Month: October 2014
Does it reflate economies if all nations increase their exports?
The Germans lecture the periphery to engage in structural reform and increase their exports. A variety of IS-LM Keynesians strike back and note that not all nations can increase their net exports, therefore it is a kind of zero-sum game which won’t boost aggregate demand overall. This is sometimes followed by blaming the Germans for soaking up aggregate demand from other parts of the world.
But that Keynesian counter is a mistake, perhaps brought on by the IS-LM model and its impoverished treatment of banking and credit.
Let’s say all nations could indeed increase their gross exports, although of course the sum of net exports could not go up. The first effect is that small- and medium-sized enterprises would be more profitable in the currently troubled economies. They would receive more credit and the broader monetary aggregates would go up in those countries, reflating their economies. (Price level integration is not so tight in these cases, furthermore much of the reflation could operate through q’s rather than p’s.) It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.
Second, the higher (gross) exports and higher quantity of trade overall would produce positive wealth effects. This too would reflate economies through a variety of well-known mechanisms, including but not restricted to the easing of collateral constraints.
In other words, it can help reflate all or most of the economies if they increase their gross exports, even though net exports are a zero-sum magnitude.
This interpretation of the meaning of zero-sum net exports is one of the most common economic mistakes you will hear from serious economists in the blogosphere, and yet it is often presented dogmatically or dismissively in a single sentence, without much consideration of more complex or more realistic scenarios.
Some of the most important sentences in economics
This is from Larry Summers and Lant Pritchett:
…knowing the current growth rate only modestly improves the prediction of future growth rates over just guessing it will be the (future realized) world average. The R-squared of decade-ahead predictions of decade growth varies from 0.056 (for the most recent decade) to 0.13. Past growth is just not that informative about future growth and its predictive ability is generally lower over longer horizons.
The main point of this paper is to argue that Chinese growth rates will become much lower, perhaps in the near future, here is a summary of that point from Quartz:
Summer and Pritchett’s calculations, using global historical trends, suggest China will grow an average of only 3.9% a year for the next two decades. And though it’s certainly possible China will defy historical trends, they argue that looming changes to its authoritarian system increase the likelihood of an even sharper slowdown.
The piece, “Asiaphoria Meets Regression Toward the Mean,” is one of the best and most important economics papers I have seen all year. There is an ungated version here (pdf). I liked this sentence from the piece:
Table 5 shows that whether or not China and India will maintain their current growth or be subject to regression to the global mean growth rate is a $42 trillion dollar question.
And don’t forget this:
…nearly every country that experienced a large democratic transition after a period of above-average growth…experienced a sharp deceleration in growth in the 10 years following the democratizing transition.
As Arnold Kling would say, have a nice day.
Germany fact of the day
A shocking example is the decrepit state of German military hardware. Of the Luftwaffe’s 254 fighter planes, 150 cannot fly.
That is from Wolfgang Münchau at the FT.
Sunday assorted links
1. Good essay on risk communication during pandemics (though it focuses on flu, not Ebola).
2. Charles A. Beard and the Columbia School of Political Economy.
3. What Saddam Hussein said in public vs. what he said in private (hat tip www.bookforum.com for the last two links).
Charles Murray on Ayn Rand
Charles Murray has a good piece on Ayn Rand, critical in parts but especially insightful about why Rand’s books continue to be so inspirational and influential:
Rand expressed the glory of human achievement. She tapped into the delight a human being ought to feel at watching another member of our species doing things superbly well. The scenes in “The Fountainhead” in which the hero, Howard Roark, realizes his visions of architectural truth are brilliant evocations of human creativity at work. But I also loved scenes like the one in “Atlas Shrugged” when protagonist Dagny Taggart is in the cab of the locomotive on the first run on the John Galt line, going at record speed, and glances at the engineer:
He sat slumped forward a little, relaxed, one hand resting lightly on the throttle as if by chance; but his eyes were fixed on the track ahead. He had the ease of an expert, so confident that it seemed casual, but it was the ease of a tremendous concentration, the concentration on one’s task that has the ruthlessness of an absolute.
