Economics

Will Amazon copy Netflix?

by on July 17, 2014 at 12:07 am in Books, Economics, Film | Permalink

According to Gigaom, the e-commerce giant [Amazon] is working on a subscription ebook service called Kindle Unlimited, which would offer unlimited ebook rentals for $9.99 a month.

There is more here.  According to one estimate it would be for 638k titles or so, of course it will matter a great deal which ones.  I would consider this “developing,” but also “not yet confirmed.”

Addendum: Virginia Postrel offers a good analysis.

I do have a very clear idea as to what I think the profession should mean by AD—nominal GDP. And I’ve seen the AD curve drawn as a rectangular hyperbola in a few textbooks (although the number is gradually diminishing.  But it’s clear that most people don’t agree with me.  So what do they think AD is?

On some occasions people discuss AD as if it’s a real concept.  Changes in the real quantity of goods and services purchased by consumers, investors, governments, and (in net terms) foreigners.  But that can’t be AD, as it would imply that all changes in RGDP were caused by shifts in AD.  After all, all purchases are also sales, so the total aggregate quantity supplied equals the total aggregate quantity demanded.

In the textbooks AD is a downward sloping line in P/Y space, which is not generally assumed to be unit elastic.  That means when AS shifts, NGDP may also change.  But why does NGDP change? What is held constant along a given AD curve?  Presumably a given AD curve is supposed to be holding constant things like monetary and fiscal policy, animal spirits, consumer sentiment, etc.

His longer query is here.  I increasingly think it is a mistake to draw too sharp a distinction between aggregate demand and aggregate supply, at least beyond the very first round of an economic shock.  But what do you all think?  What do you all mean by “aggregate demand”?

China sentences to ponder

by on July 16, 2014 at 10:45 am in Current Affairs, Economics | Permalink

With credit at 200% of GDP and average financing costs of roughly 7%, Chinese borrowers now need to generate cash-flow growth of 14% to cover their interest payments without eroding their profitability or being forced to borrow yet more.

From Free Exchange blog, there is more here.

Peter Orszag: We have had incredibly good news over the past three to five years. If I’d been told when I was director of either CBO or OMB that we would have a 12-month period when Medicare spending was basically flat in nominal terms — and therefore on an inflation-adjusted, per-beneficiary basis, significantly negative — I would have thought impossible and yet that’s exactly what we’re living through.

If this continues, it’s massive — everything you think you know about the nation’s long-term fiscal gap would be wrong.

That is from Vox, there is more here.  Note that since Medicare spending is slowing down too, this phenomenon probably is not just from slow economic growth.  From Wonkblog (don’t get confused) here is further commentary, arguing the fiscal gap still will be a problem.

Bernanke v. Friedman

by on July 15, 2014 at 7:05 am in Economics | Permalink

Milton Friedman argued that the Great Depression was caused by a banking collapse that reduced the money stock and decreased velocity leading to a massive failure of aggregate demand that was not countered by the Federal Reserve. The title of his book with Anna Schwartz is apt, A Monetary History of the United States. Ben Bernanke also put the banking crisis at the center of his story of the Great Depression but the propagation mechanism was quite different. Bernanke argued that the banking crisis led to a collapse of credit. His contribution to Great Depression literature is also aptly titled, Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.

In an excellent paper from Boom and Bust Banking, Jeff Hummel shows that these two stories have different implications for policy. (FYI, B&BB was edited by David Beckworth and also contains excellent papers by Scott Sumner, Nicholas Rowe, Larry White and others. Full disclosure, I was the general editor.) In Friedman’s story what is required is monetary policy, an increase in the money stock to keep nominal GDP from falling. In Bernanke’s story what is required is actually fiscal policy (albeit fiscal policy performed by the Fed), namely emergency lending to banks to keep credit flowing. These two approaches are not mutually exclusive and in ordinary times the differences are subtle. Under the immense pressure of the great recession, however, the differences became large and important. Instead of primarily pursuing a Friedman policy of injecting liquidity into the system, Bernanke followed his nonmonetary prescription and injected credit. Bernanke’s approach has turned the Fed into what Hummel calls a central planner of credit (e.g here), an unprecedented change with potentially very large consequences for the future.

