Month: June 2010
Johan Almenberg writes to me:
I have a blog request: a list of the top ten least bohemian cities in the world. Why are some cities more conducive to bohemian lifestyles than others? Does rent control result in more or less of this? I would love to read your thoughts and hopefully so would other people.
Writing this from rent-controlled Stockholm which I believe deserves a place on the top ten.
I won't give him ten, but how about Kuala Lumpur as the world's most non-bohemian city, counting the free world only? (Otherwise Pyongyang wins.) It doesn't have much to do with rent control. Dubai is an interesting choice but I don't think it counts as part of the free world. Santiago, Chile does not strike me as very bohemian. Better not nominate Prague!
In the United States, I would name San Antonio as the most non-bohemian major city, or maybe El Paso, with Atlanta as a runner-up. Might there be somewhere very non-Bohemian in northern Florida? Does Richard Florida have an index for this somewhere?
What are your picks?
In this environment, an increase in uncertainty–a mean-preserving spreading-out of ex ante investment project return distributions–causes a greater share of investment projects to fail to make the 1/Î² guaranteed gross-rate-of-return hurdle. So production of investment goods falls…
…and production of consumption goods rises, as labor is redirected.
There is no employment-reducing fall that I can see in aggregate supply in response to an increase in uncertainty. Yes, there is a structural readjustment as investment-goods industries shed labor and consumption-goods industries gain labor. But this is no more a fall in aggregate supply that leaves an extra 5% of the labor force with nothing productive to do than there was a fall in aggregate supply earlier, when perceived uncertainty fell and labor moved into investment-goods production–remember, back when financial engineering guaranteed by S&P and Moody's offered a way to create more of the AAA assets that the representative worker wanted to hold. There is a fall in aggregate supply in the sense that the value added by investment projects falls–but that fall shouldn't have implications for employment.
I think Brad is assuming I've fallen into the "Paul Krugman is right and Austrian Business Cycle theory is wrong" trap, but it's a different story. I have in mind a model of costly-to-reverse investment where many entrepreneurs decide to wait. It's also the case that producing consumption goods can be risky, even non-durable consumption goods: look at the decline in the number of luxury food items in a Whole Foods over the last few years. Brad may not be convinced, but there's no logical problem in the story.
Here is one of the empirical pieces on how uncertainty reduces investment and yes RW this is also a negative supply shock, as it makes extant resources less productive, at least for the time being. Here are more papers in the area. Here is one recent relevant model or see the papers of Robert Pindyck. Again, I don't wish to push "uncertainty" as the only story, it's rather the simplest means of seeing that it's not all just about weak aggregate demand.
Scott Sumner likes to scream from the rooftops about how Bernanke has forgotten his previous work on monetary economics. I like to note that there is more than one — indeed more than two — Ben Bernankes. He wrote his MIT dissertation on uncertainty and irreversible investment. One of the Ben Bernankes I follow is in part a real business cycle theorist.
Brad also writes:
…the cost of borrowing for the government has fallen–the market value troday of future cash tax flow earmarked for debt repayment has gone way, way up–therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea.
I'll blog more on that soon, in a separate post. For the time being I'll repeat my point that the monetary authority moves last anyway, so it's ultimately a matter of monetary rather than fiscal policy, whether we like that fact or not.
But despite all this, there's one pretty good reason to think that Tyler is basically right: tax cuts. Lefty economists might generally believe that increasing spending is a more efficient way of stimulating consumption than reducing taxes, but they'd almost certainly accept a big tax cut as an almost-as-good substitute. And tax cuts have two big advantages over spending. On the substantive side, they work faster. Spending takes time to work its way through the economy, but a tax cut (for example, a payroll tax holiday) boosts the economy almost immediately. And on the political side it's quite doable. Republicans would be persuadable because they love tax cuts and Democrats would be persuadable because it would help the economy. For Obama, then, it would be the best of all worlds: a fast stimulus that gets bipartisan support, something that boosts the economy while dampening the inevitable criticism he'd get for blowing up the deficit.
But he's not pushing for this. Not even quietly. And this suggests that Tyler is right: Obama's advisors might be in favor of further fiscal stimulus, but not by much. And the best explanation for this is that lefty or not, they're genuinely afraid, as Tyler says, that it would bring only marginal improvements at the cost of significant problems down the road.
The full link is here.
1. Physical, paper books with embedded hyperlinks, via Michelle Dawson.
I had the following conversation with a friend who wishes to remain anonymous (it wasn't Tyler).
A: Heh, how's it going?
Anon: Oh, so, so. I had a paper rejected today.
A: Ah, sorry, I get depressed when that happens.
Anon: Well in my case it's not all bad. My wife and I have an understanding that whenever I have a paper rejected we have sex.
A: What! That's a terrible system for getting papers published. What kind of economist are you?! Don't you understand incentives!
Anon: What kind of economist am I? What kind of economist are you?! You have failed to understand what I am maximizing!
I bowed down before the greater wisdom of my friend.
Matt and Ezra both comment on my post that most of the largest Chinese firms are state-owned or controlled by state-owned banks. (Both blogs, by the way, have interesting running coverage of the same China trip.) How can this be the case in the world's greatest economic growth miracle? How come it works (sort of, there were lots of privatizations, starting in the 1980s) in France too?
Yet state-owned industries do not have a fantastic record overall; ask England.
In part this is a puzzle but in part France and China have one important feature in common: it's high status to be a ruler. Very smart Frenchmen often grow up wanting to work for the government. Hardly anyone in France thinks that is weird and so the French bureaucracy has some of the best talent in the country.
There is also a long-standing tradition of the prestige of the Chinese mandarin. Furthermore, and perhaps more importantly, the Chinese Communist Party is the ultimate source of control and prestige for the entire society and it too attracts many talented people.
It's not enough to attract talented people, however. Unlike in the former communist Soviet Union, the Chinese government is (somewhat) dedicated to improving the nation. At least at a ten percent rate of growth, this political equilibrium works. And the state-controlled enterprises have to compete in a commercial environment, again unlike many former socialist experiments with state ownership. Most of all, China is grabbing the low-hanging fruit by moving smart, hard-working individuals from rural jobs to highly productive jobs and when you are grabbing the low-hanging fruit many things are possible. A lot of systems work OK until you get near the "you ought to shut down" constraint.
It's also possible that the successes of state ownership "decay" with time, as was arguably the case with the French model before the privatizations and has been the case with NASA in the United States.
The United States is far from having the right pieces to make public ownership work on a widespread basis and of all the major capitalist economies we have experimented with it about the least. Federalism, a regionalist Congress, separation of powers, and a high proportion of political appointees all militate against successful government ownership. Plus we are a large economy with relatively little external discipline in the form of international trade.
We could "respect" our bureaucrats much more than we do, yet they still would not have the real status they enjoy in France. It's simply not built into our culture, which worships wealthy businessmen and also the so-called "common man."
Imagine if everyone wrote a tweet: "Hey guys, over at the Department of Education. You're awesome. Luv ya!" It wouldn't much matter because still not many people deeply and sincerely wish to emulate them.
I also prefer to live in a society where the public sector does not have so much prestige. Very often governmental prestige stifles innovation and implies a series of more general insider, elitist, and sometimes authoritarian attitudes. It's also worth a quick look at the histories of what France and China had to do to build up so much governmental prestige; not pretty.
We should recognize that the public ownership model has worked for China, but I don't want to see it widely copied. I don't want to see it in Venezuela, Argentina, Turkey, Pakistan, Sri Lanka, Cuba, India, the Philippines, Nigeria, Central African Republic, or anywhere in Eastern Europe, to name a few other candidate countries. Do you?