Economics

I don’t have a similar graph for subway workers, but come on. The overall pictures is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses. Indeed these professions seem to have lost ground salary-wise relative to others.

That is just one bit from a very excellent blog post by Scott Alexander.

What is often missed—and, frankly, it would seem deliberately misrepresented in his own autobiographical works—is that in Italy, Modigliani, by age 20, was a well published fascist wunderkind, having received in 1936 an award for economics writing from the hand of Benito Mussolini himself. Further, in 1947, at age 29, Modigliani published a 75-page article whose title in English translation would be “The Organization and Direction of Production in a Socialist Economy” (Modigliani 1947), an article that affirms socialist economics. In 2004 and 2005 there appeared English translations of five fascist works by Modigliani originally published during 1937 and 1938 (all five translations are collected by Daniela Parisi in Modigliani 2007b). The socialist paper of 1947 has never been translated in its entirety, though the  Appendix to this profile contains excerpts selected and newly translated by Viviana Di Giovinazzo, to whom we are very grateful.

That is from Econ Journal Watch, by Daniel B. Klein and Ryan Daza, with Viviana Di Giovinazzo, and here is the broader page on the ideological histories of the Nobel Laureates (interesting throughout).  The point here is not to trash Modigliani, but rather to point out how thoroughly fascist ways of thinking can seep into a society.  Furthermore, fascism and other forms of authoritarianism rule are a massive tax on human creativity, as it is unlikely Modigliani could have turned his career around had his life under Mussolini’s regime persisted.

He emails to me:

Hi Tyler, Alex

Tyler asks Is a strong dollar better than a weak dollar? and says “Yes, for Americans though not for the world as a whole.  For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.  That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall.”

Actually, I think that the baseline economic answer is Neither : the optimal level is just the equilibrium frictionless real business cycle level — if the dollar is above or below it, the US is worse off (and so is the rest of the world).

Why? Matteo Maggiori and I have a model to analyze such things (“International Liquidity and Exchange Rate Dynamics”, QJE 2015) – a full-fledged GE model  that allows to study in particular the effects of those noise trader shocks.
 
Short version: a strong dollar appreciation now helps the US now (as Tyler rightly says), but will force a depreciated dollar later (as this GE intertemporal model works out), which will hurt the US later. Summing over all periods, it’s a small (2nd order) negative.

Long version (see section II.D and III.B of the paper). Suppose there are 2 periods. At time 0, Tyler is right – the US is better off that period. However, that creates a trade deficit, which increases US indebtedness, and that will create a lower dollar in the future, and will hurt the US (as Tyler would rightly have said). E.g. if the equilibrium dollar yen rate is 100, and if the dollar is stronger at 105 at 0 because of a demand shock, then at period 2 it will need to be 95 (the logic also works with more than 2 periods). All in all, it’s a first order wash, and the loss comes from the 2nd order distortion terms (worked out in full detail in Proposition 8 of the NBER WP version). Likewise, a weak dollar now would hurt the US now, help the US later – again with a small negative overall.

A caveat: if the US is in a recession with high unemployment, a weak dollar is strictly better (for the US and the world), as it alleviates unemployment and increases total production.

Policy conclusion: don’t intervene, unless you have a very strong reason to think your currency is appreciated (or depreciated) – then, reverse that via FX interventions.
 
I hope that helps.
 
Continued thanks for the great blog!

Xavier
TC: My theory of exchange rates is “less intertemporal” than that, but a fantastic answer in any case.  Read also Ryan Avent on all of this.

The White House Council of Economic Advisers is being demoted by the Trump administration, which said in a statement Wednesday that the president’s cabinet won’t include the chairman of the CEA, an official that President Donald Trump also has yet to name.

The diminished stature for the CEA, which was part of President Barack Obama’s cabinet and has advised presidents for over seven decades on the economic impact of their policies, means Mr. Trump will likely rely more heavily on other advisers, such as Gary Cohn, the former Goldman Sachs president who is head of the National Economic Council, and Peter Navarro, the trade critic who is leading the National Trade Council.

Here is more from Josh Zumbrun at the WSJ.

Vice President Mike Pence has hired Mark Calabria as his chief economist, according to several people familiar with the move.

Calabria was director of financial regulation studies at the Cato Institute, where he was a prominent voice on financial services and economic policy and an expert on mortgage and housing reform.