??????????????????What brought Hummel’s paper to mind today was strong support from a surprising source, a broadside against Bernanke’s handling of the great recession from the President of the Federal Reserve Bank of Richmond, Jeffrey Lacker (writing with Renee Haltom). Lacker and Haltom don’t cite Hummel but they support his analysis and although they write in careful, measured tones you don’t have to be a Straussian to recognize that it’s a direct attack on Bernanke:

When the central bank utilizes “lender of last resort” powers to allocate credit to targeted firms and markets, it encourages excessive risk-taking and contributes to financial instability. It also embroils the central bank in distributional politics and jeopardizes the independence that is critical to the central bank’s ability to ensure price stability. The lesson to be learned from the expansive use of the Fed’s emergency-lending powers in recent decades is that it threatens both financial stability and the Fed’s primary mission of ensuring monetary stability.

One thing Lacker and Haltom don’t do, however, is say how the Fed can unwind its positions. During the crisis the Fed pulled a genie out of the bottle and the genie delivered trillions to grateful borrowers. But how can the genie be put back in the bottle? The problem, in my view, is not primarily one of inflation or economics but now of politics.

There is a new and extremely distressing NBER paper by Derek Neal and Armin Rick:

More than two decades ago, Smith and Welch (1989) used the 1940 through 1980 census files to document important relative black progress. However, recent data indicate that this progress did not continue, at least among men. The growth of incarceration rates among black men in recent decades combined with the sharp drop in black employment rates during the Great Recession have left most black men in a position relative to white men that is really no better than the position they occupied only a few years after the Civil Rights Act of 1965. A move toward more punitive treatment of arrested offenders drove prison growth in recent decades, and this trend is evident among arrested offenders in every major crime category. Changes in the severity of corrections policies have had a much larger impact on black communities than white communities because arrest rates have historically been much greater for blacks than whites.

The paper is here.  There are ungated copies here.

There is a new NBER paper by Scott Cunningham and Manisha Shah:

Most governments in the world including the United States prohibit prostitution. Given these types of laws rarely change and are fairly uniform across regions, our knowledge about the impact of decriminalizing sex work is largely conjectural. We exploit the fact that a Rhode Island District Court judge unexpectedly decriminalized indoor prostitution in 2003 to provide the first causal estimates of the impact of decriminalization on the composition of the sex market, rape offenses, and sexually transmitted infection outcomes. Not surprisingly, we find that decriminalization increased the size of the indoor market. However, we also find that decriminalization caused both forcible rape offenses and gonorrhea incidence to decline for the overall population. Our synthetic control model finds 824 fewer reported rape offenses (31 percent decrease) and 1,035 fewer cases of female gonorrhea (39 percent decrease) from 2004 to 2009.

Alas, I do not see ungated versions on Google, or maybe try this one (pdf).

I have read a good deal on this topic and I am not very satisfied with most of it, from either side.  Too often citing and then refuting weaker claims from the other side is conflated with showing that one’s own view is right.  Here are a few issues we ought to consider and indeed focus on:

1. Five to ten years from now, how much do we think employment will have gone down as a result of ACA?  (That is from the employer mandate, high implicit marginal tax rates because of the subsidies, and also from a lesser need to stay employed to have health insurance.)  By the way, you can’t in other contexts believe strongly in rigidities and then confidently point to a small employment response within a one year time frame and claim to know these labor market effects are small ones.

1b. How will the effort to introduce greater equality of health care consumption fare if wage and income inequality continue to rise?  Will this attempt at consumption near-equalization require massively distorting incentives?

2. Given your answer to #1, and given how much employment itself boosts health, will ACA even have improved overall health in America?  What outcome indicators might show this?

