Month: September 2011
Brad DeLong defines “the long run”
Empirical reality has told us that–at least when inflation is very low, as it is at present–the short-run is not less than five years but (shudder) can be as long as fifteen.
The full post, which offers more, is here.
That is exactly the kind of direct response I have been looking for, though I might get greedy and ask what makes inflation “very low.” Core inflation has now reached two percent and I can’t quite regard the non-core, which is higher at 3.8 percent, as totally irrelevant. (Why is it I hear Scott Sumner in my ear, and can you guess which four-letter abbreviation he is screaming out?)
In my view, supply-side factors are the main reason why the employment-to-population ratio has been so dismal since 2000, demand-side factors are the main reason why so many bad things have happened since 2007-2009, and supply-side factors and mismatched expectations are the fundamental reason why demand-side factors went south in 2007-2009.
It also seems to me that the long run comes more quickly when TFP is relatively high, which again brings us back, at least partially, to the supply side. This view is supported by theory. When the economy has a lot of broad-based technological innovation, at least somewhat evenly distributed, job creation is easier, income effects are more likely to positively cumulate, and monetary and fiscal policy are more likely to gain traction.
Part of me is willing to accept a linguistic bargain, something like the following: “I will admit that the short run can last for fifteen years, if we agree that TFP helps determine that horizon.” Another part of me then realizes that if the long run helps determine the relevance of the “short run,” the long run is always mattering. At which point I go back to believing that the traditional “old Keynesian” distinction between the long run and the short run is sometimes more confusing than illuminating.
The rise of the generalist
I don’t know if I’ve heard anyone say this and I am not quite sure what I think about it myself, but one way to view the economy in the Information Age is that the returns to specialization are falling.
So, those who like such things can go all the way back to Adam Smiths pin factory and think about all the tasks involved in making pins and how each person could become more suited to that task and learn the ins and outs of it.
However, in the information age I can in many cases write a program to repeatedly perform each of these tasks and record ever single step that it makes for later review by me. The individualized skill and knowledge is not so important because it can all be dumped into a database.
What really matters is someone who gets pins. Not the various steps involved in making pins but the concept of the whole pin. What makes a good pin a good pin. How do pins fit into the entire global market. What the next big thing in pins.
This individual will be able to outline a pin vision that she or just a few programmers can easily implement. One could say this is the story of Facebook or Twitter. Really good ideas and just a few people needed to implement them.
However, as IT progress and machines can do more things it could be the story of the economy generally.
In contrast to The Great Stagnation, I would call this The Rise of Generalist or perhaps to be consistent The Great Generalization.
Even if you stop and think for a minute about all of the things that your computer or now even your phone can do, are you now wielding the most generalized tool ever conceived?
I would add in turn that the Generalist boosts the reach of the Specialist, as the Generalist relies on many specialists to supply inputs for his or her outputs. It may be the “tweeners” in the middle who lose income and influence, and that the extreme generalists and specialists will prosper, intellectually and otherwise.
The perspective of the statesman and the perspective of the blogger (or scholar)
Some of you have asked me what I think of the concerted central bank effort to flood European banks with dollars. Ed Harrison noted the Fed is playing it down (no press release, perhaps a fear of treason charges), I believe Roubini viewed it as a hidden forex move.
I find it a striking dilemma and here is why. The blogger in me thinks: “This just postpones all the major decisions. Once the loans are up the banks still will be strapped, and the longer you wait to resolve financial crises, the more they will cost. There is no eurobond and no rapid economic growth at the end of that tunnel.”
If I were Trichet, or some other involved statesman, I would have done what was done, albeit sooner. The statesman in me would think: “This just postpones all the major decisions. But I can’t send everyone to their doom just yet. Maybe there is some way I am wrong and a month or two from now things will look different and we can make another decision then.”
I am never sure how to reconcile these two perspectives. Of course, in real life I am a blogger and not a statesman, for good reasons I might add.
In the meantime, the banks are lobbying the BRICS.
Rogue traders, rogue burritos, and mothers of two
I was always struck in college, watching people head off into the field of finance, by the mismatch between the demographics of the folks who’d go be bankers and the stated desire to manage risk. If I’m conjuring up in my head a vision of a prudent risk manager, I’m thinking maybe a mother of two. Someone smart, of course, but also someone who’s cautious. Someone who sees the whole field. Someone who juggles. I’m not thinking “young smart arrogant dude with limited practical experience and a burning desire to get ahead.” That to me sounds more like a rogue trader!
From Matt Yglesias, here is more.
Assorted links
Demystifying (mystifying?) small business
In BPEA, from Erik Hurst and Benjamin Wild Pugsley (pdf):
In this paper, we show that substantial differences exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance, their ex-ante desire for future growth, and their initial motives for starting a business. Specifically, using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing customer base. Further, using the same data, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.
The world’s funniest analogies
From this longer list (funny throughout), presented by Bill Gross and (possibly) derived from student writings, Jason Kottke provides his favorites:
Her vocabulary was as bad as, like, whatever.
From the attic came an unearthly howl. The whole scene had an eerie, surreal quality, like when you’re on vacation in another city and Jeopardy comes on at 7:00 p.m. instead of 7:30.
He was as tall as a six-foot, three-inch tree.
John and Mary had never met. They were like two hummingbirds who had also never met.
His comment:
That first one…I can’t decide if it’s bad or the best analogy ever.
I liked this one:
He was as lame as a duck. Not the metaphorical lame duck, either, but a
real duck that was actually lame, maybe from stepping on a land mine or
something.