That’s a heroic vision of a blue-collar worker doing his job. There are many others. Critics often accuse Rand of portraying a few geniuses as the only people worth valuing. That’s not what I took away from her. I saw her celebrating people who did their work well and condemning people who settled for less, in great endeavors or small; celebrating those who took responsibility for their lives, and condemning those who did not. That sounded right to me in 1960 and still sounds right in 2010.
Second, Ayn Rand portrayed a world I wanted to live in, not because I would be rich or powerful in it, but because it consisted of people I wanted to be around. As conditions deteriorate in “Atlas Shrugged,” the first person to quit in disgust at Hank Rearden’s steel mill is Tom Colby, head of the company union:
For ten years, he had heard himself denounced throughout the country, because his was a ‘company union’ and because he had never engaged in a violent conflict with the management. This was true; no conflict had ever been necessary; Rearden paid a higher wage scale than any union scale in the country, for which he demanded—and got—the best labor force to be found anywhere.
That’s not a world of selfishness or greed. It’s a world of cooperation and mutual benefit through the pursuit of self-interest, enabling satisfying lives not only for the Hank Reardens of the world but for factory workers. I still want to live there.
…In scene after scene, Rand shows what such a community would be like, and it does not consist of isolated individualists holding one another at arm’s length. Individualists, yes, but ones who have fun in one another’s company, care about one another, and care for one another—not out of obligation, but out of mutual respect and spontaneous affection.
Ayn Rand never dwelt on her Russian childhood, preferring to think of herself as wholly American. Rightly so. The huge truths she apprehended and expressed were as American as apple pie. I suppose hardcore Objectivists will consider what I’m about to say heresy, but hardcore Objectivists are not competent to judge. The novels are what make Ayn Rand important. Better than any other American novelist, she captured the magic of what life in America is supposed to be. The utopia of her novels is not a utopia of greed. It is not a utopia of Nietzschean supermen. It is a utopia of human beings living together in Jeffersonian freedom.
Also worth reading is this superb piece by Robert Tracinsiki, All an Ayn Rand Hero Really Wants is Love.
The Ebola risk premium
Underpaid or overpaid?:
They’re looking for the few, the proud — and the really desperate.
For a measly $19 an hour, a government contractor is offering applicants the opportunity to get up close and personal with potential Ebola patients at JFK Airport — including taking their temperatures.
Angel Staffing Inc. is hiring brave souls with basic EMT or paramedic training to assist Customs and Border Protection officers and the Centers for Disease Control and Prevention in identifying possible victims at Terminal 4, where amped-up Ebola screening started on Saturday.
EMTs will earn just $19 an hour, while paramedics will pocket $29. Everyone must be registered with the National Registry of Emergency Medical Technicians.
The medical staffing agency is also selecting screeners to work at Washington Dulles, Newark Liberty, Chicago O’Hare and Hartsfield-Jackson Atlanta international airports.
There is more here, via Matthew E. Kahn. How much does the regular (non-Ebola) staff earn?
Saturday assorted links
Germany fact of the day
From 1973 to 1985 German inflation was most of the time over two percent a year, sometimes much over two percent. In 1973 it hit eight percent and in the early eighties it exceeded six percent a year. Source here (pdf), see p.6.
From 1951-1973, the Germans seemed happy with roughly the same inflation rate as what Americans had. Source here (pdf), see p.9, and also p.13, passim. In the early 1970s, the rate averaged almost seven percent a year for a few years (p.15). It is fine to note the role of oil shocks here, and in the earlier period Bretton Woods, but still Germans tolerated the higher inflation rates. They expected the alternatives would be worse and probably they were right.
The claim that the current German dislike of inflation dates back to unique memories of Weimar hyperinflation is dubious. Rightly or wrongly, today’s Germans associate high rates of inflation with wealth transfers away from Germany and toward other nations. More broadly, Germany is a more flexible country than outsiders often think, not always to the better of course.