3. Given that prices in the individual insurance market already seem to have gone up 14-28 percent, and may go up more once political scrutiny of insurance companies lessens, what is the overall individual welfare calculation from this policy change?  I mean using actual economic policy analysis, of the CBA sort, not just noting that more people have health insurance.

4. Given supply side constraints, how much did ACA increase the consumption of health services in the United States?  (I take the near-universal bafflement over the first quarter gdp revision a sign of how poorly we understand what is going on.)  And how good or bad a thing is the ongoing but accelerated shift to narrow provider networks?

5. How much of the apparent slowdown of health care cost inflation is a) permanent, b) not just due to the slow economy, and c) due to ACA?  Or how about d) the result of trends which have been operating slowly for the last 10-20 years?

Is there one of these questions we know the answer to?  Know the answer to much better now than before?

From Gavyn Davies:

…these three different interpretations of the Rule were expected by Ms Yellen to differ by as much as 2 per cent in the appropriate level for the Fed Funds rate from 2012-15. Given these wide discrepancies, any of which could presumably be chosen by the Fed under the proposed legislation, it seems pointless to try to force a rule-based system on the FOMC just for the sake of it.

Furthermore, the Rule does not really help with several key problems faced by the FOMC today. The first is how and when to reduce the size of the Fed’s balance sheet, and how that decision should relate to the appropriate level of short rates. Next is how to determine the right relationship between economic objectives and financial stability when setting short rates. Based on their views on these two issues, the FOMC might decide that short rates should be either much higher, or much lower, than suggested by the Rule.

The Rule is also largely silent on another of the Fed’s main headaches right now, which is whether to treat the official unemployment rate as a good indicator of the amount of slack in the labour market. Many members of the FOMC, including the Chair, have argued that the amount of slack is greater than implied by the unemployment rate, because the labour participation rate has been temporarily depressed by the recession. The use of the Taylor Rule does not solve this debate, it simply treats it as if it does not exist.

From the FT there is more here.  You don’t have to regard any of those points as arguments against a “Taylor Rule.”  But it is disingenuous to think that peddling the Taylor Rule as a monetary option counts as a rule for those who have general reasons for believing in monetary rules over discretion.  The Taylor Rule is lucky enough to be called a “rule,” and besides, any reaction function can be described as a rule of sorts.  In those two senses it is indeed a rule.  But the Republicans who are behind this are fooling themselves if they think this will yield the (supposed) traditional benefits of monetary rules, namely stability, predictability, non-ambiguity, transparency, and so on.

Addendum: Nick Rowe has some comments.

NBA salaries are subject to price controls at some margins, so neither Miami nor Cleveland could pay LeBron more.  Therefore a theory of profit maximization predicts LeBron will choose the deal that extends his career the most, so as to maximize lifetime income and perhaps also fun.  Another year playing also probably means higher endorsement income than a year in retirement.

In Cleveland he is not actually expected to win, at least not right away.  They can play the young guys a lot and rest his legs and extend his career, while developing the quality of the overall team.  And if the mix of players somehow comes through in a year or two, he looks like a basketball genius.  The East seems weak enough that Cleveland will at least make the Eastern Finals for the next few years, thus avoiding embarrassment.

Given their demographic structure and Bosh’s accruing softness, Miami is a contender only if it pushes LeBron very hard and thus shortens his career.  I speculate that he was very upset that he was pushed and played so hard all year long, to rest Wade, only to develop those disabling leg cramps at the end of game one against San Antonio in the Finals, which caused him to lose face.

I haven’t seen other analyses take career length into account.  LeBron is entering his thirties and watching the physical implosion of Kobe Bryant, one of his role models.  He knows Michael Jordan took two years off and ended up as a geezer on the Washington Wizards.  He sees Wade — one of his best buddies — a broken player at age 32.  Why not choose the outcome that might give him a few extra years of both salary and fun?