Before joining Cato in 2009, Calabria worked for the Senate Banking Committee, where he handled housing, mortgage finance, economics, banking and insurance for then-ranking member Richard Shelby (R-Ala.).

Here is the Politico linkMark is also a George Mason Ph.d.

A few days ago you all were speculating about which fictional objects you might wish to own.  I was struck by how the more extravagant answers seemed to fail, and partly because of what my early teacher Ludwig Lachmann called “the complementarity of capital.”

Say you had a time machine to visit the past.  Sounds like fun, right?  But consider the violence in earlier eras, trying to understand their languages, or avoiding nasty germs and infections.  How can you return to the current day without a risk of bringing back a plague that will kill many people?  Markets have not provided the complementary goods to make these trips work.

How about a pen that creates any object you might try to draw with it?  Expect a knock on the door from McLean, or if you are less lucky some polonium in your Product 19.  I wonder for how long you could keep such a device secret, and do you always know when there is CCTV?  I wonder for how long you could stay alive.

A transporter might kill you through the act of copying you, but that aside how would you know you are not putting yourself into moving traffic or a lake?  What kind of monitoring stations do you hope to make use of?  How many cultures would attack the arriving visitor for witchcraft?  Maybe there is a way to plop down in open fields only, but at that point you might wish to consider a business class ticket along with checked bag.

Even owning something as simple as the Mona Lisa would be problematic.  You would have to protect it and install climate control — who is going to pay for that?  How might they rezone your house?  Or would you never ever tell anyone, and thus keep all your friends at a distance?  For what gain, ultimately?

Having one extra thing is devilishly hard to make extremely valuable, even if you are allowed to invent something that doesn’t exist or violate the physical laws of our universe.  The real gains in this world are from cooperation and networks of support, and having something unique doesn’t much plug you into those.  In other words, trying to bypass market evolution isn’t nearly as powerful as you might think.

They have a new book out, namely Governing Global Health: Who Runs the World and Why?  It is to the point, clear, uses economic reasoning very well, and serves up the information you actually want to learn.  It is a look at some major public health organizations, specifically the Global Fund to Fight AIDS, TB and Malaria, the Gavi Alliance, the WHO, and the World Bank, and how they operate, from a public choice point of view.  It’s hard to think of many books I’ve looked at over the last year or two that so well understand the notion that readers want a “landscape” of sorts painted for them.  So if you have an interest in public health issues, or in either or both of the two authors, I can gladly recommend this to you.

Here is an earlier Chelsea Clinton memo on Haiti.

Yes, for Americans though not for the world as a whole.  For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar.  That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall.  If you owned lots of ponies, would you not want the price of ponies to go up?

A weak desire to substitute into imports could blunt this result somewhat.  Or in other words, American tourists will benefit to a disproportionate degree.

The down scenario is that a lot of emerging economies have too much dollar-denominated debt, and the second-order blowback from their potential insolvencies could hurt America too.

I am sorry this post did not come up at 3 a.m.

India Fact of the Day

by on February 8, 2017 at 7:36 am in Economics, Law, Travels | Permalink

In India it is illegal for the police to arrest a woman after dark. The law apparently stems from a case decades ago when a woman was arrested at night and raped by the police. The law doesn’t seem like the second-best way to prevent police rapes let alone the best way. But what should an enlightened court do? Rape is already illegal. The courts create law but the law doesn’t rule. Thus, instead of obliging the police to control themselves the law gives women the grounds to refuse arrest. Imperfect but perhaps easier to monitor.  In India the state is so weak that third and fourth best solutions may be the only ones possible.

That is the topic of my latest Bloomberg column, the proposed answer is Pakistan, here is the closing conclusion:

When I started pondering this “underrated” question about 15 years ago, it was mainly about guessing hidden strengths of various economies, based on esoteric knowledge of sectors and regions and histories. These days, it is most of all an exercise in gauging media overreactions. The underrated countries are places you read and hear lots about, not obscure locales you’ve barely heard of.

It’s a sad world where discarding “what you think you know that ain’t so” has so grown in importance.

Do read the whole thing.

A few days ago Conor Sen tweeted:

It’s close right now, but today might be the lowest close for the VIX since February, 2007.

Here is the broader chart.  How can that be?  Not to mention a high Dow.

The consensus view is that the first two weeks for Trump have been an extreme disaster.  But is that true?  Protest has been robust, and so far checks and balances seem to be working.

