Month: February 2011

Interfluidity has a dream

A few nights ago, a gentleman accosted me in a dream and declared himself to be “Tyrone”, Tyler Cowen’s evil twin. Tyrone told me that his brother had “as usual” got it all backwards.  In fact, he told me, we’ve been in the Great Stagnation for a century as a result of, rather than for the lack of, technological progress. The median household is experiencing wealth stagnation caused by technological change. Households are feeling the pain now more than in the past, even despite a relatively modest pace of change, because over the past few decades we have managed to avoid employing the sort of durable and effective countermeasures to stagnation that have succeeded in the past.

Here is much more, interesting throughout.  Here is another excellent sentence:

I worry that specialization in the information asymmetry industry could be an antidevelopment strategy for developed countries.

*Pirates of Barbary*

The author is Adrian Tinniswood and the subtitle is Corsairs, Conquests, and Captivity in the 17th-Century Mediterranean.  Excerpt:

I found that robbery on the high seas was far from being the private enterprise I'd imagined it to be: behind it lay a sophisticated system of socialized crime, state-sanctioned and state-regulated, an early and efficient example of public-private partnership.  And I came to understand the enormous economic importance of the Mediterranean trade in slaves, a trade which took the liberty of around one million Europeans and at least as many North Africans in the course of the seventeenth century.

He covers a different set of pirates than does Peter Leeson and in this sense there is no contradiction; still, this is an interesting book for an alternative perspective on pirate economics and history.

*Getting Better*

The author is Charles Kenny and the subtitle is Why Global Development is Succeeding — and How We Can Improve the World Even More.

This is an excellent book on catch-up growth, which is proving remarkably robust.  Ongoing democratization is proving more stable in countries such as Turkey and Brazil than many people, including myself, had expected.  Here are previous MR mentions of Charles Kenny.  Here is Kenny's blog.

Bloggingheads with Matt Yglesias

The topic is The Great Stagnation, find the dialogue here.  My favorite part was when we both discussed why we find David Ricardo an interesting thinker.  One way of summing up TGS is to cite local diminishing returns and yet longer-run increasing returns, though right now we're on the diminishing segment of that curve.  Ricardo got the first part right, and it took the world some number of decades to prove him wrong about the longer run.  TGS is a book set in the traditions of classical economics, which was a lot of the first economics I ever read.

Is the cow a silo of option value?

I was struck by this argument, which I had never heard:

The overriding advantage of meat is that demand for it is elastic.  People don't need it but they like it, and up to a point, however much you produce, they'll keep on buying it.  The demand for cereals for human consumption, on the other hand, tends to be inelastic.  People need their pound of grain a day, but they don't need much more, and they won't buy any more unless they have sufficient wealth to invest the grain in animals, either to produce higher value food, or else to keep it "on the hoof" for a rainy day (or a drought).

The existence of meat means that a farmer can sow wheat, barley, oats, beans, maize, and so on with reasonable confidence that, in the event of a good harvest, someone will buy it, because even if everybody has sufficient, it can be fed to animals.  This dynamic is not restricted to a money economy.  It works exactly the same for Melanesian subsistence farmers who can sow enough sweet potato and manioc to cover a bad year knowing that it is not a waste of effort, because in a good year the surplus can be fed to pigs.

Take the animals, the elastic element, out of the equation and the business of sowing grain suddenly become far more risky…This elementary matter of the need for a feed buffer fails to feature in most of the literature that is written about meat-eating and vegetarianism…

That quotation is from Simon Fairlie's quite interesting Meat: A Benign Extravagance

As they used to say on the U. Chicago Ph.d. qualifying exams, true, false, or uncertain?  And under what conditions?

*Reforming U.S. Financial Markets*

The authors are Randall S. Kroszner and Bob Shiller, the subtitle is Reflections Before and Beyond Dodd-Frank, and the volume consists of a paper by Shiller (let’s democratize and humanize finance) and a paper by Kroszner (“don’t throw out the baby with the bathwater“) and lots of transcribed discussion.  Here is one excerpt from George Kaufman:

Why do we study the past?  An optimist would say to avoid repeating the same errors.  As the late Spanish-American philosopher George Santayana (1863-1952) noted: “those who cannot remember the past are condemned to repeat it.”  But I find this observation not to be very interesting as most policymakers I have met remember at least some of the past.  Unfortunately, this leads me to conclude more generally that “those who can remember the past are condemned to agonize first and then to repeat it.”

Kroszner’s policy suggestions include greater competition for the ratings agencies, fewer and deeper tranches for MBS, and more standardization in servicing agreements, among other ideas.  His is the best extant statement of a “marginal adjustment and fill in the regulatory gaps approach,” and the reader will notice that most economics bloggers tend to be more pessimistic about the efficacy of marginal reform and to favor blunter restrictions, such as might be applied to leverage.  Kroszner also offers a good discussion of how implicit governmental guarantees undermine the development of market infrastructure, for instance the systematic development of data bases to better inform market participants.  Kroszner of course was on the Board of Governors during the financial crisis.