Addendum: Apparently LBJ is taking only a two-year contract with Cleveland.

James could have taken a four-year contract worth more than $88 million from the Cavs. But he now will be able to negotiate a better contract in two years and also has the choice to opt out after one season to renegotiate next summer. Player options only can come before the final season of a contract, another reason for the two-year deal.

That is emphasis added, the pointer here came from Angus.  I would mention that the theory of profit maximization is often underrated and that this Cleveland deal really is a good one for LBJ.

For now, prices are high: around $20 a gram, which is twice the black-market (or medical) cost. That partly reflects eye-watering excise taxes: 25% at each stage of distribution, plus normal sales taxes. But wholesale prices are high too, suggesting supply shortages are the main culprit.

There is more here, from The Economist, much of it deals with how far the United States is from having truly legalized marijuana.  [Note: an earlier version of this post mistakenly referred to Colorado.]

The Stanford Geospatial Network Model of the Roman World

“For the first time, ORBIS allows us to express Roman communication costs in terms of both time and expense. By simulating movement along the principal routes of the Roman road network, the main navigable rivers, and hundreds of sea routes in the Mediterranean, Black Sea and coastal Atlantic, this interactive model reconstructs the duration and financial cost of travel in antiquity.”

http://orbis.stanford.edu/

For the pointer I thank Michael Gibson.

One of the arguments for reauthorizing the Ex-Im Bank is that the EU subsidizes Airbus in an increasing returns to scale industry, and so therefore we need to do the same for Boeing.  Boeing is by far the largest beneficiary from the Bank.

Yet the Pentagon spends a lot of money on Boeing already, basically ensuring the company will operate at quite a large scale.  I cannot find formal figures on how much the European Union spends on military contracts with the Airbus Group, but it is highly likely to be much less than what the Pentagon spends on Boeing, given the differences in defense spending across the two regions.

In other words, through military spending we are already doing what strategic trade policy (ostensibly) dictates.  General Electric, which is number two on that list of Ex-Im beneficiaries, is also a significant Pentagon contractor, as is number three Bechtel of course.

By the way, did you know that the standard models dictate an export tax rather than an export subsidy if the duopolistic firms operate as Bertrand rather than Nash competitors?  See Eaton and Grossman (1986), or this Flam and Helpman piece (pdf) or Cheng (1988).  I am not suggesting that Bertrand competition is exactly the right assumption here, rather the point is that strategic trade models are not very robust in their policy implications.

The downsizing of some American homes

by on July 11, 2014 at 2:25 pm in Economics | Permalink

Doug Immel recently completed his custom-built dream home, sparing no expense on details like cherry-wood floors, cathedral ceilings and stained-glass windows — in just 164 square feet of living space including a loft.

The 57-year-old schoolteacher’s tiny house near Providence, Rhode Island, cost $28,000 — a seventh of the median price of single-family residences in his state.

“I wanted to have an edge against career vagaries,” said Immel, a former real estate appraiser. A dwelling with minimal financial burden “gives you a little attitude.” He invests the money he would have spent on a mortgage and related costs in a mutual fund, halving his retirement horizon to 10 years and maybe even as soon as three. “I am infinitely happier.”

There is more here, and for the pointer I thank Peter Marber.

A Japanese jeans maker has found a new way of capitalizing on zoo animals. Zoo Jeans is producing jeans “designed by dangerous animals.” Denim is wrapped around tires, which are then thrown to the lions who enjoy ripping and biting at the material. This produces that all-important designer, distressed look.

Rather than simply being a marketing gimmick, there is actually value in this from an animal welfare perspective. Involving lions and the zoo’s other large carnivores in the activity is part of what’s called environmental enrichment. This is the provision of stimuli to help improve well-being. It’s a win-win activity for many zoos, who can make alternative profits from their animals, which tend to be used to provide extra facilities for them.

The full story is here, and for the pointer I thank Gary Rosen.