Category: Economics

It starts with Nicholas Bloom and Raj Chetty, and includes Ali Wyne and Peter Leeson and Justin Wolfers,  among other luminaries,  courtesy of Big Think.  Here is Bloom:

I do not think that any one single breakthrough will happen.  The progress is likely to be heavily empirical—simply because more and more data is becoming available, and it is easy to analyze with fast computers (so empirics is now advancing faster than theory)—and spread across many hundreds of topics.  So economics has gone from Victorian science, where one genius in his shed could invent the steam engine over the weekend, to industrial science, where innovation comes in thousands of tiny steps made by dozens of research teams.

Here is Wolfers:

Economic theory will become a tool we use to structure our investigation of the data.  Equally, economics is not the only social science engaged in this race: our friends in political science and sociology use similar tools; computer scientists are grappling with “big data” and machine learning; and statisticians are developing new tools.  Whichever field adapts best will win.  I think it will be economics.

The local government of Liuzhou in southern China’s Guangxi Zhuang autonomous region has ended its hunt for rogue piranha fish after offering a reward which attracted thousands of hopeful fishers to local rivers. The quest to capture the troublesome fish — whose presence in the river is unexplained — has become farcical, with online retailers offering to sell and deliver piranhas to the region for 12 yuan (US$1.80) apiece.

The story is here and for the pointer I thank Peter Metrinko.

Here is Noah Smith on microfoundations, responding to Matt Yglesias (here and here, here is also a Krugman post on the topic).  I am usually pro-microfoundations, though without any particular philosophy of science-derived attachment to the idea.  Here is why:

1. In some very important, simple, and intuitive models, there is nominal stickiness but money is still neutral.  Caplin and Spulber 1980 is one of my favorite pieces and time spent studying their model will be repaid with value.  I don’t think the model applies to 2007-2009, or say 1929-1933, when we have “out of the ordinary” shocks, but it may apply to many other time periods.

2. Often the data suggest that money is neutral or roughly neutral or at least the data are not inconsistent with neutrality.  I know that one does not hear much about that in today’s economics blogosphere, but I kid you not.  Again, I differ strongly from this literature for “the times which really matter,” such as 2007-2009 or 1929-1933, but still I take the data seriously.  Try this relatively “atheoretical” piece by Harald Uhlig, which does not reject monetary neutrality (nor does it cover 2007-2009).  Nominal stickiness models have trouble explaining why money doesn’t matter more than in fact it does.  Understanding microfoundations will keep you out of the trouble you will get in if you keep trying to use money to expand output.

3. We can try to nudge people into more flexible wages, but again that requires some understanding of microfoundations.  The Fed can prevent any risk of a deflationary downward spiral, and please note it is no coincidence we are in the two percent inflation range.  You don’t have to view this as a high return activity to favor it  (it is funny how the mere mention of wage nudges will cause many people to suddenly turn against the nudge idea, at least temporarily.)

4. Microfoundations don’t have to mean intertemporal maximization with extreme assumptions about rational or well-behaved preferences.  George Akelof has written some of the best papers on microfoundations.  Nor do microfoundations have to mean staking out an extreme position on the Lucas critique.

5. There are plenty of flex-wage professions which still have been seeing high unemployment.  Like real estate agents.  Or what happened to all those Mexicans who used to stand around on street corners?  Were their wages sticky too?  I don’t think so.  Does their return to unemployment or underemployment in Puebla refute the sticky wage model?  I personally don’t think so, but it’s hard to answer that question — an obvious one to a critical observer — without a clear sense of microfoundations.

6. Just how bad is monopoly?  We wish to know when designing a competition policy.  Under some microfoundations models, the existence of market power is essential for ongoing stickiness, in other models not.  This question matters, and we need microfoundations to better resolve it.

7. Should a government subsidize, tax, or be neutral toward contract indexation?  Try answering that question, or even getting started on it, without some sensible microfoundations.

8. If you are trying to end a hyperinflation or high rate of inflation, do you need to get fiscal policy right, in some kind of credible manner, before enacting monetary restraint?  It is hard to imagine answering this question without good microfoundations.

I could go on.  I am worried that people are rejecting microfoundations because they think microfoundations imply objectionable attitudes toward macro policy.  But note: if those attitudes are objectionable and indeed wrong, they won’t be implied!  It is entirely defensible to argue “we should have a more expansionary monetary policy today, even without the microfoundations to support that view.”  It is much tougher to argue “economics should deemphasize microfoundations altogether.”  The broader the range of questions one considers, the more important microfoundations turn out to be.

It’s beginning to look like Keynes was wrong about liquidity traps, at least when he argued that there’s a certain minimum nominal yield that government bond investors demand, and that long term rates can be reduced no further.  Wherever people draw a line, bond yields just seem to plunge right through, to one record low after another.  And we know from Japan that they can go even lower.  But what does this mean?

It probably means multiple things.  For instance it suggests that the Keynesian/market monetarist AD pessimists and the Great Stagnation AS pessimists are both right.  We are looking at BOTH low inflation and low real GDP growth for many years to come.  Why don’t I think AD explanations are enough?   Partly because even the 20 year T-bond now has a negative real yield. Indeed it suggests the Bernanke “global savings glut” hypothesis is also correct, a point I’ve argued previously.  Japan is the future of the world.

Here is more.  And this:

The rate of nominal GDP growth in the US over the past 3 years has been above 4%, which is considerably higher than in Japan.  I would have thought that might well be enough.  (The fact that it wasn’t makes me think Japan is light years away from exiting the zero bound.)

In the IS/LM framework many…are using, doesn’t this mean that we are getting “growth” by firms investing in projects with a negative NPV now made profitable by an even more negative discount rate?

Here is more from Angus.

…many rallies end in the same way: the burning of an American flag.

…The man who dominates much of the supply chain of American flags to religious groups, 30-year-old Mamoon-ur-Rasheed – who’s been publishing anti-American placards and hand-made stars and stripes since his school days, when he was angered by the Clinton administration’s sanctions on Pakistan following its nuclear weapons testing in 1998 – is now remarkably dispassionate about his services, as well as about the short shelf-life of his flammable goods.

“We work hard for our product, and we get paid for our product,” says Rasheed, clad in a camouflage baseball cap and seated behind a desk that takes up most of the space in his eight-by-six-foot office in Gulashan-e-Iqbal, one of the city’s oldest working class neighborhood.

“So what if it burns? The purpose of the flag is to last for an hour. It’s unfortunate, but if the demand is for an hour, then the supplier must meet such demand too,” he says.

The story is here, and for the pointer I thank Jake McGuire.