Month: April 2022

Austrian business cycle theory by any other name

by  Tyler Cowen

Since sectors differ in their sensitivity to interest rates, monetary policy produces inefficient sectoral fluctuations. In a model with sectoral heterogeneity, I show that policymakers should weight sectors proportionally to their interest elasticities, account for dynamic demand effects from durable goods, and systematically utilize forward guidance to reduce sectoral volatility. A calibrated model confirms these recommendations and finds that neglecting sectoral volatility produces substantial welfare losses. The best-performing policy rule stabilizes a sectorally weighted measure of inflation, plus lags of past durable inflation.

That is a newly published piece by Jonathan Kreamer in American Economic Journal; Macroeconomics.

The very best parts of the best Beatle songs

by  Tyler Cowen in

You also might title this post “How to listen to The Beatles.”  Here are the best parts, in no particular order:

1. The violins/voices warm-up to Sgt. Pepper.

2. The George/John background vocals to “You Won’t See Me.”

3. The sounds during the fade out section of “You Never Give Me Your Money.”  This is perhaps my #1 pick.

4. The total, sudden silence at the end of “I Want You “She’s So Heavy.”  Radio stations and streaming services don’t get this one right.

5. The drums/bass collision, combined with backward tape on the vocal, at the end of “Rain.”

6. The short Indian drone segment in one of the latter choruses of “She’s Leaving Home.”  Starts at about 2:57.

7. The airiness/breathing aspect of “Long Long Long.”  Not George’s very best song, but still notable for its acoustic properties.

8. Paul’s brief “return to the womb” piano and vocal close to “Cry, Baby, Cry.”

9. The parts of “Blue Jay Way” (starts about 3:44) and “I am the Walrus” (1:59) when the normal music stops and a bunch of sounds, including cello and also some “acoustic-electric” sounds, come together in a crescendo.  Try also Paul’s much later “Cosmically Conscious,” originally written in 1968 and obviously so (how?).  The cacophony and fade at the end of “All You Need is Love” is the best part of that (very good) song!

10. All of “Strawberry Fields Forever,” which apparently was produced so as to be in two different keys at the same time.

In an earlier post, I suggested that to understand the Beach Boys and their sound world you should listen carefully to “Vegetables” on a high-quality sound system.  Figure out that sound world, and then apply that understanding to the rest of your Beach Boys listening.  Well, here are my comparable tips for The Beatles.

*Jena 1800*

by  Tyler Cowen

Jena had only about five thousand inhabitants at the time, but for a while in the early nineteenth century it was the center of German intellectual life.  In one house (Leutragasse 5) you had living, at the same time, Friedrich and August Wilhelm Schlegel, Caroline Schlegel, Dorothea Veit, Friedrich Wilhelm Joseph Schelling, Friedrich von Hardenberg (“Novalis”), and Ludwig Tieck.

How is that for “small group theory“?

Fichte, Goethe, and Hegel show up as well!

The author of the book is Peter Neumann, and the subtitle is The Republic of Free Spirits.  It is not captivating (Germanic style, then translated), but I found it valuable nonetheless.  Which other contemporary work covers this remarkable assemblage of talent?

A short disquisition on Cowen’s Third Law

by  Tyler Cowen in

“All propositions about real interest rates are wrong,” and this one is in the form of a Bloomberg column.  Here is one part:

The law of demand is one of the sacrosanct principles of economics: If the price of apples goes up, the demand for apples will go down. Yet when real interest rates go up, it is not obvious that the demand to invest goes down, even if the numbers are adjusted for possible reasons why real interest rates might have changed in the first place. This raises a profound question: If the law of demand doesn’t apply, how well do we understand investment and real interest rates at all?

The puzzles deepen. There was a longstanding debate in economics about whether the U.S. Federal Reserve, using monetary policy, could affect real rates of interest. After extensive research, the conclusion was reached that the Fed can indeed have a marginal effect by supplying more liquidity to markets. Yet the effect is sufficiently small that there can be a plausible debate about whether, statistically speaking, it exists at all.

These days, however, the real federal funds rate measures as below -4%, based on measures of core inflation. No one doubts that the monetary expansions of the Fed, which have brought much higher inflation, are a major factor behind that shift. In other words, the Fed’s impact on real rates is far more potent now than in times past.

It gets worse yet. Most observers were not anticipating that expected short rates could fall and stay below -4%. Why hold those assets at all? I don’t have a good answer to that question.

Recently the term structure of interest rates has become inverted, by which it is meant that the short-term rates are higher than the long-term rates. Economists have debated for decades whether such a sign might be a good predictor of a recession. (The theory is that low long-term rates mean that future demand to invest will be low, a bearish sign.) Yet the current data are ambiguous. So not only are real interest rates often hard to predict, but they themselves are not typically clear predictive signals on their own.

There are further conundrums at the link.