From the comments, on a fusion reactor
So for once I can intelligently comment on a Marginal Revolution article. (I have a Ph.D. in applied plasma physics and fusion energy; I worked on the “conventional” fusion reactor design, the tokamak). Lockheed hasn’t released many details of their concept (at least, not enough details that it can actually be evaluated in technical detail), but it looks like it’s a combination of a magnetic mirror and a levitated dipole. The magnetic mirror was studied in detail in the 1960s and 1970s and didn’t work out (due to [detailed plasma physics reasons]) and the levitated dipole has a fundamental flaw as a power-producing reactor in that the superconducting magnets are inside the neutron shielding – neutrons destroy the magnets.
It’s tough as a scientist to be able to comment on things like this, because it’s “science by press release”, i.e. there’s a big media hype but the actual researchers don’t release enough technical details to actually evaluate it. One wants to remain cautiously optimistic, but with fusion in particular, we’ve been down this road many, many times. Thus I predict that the most likely outcome is that as they scale their device up, they’ll find that the confinement (a measure of how well the device holds a fusion plasma) unexpectedly drops off due to some different types of turbulence turning on at higher temperatures / higher pressures… and it will quietly go away.
I hope that I am proven wrong.
There are other interesting comments at the link and Kottke offers more.
Immigration Granger-causes neither unemployment nor growth
So argues a new paper (pdf) by Ekrame Boubtane, Dramane Coulibaly, and Christophe Rault, the abstract is here:
This paper examines the causality relationship between immigration, unemployment and economic growth of the host country. We employ the panel Granger causality testing approach of Konya (2006) that is based on SUR systems and Wald tests with country specific bootstrap critical values. This approach allows to test for Granger-causality on each individual panel member separately by taking into account the contemporaneous correlation across countries. Using annual data over the 1980-2005 period for 22 OECD countries, we find that, only in Portugal, unemployment negatively causes immigration, while in any country, immigration does not cause unemployment. On the other hand, our results show that, in four countries (France, Iceland, Norway and the United Kingdom), growth positively causes immigration, whereas in any country, immigration does not cause growth.
This result reflects two broader lessons. First, at the margin the major benefits from migration are to the migrants. Second, again at the margin, most policy changes matter less than you think they will.
Hat tip goes to Ben Southwood.
Assorted links
1. The drone brawl between Serbia and Albania.
2. E. Glen Weyl on the openness-equality tradeoff in global redistribution, or is there a case for the Gulf monarchies?
3. Shenzhen black swans feed pellets to carp.
4. When is martial law a tourist attraction? (the culture that is Thailand)
6. Arnold Kling on Alan MacFarlane.
7. Monetary policy with interest on reserves (speculative)
The economic value of misbehavior
There is a new paper by Papageorge, Ronda, and Zheng, with a very interesting thesis, namely that preparing rowdies for better schooling results may not help their long-term prospects in life:
Prevailing research argues that childhood misbehavior in the classroom is bad for schooling and, presumably, bad overall. In contrast, we argue that childhood misbehavior reflects underlying traits that are potentially valuable in the labor market. We follow work from psychology and treat measured classroom misbehavior as reflecting two underlying non-cognitive traits. Next, we estimate a model of life-cycle decisions, allowing the impact of each of the two traits to vary by economic outcome. We show the first evidence that one of the traits capturing childhood misbehavior, discussed in psychological literature as the externalizing trait (and linked, for example, to aggression), does indeed reduce educational attainment, but also increases earnings. This finding highlights a broader point: non-cognition is not well summarized as a single underlying trait that is either good or bad per se. Using the estimated model, we assess competing pedagogical policies. For males, we find that policies aimed at eliminating the externalizing trait increase schooling attainment, but also reduce earnings. In comparison, policies that decrease the schooling penalty of the externalizing trait increase both schooling and earnings.
For the pointer I thank the excellent Kevin Lewis.
Five case studies in politicization
This is a fascinating Scott Alexander take on tribalism and how political issues are framed, starting with Ebola. As Robin Hanson would say, “politics isn’t about policy.” Here is the segment on how climate change issues might be marketed to the Right:
Global warming has already gotten inextricably tied up in the Blue Tribe narrative: Global warming proves that unrestrained capitalism is destroying the planet. Global warming disproportionately affects poor countries and minorities. Global warming could have been prevented with multilateral action, but we were too dumb to participate because of stupid American cowboy diplomacy. Global warming is an important cause that activists and NGOs should be lauded for highlighting. Global warming shows that Republicans are science denialists and probably all creationists. Two lousy sentences on “patriotism” aren’t going to break through that.