He issued a bunch of executive orders that mostly cannot be carried through.  He still hasn’t filled most of the second-tier positions of import, and for the State Department he fired/induced to quit a whole bunch of senior figures.  That militates in favor of not much getting done.  Obamacare abolition and tax reform are being postponed until next year it seems, for better or worse.  The Wall is stupid but won’t matter much and may not even happen, given environmental review, Native American rights, and the preferences of Texas Republicans.

Trump also trampled on just about every sacred icon held by those who inhabit my Twitter feed, most of all by having Bannon insult the press by telling them to shut up for a while, and the steady stream of absurdities continues.  Yet the underlying story (NYT) seems to be about six guys in the White House who don’t know how to use the levers and pulleys of the Executive Branch.

Or consider the assessment of E. Richards:

As of now, however, events since January 20 support the conclusion that Donald Trump is not very sincere about actual, rather than verbal chaos and that his administration will mostly defend the world order status quo.

As for beating up on the marmite crowd, is there a better form of training wheels?

People, I do not favor this kind of experiment with governance or with rhetoric.  And the market is by no means always a correct forecast.  But right now it is worried less than many of you are.  I do understand that America is consuming some of its political and reputational capital.  Yet so far the best prediction is that the relatively manageable scenarios are coming to pass.

Addendum: Just think what kind of embedded embarrassment this is for the Democrats.  Whether you agree with Democratic economic policy or not, and whether you agree with the markets or not, the Democrats in effect cannot convince the markets that their presidential rule is better for capital values than is the…scenario of Trump.  The more stupidities you see, and the more you criticize him, the more painful that ouch should become.

Britain has changed since 1998.

Back then, it only took workers about three years to save enough money for a down-payment on a house. Now it takes 20 years, on average, according to the Resolution Foundation, which published a landmark report on income, housing, and inequality in Britain last week.

Here is further information, via the excellent Samir Varma.

There is a new paper on this topic, by Gigi Moreno, Emma van Eijndhoven, Jennifer Benner, and Jeffrey Sullivan.  The upshot is to beware price controls:

Price controls for prescription drugs are once again at the forefront of policy discussions in the United States. Much of the focus has been on the potential short-term savings – in terms of lower spending – although evidence suggests price controls can dampen innovation and adversely affect long-term population health. This paper applies the Health Economics Medical Innovation Simulation, a microsimulation of older Americans, to estimate the long-term impacts of government price setting in Medicare Part D, using pricing in the Federal Veterans Health Administration program as a proxy. We find that VA-style pricing policies would save between $0.1 trillion and $0.3 trillion (US$2015) in lifetime drug spending for people born in 1949–2005. However, such savings come with social costs. After accounting for innovation spillovers, we find that price setting in Part D reduces the number of new drug introductions by as much as 25% relative to the status quo. As a result, life expectancy for the cohort born in 1991–1995 is reduced by almost 2 years relative to the status quo. Overall, we find that price controls would reduce lifetime welfare by $5.7 to $13.3 trillion (US$2015) for the US population born in 1949–2005.

I would insist that we do not have good enough models of the innovation process to really understand the price elasticity of supply.  Nonetheless it is surely not zero, and under plausible assumptions the price controls are a bad idea.

We need a new rooftop chant: “Beware analyses that neglect supply elasticities,” to sweet cadences of course.  They should play that on AM radio as well.

For the pointer I thank the still excellent Kevin Lewis.

MSNBC and Fox News are capitalizing on President Donald Trump’s TV watching habits, dramatically increasing issue advocacy advertising rates in recent weeks as companies and outside groups try to influence Trump and his top lieutenants.

The ad rates for “Morning Joe” have more than doubled post-election, according to one veteran media buyer. Trump, who reportedly watches the show most mornings, has a close relationship with “Morning Joe” host Joe Scarborough, and they talk regularly.

Fox News’ “The O’Reilly Factor” and other primetime programs on Fox News have boosted their rates about 50 percent. Trump also is a frequent viewer of the network’s primetime shows.

“The president’s media habits are so predictable, advertisers migrate to those areas,” said one media buyer.

One prominent D.C. consultant said some of his clients, including a big bank and major pharmaceutical company, were negotiating this week to buy ads on “O’Reilly” and “Morning Joe” because they knew they had a good chance of reaching the president.

That is from Daniel Lippman and Anna Palmer, via Kevin Lewis.