From the comments
“Lord” has a way with words:
The filp side of AD is unused capacity which is why it takes long to adjust, more of the same can be produced from productivity improvements alone and more investment is unnecessary. This means high profits for incumbents that are not competed away because everyone knows the encumbant can always undercut them if they had to. The combination of low inflation and productivity growth result in little to no progress in price adjustment. The entirety of growth must be borne by innovation which is small and slow, especially now. The wealth loss means debt liquidation will proceed for an extended period of time, doubly long since collateral values aren’t there to lower rates and risk premiums are greatly enhanced. Those are structural but ones that could be fixed monetarily with a sufficient money drop but probably not otherwise with conventional policy since there is little reason to borrow by anyone with the capacity to do so and little capacity to borrow by those with reason to. Game over.
Pen and pencil myths
There’s a popular myth that NASA spent “millions” of dollars developing a pen for astronauts to use in the weightless environment of a space ship — while their sensible Russian counterparts were happy to use the low-tech pencil. Alas, for all its appeal and plausibility, this is not true. Initially, astronauts and cosmonauts were both equipped with pencils, but there were problems: if a piece of lead broke off, for example, it could float into someone’s eye or nose. A pen was needed, one that would defy gravity, write in extreme heat or cold, and be leak proof: blobs of ink floating around the cabin would be more perilous than a stray pencil lead. A long-time pen maker named Paul C. Fisher patented the “space pen” in 1965 (which he had developed at the cost of a million dollars, at the request of but not under the auspices of NASA.) NASA bought four hundred of them at $6 each, and, after a couple of years of testing, the pens were put into space.
That is from Kitty Burns Florey, Script & Scribble: The Rise and Fall of Handwriting.
Assorted links
2. “This town lacks for nothing…”: automatic stabilizers in Italy, austerity edition.
3. The only industry in South Sudan.
4. Free Nollywood streaming on-line.
5. Almost three-quarters of the London rioters appearing in court already have had criminal convictions. “Those with criminal records have an average of 15 offences each.”
6. Now everything is super-correlated, super scary.
Detroit moves to a two-tier wage structure (can we call it a jobs package?)
They are a cornerstone of Chrysler’s unlikely comeback: 900 employees turning out a Jeep Grand Cherokee sport utility vehicle every 48 seconds of the working day at an assembly plant here.
Nothing distinguishes them from other workers at the Jefferson North plant, except their paychecks. The newest workers earn about $14 an hour; longtime employees earn double that.
…the advent of a two-tier wage system in Detroit is spiking employment for one of the country’s most important manufacturing industries.
Here is much more, interesting throughout, and I thank Miles Robinson for the pointer. By the way:
Workers at Jefferson North said that the pay gap had not created visible tension.
See the article for some qualifiers on this front, but there is nothing unusual or shameful in using the prospect of promotion to induce discipline.
A simple question: is this a) macroeconomic good news, or b) macroeconomic bad news? That it “has to happen” may be bad news, I mean “that it is happening,” given initial conditions. I vote for a), good news, what do you vote for? What are liquidity trap proponents supposed to answer?
The Italian Job
NYTimes: With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.
The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.
“Jobs like these have kept this city alive,” said Caterina Valenti, 41, an auxiliary in a neat blue uniform as she sat recently with two colleagues, all on duty, drinking coffee in the town’s bar on a hot afternoon. “You see, here we are at the bar, we support the economy this way.”
Do women compete better in teams?
Nearly two-thirds of the “gender competition gap” – the gap between the likelihood of men or women to enter a competition – disappears when people are offered the chance to compete in two-person teams rather than as individuals. Academics Andrew Healy and Jennifer Pate claim that their findings, published in the Economic Journal, have important implications for the design of competitive environments, such as elections and corporate career ladders.
The pair believe their research reveals that competing in teams “levels the playing field” by encouraging a higher number of qualified women to take part and discouraging unqualified men. They argue that this insight should help organisations to select the best-qualified leaders.
A gated version of the paper is here, an ungated version is here.
Does Greek default mean Greece leaving the eurozone?
I get this question a lot; by the way this guy advocates one and not the other. “Not necessarily, but probably” is the answer.
Let’s say Greece opts for a large default. The Greek government’s commitment to the Greek banking system could then be seen as either stronger or weaker. Stronger because they have more money left over, or weaker because they are breaking their commitments. Note that Greece is still borrowing to meet current budget, so a large unauthorized default probably weakens the commitment to the banks. They’re still out of money and then some.
In my view the commitment of the Greek government to its banking system needs to be seen as much stronger. If perceptions remain the same or weaken, the silent run on Greek banks will continue or worsen. Sooner or later, the Greek government, through guaranteed or nationalized banks, will be redeeming “a euro” for “less than a euro,” at which point they have de facto left the eurozone. Remaining in the eurozone means making the bank redemption promise truly credible at a one-to-one rate. Default makes that tougher rather than easier.
Even if Greece, after a large default, has enough cash to back its banks, the market still might be thinking Greece will leave the eurozone for optimal currency area reasons. That will lead to a continuing exodus of deposits from Greek banks. It’s not clear how the Greeks can stem that additional pressure and it means we’re again back to a weak Greek commitment to its banking system. Leaving the euro means getting that pressure over with and beginning the process of Greek bank recapitalization, long and painful though it might be.
To sum up, I expect that default would lead to Greece leaving the eurozone, though you can write down conditions (more cash on hand for the government, consequences of default vanish quickly, stronger guarantee to banks, no subsequent fear of eurozone desertion) where that doesn’t have to be the case.
The excuses have run out
John Quiggin writes:
- Average US household size has been increasing since 2005 and is now back to the 1990 level
- Changes following the Boskin Commission report of 1996 have mostly accounted for product quality improvements and substitution effects
- The EITC was last changed in 2001, and the effects were modest. It seems likely to be cut as part of the current move to austerity
- Access to health insurance has generally declined. Obama’s reforms will change this if they survive to 2014, but that’s far from being a certainty
Work backwards to figure out the context.