If I were in charge of convincing the Red Tribe to line up behind fighting global warming, here’s what I’d say:
In the 1950s, brave American scientists shunned by the climate establishment of the day discovered that the Earth was warming as a result of greenhouse gas emissions, leading to potentially devastating natural disasters that could destroy American agriculture and flood American cities. As a result, the country mobilized against the threat. Strong government action by the Bush administration outlawed the worst of these gases, and brilliant entrepreneurs were able to discover and manufacture new cleaner energy sources. As a result of these brave decisions, our emissions stabilized and are currently declining.
Unfortunately, even as we do our part, the authoritarian governments of Russia and China continue to industralize and militarize rapidly as part of their bid to challenge American supremacy. As a result, Communist China is now by far the world’s largest greenhouse gas producer, with the Russians close behind. Many analysts believe Putin secretly welcomes global warming as a way to gain access to frozen Siberian resources and weaken the more temperate United States at the same time. These countries blow off huge disgusting globs of toxic gas, which effortlessly cross American borders and disrupt the climate of the United States. Although we have asked them to stop several times, they refuse, perhaps egged on by major oil producers like Iran and Venezuela who have the most to gain by keeping the world dependent on the fossil fuels they produce and sell to prop up their dictatorships.
We need to take immediate action. While we cannot rule out the threat of military force, we should start by using our diplomatic muscle to push for firm action at top-level summits like the Kyoto Protocol. Second, we should fight back against the liberals who are trying to hold up this important work, from big government bureaucrats trying to regulate clean energy to celebrities accusing people who believe in global warming of being ‘racist’. Third, we need to continue working with American industries to set an example for the world by decreasing our own emissions in order to protect ourselves and our allies. Finally, we need to punish people and institutions who, instead of cleaning up their own carbon, try to parasitize off the rest of us and expect the federal government to do it for them.
Please join our brave men and women in uniform in pushing for an end to climate change now.
The piece is interesting throughout, hat tip goes to MR commentator Macrojams.
Does subsidizing higher education increase or decrease signaling costs?
As of 2004, only 16.7% of the cost of Korean higher education was picked up by government, as opposed to an OECD average of about 77% (see this paper). That’s a relatively low level of subsidy. And yet Korea has one of the highest degree-granting rates in the world, the status of the school you go to is all-important, tiers of quality are fairly rigid, admission is closely linked to exam performance, and doubts have been raised about how much people actually learn in those schools. At least when it comes to surface phenomena, it appears Korean higher education has a lot to do with signaling.
In Germany they just made the universities completely free, and in the past they were quite cheap, which of course means subsidized. Germany also sends a relatively high percentage of its population to vocational training, where presumably the students learn some concrete skills. Could it be there is too much slacking in German universities (which I have interacted with twice, both as student and as professor) for attendance to serve as a very effective signal?
Can it be the case that a government subsidy, by limiting privately-perceived quality and returns, can lower private signaling costs? Should advocates of the signaling model therefore be more favorably inclined toward subsidies?
The limits of open borders advocacy
Here is a very good piece by The Mitrailleuse, though I do not agree with all of it. Here is the conclusion:
In summary, the libertarian discussion surrounding immigration shouldn’t be viewed as an all or nothing proposition and as Sanandaji has argued, it should take real world empirical patterns into account rather than assume away voting, the public sector, and social externalities. Libertarians should adopt the same skeptical economist’s view they apply to all other subjects when weighing questions about immigration to determine if we can actually affect the changes we would like to make.
It is perfectly acceptable for libertarians to disagree on such a complex subject and to hold opinions in favor of more marginal change. There are plenty of modest ways libertarians can criticize the existing immigration system without being in favor of open borders. These libertarians shouldn’t be vilified for their humility and prudence. There is no academic consensus on the subject and the issue is too complex and contextual for there to be a clear-cut libertarian position. The burden of proof lies on advocates of open borders to engage these criticisms.
For the pointer I thank Andrea Castillo.