I came away from this book thinking: “There aren’t enough safe assets out there.  But how can we solve that problem?”

I would have enjoyed hearing Interfluidity at this session.  

David Brooks on *The Great Stagnation*

Tyler Cowen’s e-book, “The Great Stagnation” has become the most debated nonfiction book so far this year.

…It could be that the nature of technological change isn’t causing the slowdown but a shift in values. It could be that in an industrial economy people develop a materialist mind-set and believe that improving their income is the same thing as improving their quality of life. But in an affluent information-driven world, people embrace postmaterialist mind-set. They realize they can improve their quality of life without actually producing more wealth.

Here is more.

Budget sentences to ponder

The regression coefficient of -0.07 suggests that in countries where revenues as a share of GDP were 10 percentage points lower in 1979, health care spending increased as a share of GDP by 0.7 less in the next 30 years.  This association is consistent with the hypothesis that high tax rates limit the further growth of public contributions to health spending because of the much larger economic costs…and because of political pressures against high tax rates, a result also found in a cross-country study…

That is from the scary paper by Katherine Baicker and Jonathan Skinner, "Health Care Spending Growth and the Future of U.S. Taxes."  (Can anyone find an ungated copy?  Can we all say a hail to James M. Buchanan?)

As for today's announced budget, Kevin Drum serves up some relevant remarks.

The Pharaoh and the Commanding Heights

The Egyptian military is, for now, looking like a force for democratization. It should not be forgotten, however, that the military is an oligarchy which controls huge swaths of the Egyptian economy.  Chariotguy

SFChronicle: It owns companies that sell everything from fire extinguishers and medical equipment to laptops, televisions, sewing machines, refrigerators, pots and pans, butane gas bottles, bottled water and olive oil.

Its holdings include vast tracts of land, including the Sharm el-Sheikh resort, where ex-President Hosni Mubarak now resides in one of his seaside palaces. Bread from its bakeries has helped head off food riots.

Time notes:

Another source of the military's untold wealth is its hold on one of this densely populated country's most precious commodities: public land, which is increasingly being converted into gated communities and resorts. The military has other advantages: it does not pay taxes and does not have to deal with the bureaucratic red tape that strangles the private sector. 

…The revenue streams from its various holdings help the military maintain the lifestyle its officers have grown accustomed to, including an extensive network of luxurious social clubs as well as comfortable retirements – all of which helps ensure officer loyalty.

Not surprisingly, the military has opposed privatization and economic liberalization. The Egyptian military currently commands a great deal of respect in Egypt but what happens when a nascent democracy tries to reform an entrenched oligarchy?

Unemployment rates have doubled in most sectors — what does that mean?

Paul Krugman makes this observation, which I believe dates back to Rortybomb and perhaps earlier.  Rortybomb, Krugman, and others have cited it as evidence for demand-based, non-structural theories of unemployment.  I believe this is not exactly the correct inference.

Let's say you have the iPad sector, where unemployment is one percent (990 of 1000 are employed), and the typewriter sector, where unemployment is twenty percent (800 of 1000 are employed).  AD falls across the board, and that means there is in effect a proportional real wage mark-up, relative to what conditions justify, on both sectors.  Let's say that in both sectors real wages are suddenly five percent too high, again because of the whack to AD, which you can view as insufficient inflationary pressure.

To continue with this deliberately artificial example, let's also say we have equal and unitary labor demand elasticity in each sector.  So if the real wage is five percent too high because of the deflation, the quantity of labor demanded should fall by five percent.

In the iPad sector, employment falls five percent, or 49.5 workers, I will call it fifty even, to 940 workers employed, or the rate of unemployment goes up from one percent to six percent.

In the typewriter sector, employment falls by five percent, which leads to 760 employed out of 1000, or the rate of unemployment rises from twenty percent to twenty-four percent.

The two rates of unemployment, in the two sectors, do not go up proportionally or even close to proportionally.  It is harder to boost up the unemployment rate in the typewriter sector; the intuition is simple, namely that it is easier to double the unemployment rate when that rate is starting at the very low figure of one percent.  You can set this problem up in many different ways, but it's hard to avoid that core intuition.

If the rate of unemployment is going up proportionately in both sectors, it means the downturn is administering an especially strong shock to the weaker sectors.  It is a "final death blow tip them over the precipice kind of shock."  It does not signify AD irrelevance, but rather that negative AD shocks and preexisting structural problems somehow magnify each other.

Yet numerous times I have seen proportional changes in unemployment rates cited as evidence for a pure AD approach.  That does not follow.

As a final point, please note that not all non-AD theories imply excess demand for labor in a significant number of sectors.  There are plenty of non-AD theories, such as an increase in the risk premium, where there is a big negative employment move pretty much across the board.  I continue to see this point misunderstood.

The Keynesian bloggers are correct to argue against AD denialists, but when it comes to their arsenal of counters they are overreaching.