not a country has or will reach an advanced level of development.

(3) A society’s ability to innovate and its willingness to transfer and accept technologies from other countries also plays a big role in its ability to grow and develop.

(4) Orthodox economics lacks much in trying to explain economic development (see following points).

(5) The market is a powerful force that needs to be harnessed for economic development to occur, but even Adam Smith argued that the market has serious flaws, and there is a role for government to play in the proper functioning of a market economy. He also argues that governments can make as big, or bigger, mistakes than the businesses they are trying to regulate.

(6) There is not one approach to economic development that is appropriate across all countries, and yesterdays “virtues” or “factors” that drove some countries out of poverty may not be relevant (or as relevant) today. “Different strategies in different circumstances” (page 391).

(7) “And what of the poor themselves? History tells us that the most successful cures for poverty come from within. Foreign aid can help, but like windfall wealth, can also hurt. It can discourage effort and plant a crippling sense of incapacity. As the African saying has it, ‘The hand that receives is always under the one that gives.’ No, what counts is work, thrift, honesty, patience, tenacity. To people haunted by misery and hunger, that may add up to selfish indifference. But at bottom, no empowerment is so effective as self-empowerment” (page 523). I would add, and I think Landes would agree given his emphasis on the importance of institutions and culture, that this requires having the institutions that support empowerment, such as access to quality education and healthcare, workforce training programs, small business development support, etc.

(8) He has some very interesting insights on the gains from trade, and in my opinion, this is yet another example of how economic theory (or maybe the misunderstanding or mis-application of economic theory) has misguided the making of economic policy. Furthermore, his understanding of how the pursuit of trade and globalization has played out through history leads to some prescient forecasts of our current economic conditions, as shown in the following quote (keep in mind the book was first published in 1998).

“The present tendency to global industrial diffusion will entail, for the richer countries, a leveling down of wages, increased inequality of incomes, and/or high levels of (transitional?) unemployment. No one has abrogated the law of supply and demand. Many, if not most, economists will disagree. They rely here on the sacred certainty of gains from trade for all. International competition, they tell us, is a positive sum game: everyone benefits.

In the long run. This is not the place to attempt, in a few pages, a survey of the differences of opinion on this issue, which continues to generate a library of material. I would simply argue here, from the historical record, that

  • The gains from trade are unequal. As history has shown, some countries will do much better than others. The primary reason is that comparative advantage is not the same for all, and that some activities are more lucrative and productive and than others. (A dollar is not a dollar is not a dollar.) They require and yield greater gains in knowledge and know-how, within and without.
  • The export and import of jobs is not the same as trade in commodities. The two may be fungible in theory, but the human impact is very different.
  • Comparative advantage is not fixed, and it can move for or against.
  • It always helps to attend and respond to the market. But just because markets give signals does not mean that people will respond timely or well. Some people do this better than others, and culture can make all the difference.
  • Some people find it easier and more agreeable to take than to make. This temptation marks all societies, and only moral training and vigilance can hold it in check” (page 522).

If for no other reason, it is worth reading the book to gain these insights on the notion of free trade and the theory of comparative advantage. International trade brings to the forefront many very complex issues that are ignored or given very little attention if we just grab onto the gains from trade derived from comparative advantage as presented in the mainstream economics textbooks, which typically give very little mention, if any at all, to many of these other issues.

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