U.S.A. fact of the day

by  Tyler Cowen in

In 1980, some 35% of cars produced in the U.S. were manuals. Today that figure is closer to 1%, and only 3.7% of Carmax sales are for stick shifts—shockingly low considering that 80% of cars sold in Europe have manual transmissions. Some car makers, including Audi, no longer offer manual transmissions in the U.S. market at all…

Only around 18% of American drivers can handle a manual transmission, according to U.S. News and World Report.

What happened?  Here is more from the WSJ.

Tax Russian Oil

by  Alex Tabarrok in

A tax on Russian oil would be paid mostly by Russia and would not greatly raise the price of oil. I often assign a question like this to my Econ 101 students. Ricardo Hausmann runs through the argument:

At first sight, imposing a tax on a good must increase its price, making energy even more expensive for Western consumers. Right? Wrong! At issue is something called tax incidence analysis, which is taught in basic microeconomics courses. A tax on a good, such as Russian oil, will affect both supply and demand, changing the good’s price. How much the price changes, and who bears the cost of the tax, depends on how sensitive both supply and demand are to the tax, or what economists call elasticity. The more elastic the demand, the more the producer bears the cost of the tax because consumers have more options. The more inelastic the supply, the more the producer – again – bears the tax, because it has fewer options.

Fortunately, this is precisely the situation the West now confronts. Demand for Russian oil is highly elastic, because consumers do not really care if the oil they use comes from Russia, the Gulf, or somewhere else. They are unwilling to pay more for Russian oil if other oil with similar properties is available. Hence, the price of Russian oil after tax is pinned down by the market price of all other oil.

At the same time, the supply of Russian oil is very inelastic, meaning that large changes in the price to the producer do not induce changes in supply. Here, the numbers are staggering. According to the Russian energy group Rosneft’s financial statements for 2021, the firm’s upstream operating costs are $2.70 per barrel. Likewise, Rystad Energy, a business-intelligence company, estimates the total variable cost of production of Russian oil (excluding taxes and capital costs) at $5.67 per barrel. Put differently, even if the oil price fell to $6 per barrel (it’s above $100 now), it would still be in Rosneft’s interest to keep pumping: Supply is truly inelastic in the short run.

…In other words, given very high demand elasticity and very low short-term supply elasticity, a tax on Russian oil would be paid essentially by Russia. Instead of being costly for the world, imposing such a tax would actually be profitable.

Addendum: Many people in the comments aren’t getting this so let me note that there is a big difference between taxing oil and taxing Russian oil, it’s only for the latter good that demand is relatively elastic.

Formative experiences matter over long periods of time

by  Tyler Cowen in

Formative experiences shape behavior for decades. We document a striking feature about those who came of driving age during the oil crises of the 1970s⁠—they drive less in the year 2000. The effect is not specific to these cohorts; price variation over time and across states indicates that gasoline price changes between ages 15–18 generally shift later-life travel behavior. Effects are not explained by recessions, income, or costly skill acquisition and are inconsistent with recency bias, mental plasticity, and standard habit-formation models. Instead, they likely reflect formation of preferences for driving or persistent changes in its perceived cost.

That is from a newly published paper (AEA gate) by Christopher Severen and Arthur A. van Benthem.

What I’ve been reading

by  Tyler Cowen in

1. Alan Bollard, Economists at War: How a Handful of Economists Helped Win and Lose the World Wars.  A useful book on a much underrated topic.  Keynes, Kantorovich, and Leontief receive the most attention, though the book also covers of Takahashi Korekiyo of Japan.  My main complaint is the absence of Thomas Schelling.

2. Elizabeth Wilson, Playing with Fire: The Story of Maria Yudina, Pianist in Stalin’s Russia.  She converted from Judaism to Orthodox Christianity, and her career spanned from the 1920s through 1970.  She was at times out of favor, other times Stalin’s favorite pianist.  Called a “holy fool” by many, this is an excellent biography that brings its subject to life.  And her playing was full of depth, albeit with often creaky sound..

3. Ian Barnes, Restless Empire: A Historical Atlas of Russia.  One of the very most useful books for understanding Russian history — about half of this one is maps!  Changing maps over the ages.  These are the maps that Putin looks at, you should too.  A high quality book in all regards.

4. Sarah Weinman, Scoundrel: How a Convicted Murderer Persuaded the Women Who Loved Him, the Conservative Establishment, and the Courts to Set Him Free.  The murderer is Edgar Smith and the conservative is William F. Buckley — how could anyone have been fooled by these remorseless criminals?  A good look at what had been becoming a forgotten episode.  A tale of self-deception to the nth degree.

5. Caroline Elkins, Legacy of Violence: A History of the British Empire.  Yes, the empire truly was based in unacceptable levels of violence, and at its very core.  This excellent book is the very best demonstration of those propositions.  Historically thorough, and covers more than just a few cases.

There is a new reissue, with a new and good introduction, of Orlando Patterson, The Sociology of Slavery: Black Society in Jamaica, 1655-1838.

Ben Westhoff, Little Brother: Love, Tragedy, and my Search for the Truth is a very good narrative by a very good author.

Jeevan Vasagar, Lion City: Singapore and the Invention of Modern Asia is a decent first book to read on Singapore, although mostly it was interior to my current knowledge set.